An Alternative to Fuel Subsidy Removal is Higher Taxes With Kashema Bahago, Energy Economist

Africa needs to become energy secure and it will take several approaches to achieve this goal. Investments in all energy sources, which will enable widespread industrialization and electrification should be made a priority on the continent. However, many experts believe Africa can increase electrification rates and set up more industries while fighting against climate change by cutting investments in fossil fuels.

Energy! had a chat with Kashema Bahago, a Research Associate with the Centre for the Studies of Economies of Africa, to talk about continuous oil and gas exploration in Africa, fossil fuel subsidies, economic opportunities in the global energy market, and more.

What is the current oil and gas market saying about Africa's economic future?

Globally, the energy transition has been on the front burner and most of Africa’s oil and gas producing nations are highly exposed to the global energy transition, as their economies depend on oil and gas revenues, while their reserves both cost more to produce and are, on average, more carbon-intensive than oil and gas from other regions. Energy poverty is predominant in Africa, over the next two decades, rapid population growth and industrialization are expected to drive strong energy demand growth across the continent including fossil fuels. African energy demand in 2040 could be around 30 percent higher than it is today, compared with a 10 percent increase in global energy demand.

The high oil and gas prices caused by the ongoing invasion of Ukraine have had deep human, social, and economic impacts across economies and industries. European gas prices have surged more than three times in the past 12 months, due to the effect of the conflict, the European Commission has announced a plan to be energy secure, which is independent of Russian fossil fuels before 2030 via a combination of acceleration of renewable energy and diversification of natural gas supplies.

This could result in increased demand for oil and gas from the African countries that have reserves and infrastructure in place to help meet that demand. Hence, oil and gas projects are being considered to aid the supply of oil and gas from Africa to Europe, such projects include the NIGAL gas pipeline project and Maghreb-Europe Gas Pipeline (MEG) amongst others.

Image Source - Al Cook, LinkedIn

Fuel subsidies are popular in some African countries. Would you say it is proper to keep paying these subsidies? What are the alternatives?

Fuel subsidy has been a pressing issue for African energy-producing countries over the years. Based on basic energy economics, it’s typical to know that fuel subsidy is not a sustainable and productive use of public funds, which leads to excessive use and waste of petroleum products. However, there is no one solution to fuel subsidy because the economic challenges faced by several nations differ. In Nigeria for example, the economy cannot afford a fuel subsidy removal because of the additional inflationary pressure fuel subsidy removal will have on the economy, even though diesel (AGO) has been liberalized.

This was the pertinent reason why the fuel subsidy removal has been suspended when it was said to be removed based on the implementation of the petroleum industry act. Although the fuel subsidy is significantly affecting Nigerians’ revenue, Nigerians’ ability to service their debts is currently being affected. Nigerian revenue is increasing but its expenditures are increasing at a much higher rate. South Africa on the other hand announced its fuel subsidy removal and can afford to remove its fuel subsidy because its economy can afford to.

An alternative to fuel subsidy removal is higher taxes. The tax revenue percentage of GDP is low in Africa compared to other economies and regions. Europe (France) has the highest tax revenue as a percentage of GDP in Europe at 46.2 percent, America (Cuba) has the highest tax revenue as a percentage of GDP in America at 40.6 percent, Middle East and North Africa (Israel) have the highest tax revenue as a percentage of GDP in the Middle East and North Africa at 40.6 percent, Asia-Pacific (New Zealand) has the highest tax revenue as a percentage of GDP in the Asian-Pacific region at 32.0 percent while sub-Saharan Africa has the lowest tax revenue as a percentage of GDP as a region, with Seychelles being the highest in the region at 31.7 percent.

Oil and gas exploration will continue in Africa to aid industrialization - Do you believe this is the best way to go?

Yes, this is the best way to go. The global inflationary and economic effect of the Russian- Ukraine invasion is a pertinent factor that will propel the continuous investment and exploration of oil and gas. The high energy cost globally and the urgent need for the energy security of the European Union away from Russia have led to energy initiatives that will see Africa as an alternative source of energy.

