Effects of low oil prices on the South Sudan’s economy

By Mabor Maker Dhelbeny

The month of January, 2016 emerges with new crisis of low oil prices, not only in the Republic of South Sudan but worldwide. I called it – “new crises”, because we have just closed the old crises known as – ‘the senseless war’ which strangulated or throttled our economy. As various media houses reported, South Sudan crude oil prices in the world markets have seriously fallen from $ 100 to $ 30 per barrel. Meanwhile its production had already reduced to 160,000 barrels per day due to the December, 2013 crises which affects the companies’ operations and explorations. Analysts predicted that this year could be worse than the previous ones, particularly to the countries such as South Sudan which depends on oil. According to Tim Bowler, the BBC reporter on businesses: “From 2010 – 2014 world oil prices had been fairly stable, at $ 110 a barrel. Brent crude oil has now dipped below $ 50 a barrel for the first time since May 2009 and US crude is down below $ 48 a barrel”. And the reasons of this change are twofold – weak demand in countries due to insipid economic growth, coupled with surging US production; and oil cartel OPEC is determined not to cut production as a way to prop up prices, he added.

It seems in my view, if weak demand in countries with insipid or bland economic growth could contribute hereinafter as the cause of low oil prices, then Saudi Arabia which has a reserve fund of more than $ 500 billion to withstand low prices for some time, could be advise to support other consumer countries by cutting back its own oil production so that to prop up oil prices. It’s possible because Saudi Arabia became a giant oil producer and exporter, and therefore considered as the most influential member state of OPEC organization. Perhaps, Saudi Arabia and other gulf countries such as United Arab Emirate would not accept the offer because in 1980s, one of these countries had been badly affected due to the cut of its oil production in order to boost the oil prices. This will make our country’s think-tank to think twice, either to shut down its oil fields from pumping or to continue persuading the Sudan to reduce its tariff – i.e. $ 24.5 per barrel of “TFA” as agreed after South Sudan seceded from the Sudan, but with “nothing to benefit” as said by Dr. Lual Acuek, one of the South Sudanese Economists. Therefore, Khartoum’s refusal to change terms of agreement – signed in September, 2012 so that the country can be able to get more than $ 5 per barrel, may promptly force Juba to take another risk by shutting down its oil fields. In January 2012, the government had closed down its oil fields, leading to the war of Heglig (Panthou) between the “SPLA” and “SAF” forces, due to disagreement over the “TFA” with Sudan Government. Observers say the decision was not studied. If $ 9.5 as transit fee and $ 15 for transitional financial arrangement, agreed after the secession of South Sudan in 2011, hence, making the total of $ 24.5 per barrel then plus the share of oil companies and minus $ 30 per barrel is equal to $ ZERO for the “GRSS”. Since the construction of pipeline from the former Upper Nile and Unity States’ oil fields to Port Sudan in 1999, the oil sector in the then Sudan has become one of the most tremendous opportunities and great potential for investments. Hence, its input places the future of the Sudan Government’s revenue up to $ 5 billion a year. This brings me to conclude that oil is a blessing when it’s meant for development and a curse when it is meant for war.

EFFECTS OF LOW OIL PRICES

“Oil as a curse”, could be a mantra by our enemies’ ploy to avert possible development and peaceful co-existent amongst South Sudanese communities across the country. With this falls of oil prices in the world market, South Sudan’s economy is teetering as coupled with currency devaluation and high rate of inflation. Thus, the impact of falling oil prices, low oil production and floating rate of dollar adopted by the Central Bank of South Sudan and Ministry of Finance & Economic Planning have accumulatively choked economic growth by making the businessmen to borrow and spend, while poor citizens go hungry and workers walk to work. Unfortunately the “GRSS” initiatives to subsidize fuel and other food commodities as a short term programme to rescue the ailing economy, has led to the increased of fuel prices from SSP 6 per litre to SSP 22 per litre in all petrol stations in Juba. However, as a country whose economy heavily depends on oil revenue accounting for 90% of export income; the way forward should be the following:

(1) The Government of the Republic of South Sudan should have to cut spending by abandoning a number of programmes and adopt certain sacrifices.
(2) The Government of the Republic of South Sudan should immediately start to review the economic policies of the country.
(3) The Government of the Republic of South Sudan should avoid cutting oil production so that the importers will not increase their production. By cutting oil production so as to shore up oil prices we will be the losers
(4) The Government of the Republic of South Sudan should continue to persuade the Sudan to accept review and amendment of the “TFA” 2012 agreement through dialogue.
(5) The Government of the Republic of South Sudan should influent the founding members of OPEC in order to intervene with possible solution for this global oil prices.

The Organization of the Petroleum Exporting Countries – “OPEC” is a permanent intergovernmental organization, made up of eleven oil producing and exporting countries. Following the fallen of prices and production of oil in the international market and South Sudan respectively, therefore the “GRSS” will face it roughed – as experienced by high rate of inflation, currency depreciation, and accumulation of internal debts. This Writer, however, would like to appeal to the “OPEC” founding member countries which include Saudi Arabia, Kuwait, Iran, Iraq and Venezuela to resolve this global oil prices in accordance with objectives of their organization. OPEC’s objectives include seeking ways and means for ensuring the stabilization of prices in international oil markets, with a view to eliminate harmful and unnecessary fluctuations. With these effects imposed on us by the oil crises, China seems to be the major gainer of low oil prices in the world market, while the US remains as the main driver of falling oil prices due to the shale formations by tracking that left turmoil between geopolitical in the Arab world and the falling oil prices. For example, war in Syria, Libya and Iraq had also contributed to the falling oil prices because “IS” had captured a good number of oil wells which they produced and sold in the black market. Nevertheless the prolonged sanction of Iran which has just ended, may boom international oil market by increasing production due to its larger domestic budgetary demands that represents large population size, compared to Nigeria in Africa.

Any international agreement between the two countries that involves financial arrangements must contain “stabilization clause” that would prevent the risk of entering into the disputes. Such stabilization clause provides terms that are binding regardless of subsequent compromise, negotiation or amendment of the agreement, unless both parties expressly provide in writing to change the meaning or binding effect thereto. Recently, the Minister of Finance in the Sudan, Hon, Badr al-Din Mahmoud has been quoted by the Reuters as saying, “South Sudan must respect its obligation as – Sudan will stick to its oil fee”. What kind of obligation? I think it is a contractual obligation, that’s why the government has already been obliged to notify Khartoum before taking any decision which will breach the agreement. This leads me to the fact that oil agreement stipulates that if operations related to production, processing or transportation facilities becomes technically or economically unsustainable, then the country must provide a 60 day notice to shutting down production or suspending access to processing and transportation facilities. Urgently, Juba should form a committee that’ll prepare ground for dialogue with Khartoum. In case of any failure to reach the deal, then the “GRSS” must be slow in taking decision to shut down oil fields because it may contravene Article 4.1 of “ARCISS”, concerning oil or petroleum. Probably, it should be the task of a body – known as Petroleum Exploration and Production Authority to oversee the operation of petroleum and to advise the Ministry, this is in accordance with section 12 of the Petroleum Act, 2012. Economically, the review and amendment of “TFA” agreement will be in favour of the two countries in general, but in South Sudan in particular, where oil monies will be used to finance the implementation of “ARCISS” signed on the 17th and 26th August, 2015 respectively by the warring parties.

The writer is an advocate & legal consultant in Juba. He can be reached at [email protected]