By Scott B. MacDonald, Ph.D.

Apprehension over new terrorist attacks, sabotage strikes on oil infrastructure in the Middle East and the Yukos affair in Russia have helped drive oil prices to a peak and threaten to bring on the dreaded scenario of the precious black fluid selling at $50 a barrel. The Organization of Petroleum Exporting Countries (OPEC) is already pumping at it highest levels for a quarter of a century and only Saudi Arabia is thought to have any significant spare capacity to boost production. In a world where geopolitical uncertainties and oil prices and supplies are closely entwined, Africa’s star may be rising. Considering the ongoing dependence on foreign oil, this development is clearly in U.S. national interest.

Africa’s growing importance as an oil supplier comes at a time when the global energy industry is in the throes of a structural transformation. On the demand side, the longstanding U.S. role of being the dominant consumer of hydrocarbons is being challenged by China. Since 1978, when China began its growth spurt, the Asian country shifted from being an oil exporter to a major oil importer. Not far behind China is India, also energy hungry. India’s real GDP growth is expected to be around 7 percent this year. Between China and India there are over 2 billion people, working and living in rapidly growing economies, with expanding middle classes with automobile-oriented consumer cultures. That means more oil demand.

At the same time as demand is on an upward swing, there is growing concern about supply, including the aging Saudi fields and their ability to meet global demand. Production is slumping in long-time OPEC member Indonesia, which in 2004 became a net oil importer for the first time in 100 years. In addition, supply from the OECD (Organization for Economic Cooperation and Development Countries) has probably peaked.

Africa has around 33 percent of the world’s proved reserves. That includes OPEC members Libya, Nigeria and Algeria. Sub-Saharan Africa supplies about 15 percent of U.S. oil, of which Nigeria is the leader. Indeed, the West African nation is the world’s sixth-largest exporter of oil and the fifth largest supplier of the United States. Bonny Light crude from Nigeria has a highly desirous low-sulfur content that is easily converted into gasoline.

It is in the non-OPEC members where the most significant future gains are expected. In particular, the Gulf of Guinea is estimated to hold up to 10 percent of the world’s oil reserves. That region encompasses the Ivory Coast in the north down to Angola in the south. East Africa is also looming large as a potential area for oil extraction.

Africa’s oil will never duplicate the Middle East’s massive supply. In 2003, the Middle East accounted for 63.3% of proved reserves. Africa’s share was a much more modest 8.9%, the same as South and Central America and a little behind Europe and Eurasia (Russia). However, it does represent an alternative source. Considering that foreign oil workers have become targets in Saudi Arabia, Iraq’s oil pipelines are constantly being sabotaged, and politics are casting a shadow over the local oil industries in Russia and Venezuela, Africa has become more attractive.

Since 9/11 part of U.S. energy policy has been to diversify away from the country’s dependence on Middle Eastern oil. Transport from West Africa to the U.S. is far shorter than from the Middle East and avoids chokepoints such as the Persian Gulf and Red Sea. Along the same lines, much of the oil is being pumped from offshore oil fields, which could make transport easier in the case of onshore political turmoil. Equally important, the sub-Saharan oil producers, with the exception of Nigeria, are not OPEC members, reducing the complexity of pricing. For many of the U.S. oil companies the region is also attractive in that large amounts of oil have been discovered and there is a scarcity of big new oil projects elsewhere.

The growing importance of Africa as a source of oil was reflected by the visit of U.S. President George W. Bush in July 2003 to a number of countries in the region, including Nigeria. According to the National Intelligence Council, the United States is expected to buy as much as 25 percent of its oil from Africa by 2015, an amount that would put the region ahead of Saudi Arabia. But the quest for African oil is becoming competitive. The United States is not alone in appreciating Africa’s oil as many other countries have sent their oil companies hunting for new, non-Middle Eastern sources of oil, including China and India – Asia’s two “new Tigers”.

Despite the lure of Africa’s oil, there are considerable challenges. These include corruption, political violence and banditry. HIV AIDS kills thousands of people a year, while the medical infrastructure is weak and in some places virtually nonexistent. Human rights groups have rightfully criticized the widespread lack of democracy and accountability in much of the region. The billions of petrodollars coming into the region are not translating into better livelihoods for the vast majority of people. Oil companies have a mixed record in dealing with the region – the wealth they generate has not trickled down to the general population and in many cases, there has been long-term environmental damage as in the Niger Delta. There is a very strong possibility that oil-led development can serve only to reinforce authoritarian rule, corruption and environmental destruction.

Yet, the change in international oil markets represents an opportunity for Africa and those involved in the continent to do something better than in the past. And the stakes are high. The poverty that afflicts even the oil-producing countries creates the ideal breeding grounds for the penetration of al-Qaeda and its allies and if nothing else perpetuates weak civil societies dominated by lawlessness. The resentment felt by local people who have failed to share fully in the benefits of the new oil bonanza have sparked violence by ethnic militias in Nigeria’s Niger delta region and a separatist movement in Angola’s oil enclave of Cabinda.

The world of higher oil prices is likely to last through much of the decade; the trick is for African governments and their people to capitalize on that trend. This represents a major challenge – oil wealth could provide a major opportunity to break the chain of failed governments and economic experiments – or another round of dashed hopes for a better future. For the United States, more attention will have to be given to Africa, especially if there is a concerted effort to reduce the dependence on Middle Eastern oil. This also means paying closer attention to finding a balance between extracting the oil and helping provide for a sounder socioeconomic infrastructure in those countries involved in selling their oil to keep the American economy running.

Dr. Scott B. MacDonald is a Senior Managing Director and Head of Research at Aladdin Capital Management LLC, in Stamford, Connecticut. He is also the firm’s energy analyst. His most recent book is Carnival on Wall Street: Global Capital Markets in the 1990s (John Wiley 2003).