Will oil work for us? — a look at Kenya’s oil prospects

While planets are wrecked by meteors from the outside, financial systems are wiped by crises that originate from within the systems themselves. The Great Depression of 1929, which sent whole families to the street across the world, was occasioned by the collapse of the Wall Street-headquartered financial market.

This was an “inside job” considering the centrality of finance in the functioning of any economy. Like the financial markets, oil markets have the capability to bring an economy to its knees as due to the hubris of bullish traders. But, not all crises, especially oil sponsored crises, are spawned by the market activity.

As history emphasizes, embargoes are the worst culprits. The embargoes, together with war, give rise to catastrophes whose reach is almost limitless. However, this matter is not the subject of this piece due to its sheer broadness of scope and matter. Its purpose is that of introducing the topic of this piece.

The two authors of an article on page three of the Business Daily newspaper of January 27th, 2016 pose a very interesting question: can East Africa still rely on oil and gas for growth in the wake of the prices tumble? In their attempt at an answer, they offer little comfort, if any, to anyone whose mind has long been troubled by similar questions.

Additionally, they have no grounds to justify another question they throw in the middle of their article. They ask ‘…why is East Africa the new frontier for oil and gas?’ I do not know why this does not sound right to my ear, but I think it perhaps has something to do with the fact that the question reeks of the kind of optimism that is excessive and unrealistic at best, outright dangerous at the worst, given the current happenings in the global energy sector.

The prevailing mood in the oil market is that of pessimism. In the fourth quarter of 2015, the energy sector reported close to a 74% drop in earnings per share from a year earlier. This clearly demonstrates that the rosy days of oil, when it was selling above $40 a barrel, are about to exist only in the books of history. What this means is that aspiring oil exporters like Kenya are facing a future that is more complicated, and one that can least be trusted to pay today’s credit.

When oil was struck in the Lake Turkana basin, one could not help but notice the air of optimism about the health of our current account deficit, and balance of payments account. This is because the news came at a time when oil was hovering around a historical nadir in terms of price. Kenyan youth rekindled their dream of country that could provide for them jobs and opportunities for business ventures as the nation sat on the cusp of tapping the valuable product. But will our new-found wealth work for us?

History is replete with societies that have crumbled under the weight of the conflicts sparked by oil. The path from oil discovery, to exploitation, to the availability of petrodollars for consumption, to the eventual dispute on how the money should be spent, which actually spawns the conflicts, has been well documented over the years. Whether Kenya will avoid this deadly path in the course of developing its oil potential is a question that only time can satisfactorily answer.

Additionally, the situation is a bit complicated for the country if it is true that the huge sums of cash in loans that have been raised abroad by the treasury are intended to be paid back by the proceeds from oil sales. At the moment, the price of one barrel of oil is about $30. According to many commentators and analysts on this subject, the price doesn’t bear encouraging prospects in the future either.

This is because of factors that are beyond Kenya as a sovereign. One of the most notable causes of this price slump is persistent oversupply, which does not seem to be going away in the foreseeable future. The recent lifting of long-running sanctions against Iran has enabled the Middle Eastern country to trade its large volumes of oil in the world market. This simply means that even if Kenya started drilling and refining oil in 2030, there will be limited or absolutely no market for its oil.

The logical conclusion is that Kenya might actually be facing a very bleak future; a time when it will have to engage in long battles in international courts with its creditors due to loan defaults. If not, the country will have to borrow more to pay debts, which will kick off a very vicious cycle of more borrowing to finance old debts.

The effect of this will definitely trickle to the streets and homes. With the country highly indebted, it will be very difficult for it to provide basic services to its people. The leaders of that time will be at pains trying to reach a consensus across the country on what to pay for first. One can only hope that the situation will be well managed to keep the country from disintegrating.