5 February 2013

Uganda: Expert Cautions On Oil Expectations

A Norwegian petroleum expert has cautioned Uganda not to pin its economic development hopes on oil revenues, predicting that in future the world oil prices are likely to decline.

Prof Aystein Noreng told journalists at the Norwegian embassy that due to the discovery of oil in many countries, there is likely to be more supply than demand in the future, hence the reduction in prices.

"It [oil] will be less profitable. Do not expect to earn enormous rewards," Noreng said.

He added that the development of alternative sources of energy like thermal and nuclear and production of electric cars would mean less reliance on oil in the future.

Noreng advised that for developing countries like Uganda to benefit maximally from their oil, they should get involved in the entire value chain, from drilling to refining.

So far at least 3.5 billion barrels of oil have been discovered in Uganda. Production is expected to start by 2017 after the construction of a refinery and predictably there is a lot of excitement and hope that the resource will push the country towards the middle-income status it aspires.

Over a span of 30 years, it is estimated that the country could reap more than U.S $100 billion. However, some analysts have expressed pessimism that the oil revenues, if not well managed, could turn the country into a basket case like it has happened in some oil-producing countries.

Too much oil:

Noreng disagreed with predictions that the world will run out of oil in the near future as some people have said. He said the ratio between oil reserves in most oil-producing countries and annual production had remained fairly constant because of new technologies invested in oil production, ensuring that demand does not outstrip the supply.

He also said recent oil discoveries in countries like Uganda and Kenya mean that there is a lot of unexplored oil in the ground. He said there is a general assumption that supply and demand evolve independently of each other and, therefore, a disaster might occur if supply does not meet the demand.

"This view negates the significance of the market and prices; in practice, oil consumption cannot exceed available volume through production and inventory reduction," he said.

Noreng argues that if oil prices are too high, demand will decline while if they are low, incentives to explore for oil and develop oil fields will weaken and recovery will gradually decline.

"The oil market is characterized by imperfect competition, which means the price can stay well above production costs, as long as consumers pay," he said.

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