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Will Low Oil Prices Increase Internal Instability In Conflict Countries?

Will Low Oil Prices Increase Internal Instability In Conflict Countries?

With over 1.6 million internally displaced in South Sudan, and another 600,000 refugees in neighboring countries, are oil price declines exacerbating humanitarian crises in oil-producing African countries, and can we expect further deterioration as a result of the recent price depression?

This is a worthwhile issue to explore given South Sudan’s overwhelming reliance on oil revenues to fill government coffers; a similar situation that can be duplicated throughout Africa with not only oil, but other commodities exports as well. But, do price changes really exacerbate these conflicts? The answer is: it depends.

For starters, commodities predation makes sense in any number of interstate conflicts, but how about civil conflicts? Much of academic research viewed civil conflicts as tightly bound to various grievances by internal factions within the state. For example, divisions in various ethnic groups and historical conflicts between differing factions come to mind as reasons many may give for civil strife. However, there is a strong competing claim in the literature, popularized by Paul Collier and Anke Hoeffler in the mid-2000s. Their claim is that “greed” and not grievance is a significant factor in fueling these disputes. Greed in the sense of this research refers to economic and financial gains being furnished to competing factions in civil wars. This approach is highly significant in that commodities exporters have a much higher probability of encountering civil war as a result of these economic payoffs to internal actors and furthers the robustness of our understanding of civil war. Related: Can Next Week’s OPEC Meeting Comfort Oil Markets?

One should not discount the myriad grievances present amongst the varying ethnic groups in South Sudan, but this research seems to be quite relevant given its oil exports and that much of the fighting and resulting population displacement have been localized in South Sudan’s oil producing regions in Unity, Jonglei, and Upper Nile. The conflict has significantly disrupted operations centered in these oil producing regions imposing significant strain on government revenues through forgone income from Nilepet and increasing risk to other overseas players in the sector which is dominated by China (in particular CNPC (PTR) and Sinopec (SNP), India’s ONGC (ONGC:IN), and Malaysia (Petronas), with marginal activity by France’s Total (TOT), Kuwait’s Kufpec, and Kuwaiti-Egyptian Tri-Ocean Energy.

So, how do commodities pricing impact these conflicts? Well, the same research provides an answer: not much. While commodities, such as oil, may act as a central component to contributing to conflict in the first place, shifts in the price of that commodity typically do not correlate with an increase or decrease in violence within the state. These resources remain a “prize” regardless of ongoing price fluctuations. Related: Shale Gas Rig Count Could Implode Here If Prices Don’t Rebound

This means the recent depression in oil prices, even if it continues for some time, probably will not affect the level of internal conflict, and therefore should not induce further internal displacement. Importantly, if this does occur, it will be due to reasons other than the price of oil.

The timing is another important component. South Sudan’s oil income was already drastically cut back before the price drop in late 2014, which means fiscal adjustments, as well as the issuance of new debt, has already occurred. So, there was little modification to be had as a result of the forgone income from oil price decreases. In the year of its independence, South Sudan was producing nearly 350,000 bbl/d, and due to transit issues with Sudan, dropped to a trickle for 2012, and then in 2013 and 2014 resumed only to approximately 120,000 to 150,000 bbl/d.

So, there wasn’t really much oil income being transferred to the general population to begin with, so it’s not as if the population is forgoing income that may force displacement. Much of the oil income, since the inception of the state, has gone towards the military and fighting internal conflicts. For this reason, and others, oil funds simply were not making their way to the domestic population even before the price declines, which means the internal displacement is not a result of reduced benefits from the state. Related: Oil Prices Down As Storage Keeps On Filling Up

There are, of course, some caveats to consider. One issue is the price drop may affect third party aid donors, negatively impacting South Sudan. Norway and Canada, two large aid donors to South Sudan both have their own oil-based problems. While both diversified, advanced economies, Norway and Canada still derive significant portions of their respective budgets from oil revenues, which have of course decreased. Norway contributed $83 million, and Canada $66 million, each in 2013 alone, and both are in the top 5 of South Sudan’s donors. And, although this hasn’t affected their announced aid budgets for 2016, it might impose large enough constraints causing aid decreases starting in 2017, further reducing societal benefits from aid flows.

Despite the potential contribution of oil to civil wars, if this humanitarian crisis worsens or expands, it will not be due to oil price fluctuations, but due to other factors, requiring an adjustment in political analyses in this situation, and others like it. As we have seen in the past, the key to these types of development situations is determining ways to reduce incentives for commodities predation – not an easy task for nations with limited resources and negligible institutional capacity.

By Ryan Opsal of Oilprice.com

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