At the moment, even though Africa has sufficient hydrocarbons to meet global energy demands with rising production such as the Mozambique Coral Floating Liquefied Natural Gas (LNG) and Nigeria’s LNG Train 7 projects coming online, declines are anticipated in the coming years due to output reductions in legacy projects, a lack of new exploration in recent years and inadequate investments across the value chain in leading hydrocarbon producing countries such as Nigeria, Algeria, Libya, Angola, and Egypt. Hence, in the face of the current energy crisis, efforts will be made by global energy stakeholders to salvage the current energy outlook and mitigate the energy crisis going forward.

Realistically I think we need to use oil and gas in the short term because otherwise, civilization will crumble. One of the biggest challenges the world has ever faced is the transition to sustainable energy and to a sustainable economy. That will take some decades to complete - Elon Musk (ONS Conference, Stavanger, Norway, August 29, 2022)

There are current fuel price hikes across some African countries. How will this affect low-income earners in the long term?

The fuel hike has significantly affected all income classes, but low-income earners are the most affected. This is because the fuel hike reduces the disposable income of the working class, and low-income earners may not have enough disposable income, savings, or investment to cushion the effect of the fuel hike. Unfortunately, it is the unemployed who have had to bear the brunt of poverty and increased inequality. The fuel hike will cause inflationary pressures on goods and services, as significant economic activities depend on energy for their operations.

Fuel costs also affect the price of food. The already struggling low-income earners and unemployed citizens have no or very little disposable income. This further widens the gap between the rich and poor, delaying much-needed socioeconomic justice. Unemployed citizens must work out more money for day-to-day living, including for the simple act of going to look for a job or attending an interview.

In the long run, depending on the policy measures around economic growth and development that directly affects the economies and regional productivity, efficiency, and income/ wage levels, there will be economic stability, job creation, and lower poverty levels.

Expanded domestic fossil fuel production alone cannot be made a panacea for addressing the energy poverty trap. Fossil fuels are priced and traded on global markets, inserting a substantial wedge between what the average African can afford to pay for the energy and the price that energy can fetch internationally, even if it was extracted in Africa - International Policy Digest.

Are there any economic opportunities for African countries in this current global energy crisis? What are they?

The advantage of African integration and interdependence is paramount to long-term economic resilience. Africa has huge natural and human capital resources which are pertinent in unlocking opportunities during uncertainty and solving complex development problems faced by African economies if integrated as a region. This will advance the continent’s regional economic and social integration agenda that will help do away with artificial boundaries that constrain the movement of people, goods, and services across the continent. The African Continental Free Trade Area (AfCFTA) will help to create a vibrant and thriving continent-wide economy. For instance, regional strategic grain reserves and more efficient trade across Africa’s borders can help to mitigate the risk of food insecurity. It will help to make food and other goods more easily accessible and affordable.

Dealing with structural root causes of economic crisis is an opportunity to build long-term resilience. Tackling the structural root causes of these crises can provide an opportunity to build forward. Prioritizing structural transformation that is green, inclusive, and resilient will ensure that no one is left behind, and Africa is better prepared for the next crisis.

What were the energy-centric life lessons you learned while working at OPEC headquarters?

My time at OPEC optimized the energy skills I picked from the Centre for Energy, Petroleum & Mineral, Law and Policy (CEPMLP) of the University of Dundee, Scotland, UK. OPEC made me learn and experience the power and the interplay of energy politics, energy economics, and its attributes, particularly during the 2020 Russia- Saudi Arabia oil price war. In that period, I learned in real time the magnitude of OPEC’s role in stabilizing oil prices and its contributions to the global economy.

I learned of the inclusiveness approach toward addressing energy poverty globally. This is evident in OPEC’s interests in climate change and global warming issues, despite its significant dominance in oil and gas (fossil fuels) and the possible implications of climate change and global warming on the oil and gas markets, investments, and productions. Hence, the importance of energy mix. More so, the energy policy and support that is given to energy poverty regions like Africa.

Finally, the in-depth energy research and analytical skills I harnessed while working on global and regional energy projects were paramount. These skills were harnessed by a collaborative approach to working with a diverse team of specialized energy experts who are from a collection of member countries.