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Backgrounder #1944 on Africa

June 20, 2006

America's Growing Reliance on African Energy Resources

By

Most Americans view Africa as a region plagued by instability, poverty, and poor governance. Although accurate for portions of the continent, this picture is far from complete and fails to recog­nize the region's growing importance to U.S. national security and economic interests. American interests in Africa range from traditional develop­ment and humanitarian problems to the more recent challenges posed by globalization and the opportunities for terrorists and other violent actors to exploit unstable countries. There is also a rising expectation by many in America and other coun­tries that the U.S. will intervene in internal and regional African conflicts more frequently and actively, whether diplomatically or in support of military missions.

Moreover, as articulated in both the 2006 State of the Union address and the National Security Strategy, the importance of expanding and ensuring America's access to energy resources has transformed Africa from a strategic backwater into a priority region for U.S. economic, political, and military interests. How­ever, pursuit of oil should not trump the economic and political reform necessary to sustain long-term economic growth and development. Oil revenues in developing countries tend to foster corruption, con­tribute to instability, and undermine incentives for reform. This tendency makes it all the more impor­tant for the United States to press oil-producing nations in Africa to adopt policy changes that would ensure that wealth from natural resources will not be squandered or contribute to political repression and instability. The U.S. should continue this strat­egy by promoting:

  • Economic freedom and political accountabil­ity. To counter the instability common in oil-rich developing countries, governments must work to diversify their economies and encour­age investment. This is best achieved through increased economic freedom and political accountability, including strengthening the rule of law, enforcing property rights and con­tracts, maximizing labor market flexibility, lowering tax rates, removing price controls, and improving infrastructure critical to trade and investment.
  • Transparency and accountability. Resource-rich developing countries are particularly sus­ceptible to corruption and the misuse of natural resource revenues. To counter this, the U.S. should encourage greater transparency and accountability by linking aid to external checks to help to prevent imprudent or corrupt use of natural resource revenues. Additionally, the U.S. should support transparency efforts like the Extractive Industries Transparency Initia­tive (EITI) that seek to set standards on trans­parency and conduct for investors and governments and should press for open and competitive bidding procedures and binding commitments.
  • Enhanced security. Instability arising from struggles over natural resource revenues can have far-reaching effects. The U.S. and African governments should increase cooperation, training, and funding to enhance the security of oil facilities and pipelines against sabotage or theft. Similarly, oil companies should be given greater latitude to hire private security to pro­tect their facilities and personnel, train local security personnel, and engage in joint security operations with African security forces.

Implementing the strategy of diversifying the sources of America's energy imports will require securing access to and encouraging increased pro­duction of oil resources in Africa. In the long term, this requires the U.S. to encourage oil-producing states in sub-Saharan Africa to increase economic freedom, bolster the rule of law, enhance transpar­ency, and diversify their economies away from overreliance on oil and gas exports. Failure to do so will invite instability and humanitarian crises that will harm the people of Africa and undermine reli­ability and access to vital resources.

America , Energy, and Africa

Energy, particularly energy from oil and natural gas, is a vital strategic commodity to America's economy and security. It is essential for modern commerce at all stages. It enables a small portion of the population to grow and harvest the crops that feed the nation, allowing the vast majority of the work force to focus on other endeavors. It is the primary fuel used to transport goods to local, national, and international markets. It also is vital to maintaining America's military and homeland security. Maintaining access to fossil fuels for the foreseeable future is essential if Americans are to maintain their standard of living.

As noted by President George W. Bush, America is "addicted" to fossil fuels, particularly oil. Despite being the world's third-largest producer of oil in 2004-after Saudi Arabia and Russia-the U.S. remains the world's largest oil importer because its consumption far outstrips its production.[1] This reliance on foreign imports makes the U.S. vulner­able to international shifts in production. Although prices should decline from 25 year highs as new resources are discovered and brought on line and marginal fields become profitable at higher prices, increasing Chinese and Indian demand for oil and gas means that long-term prices will likely remain higher than the previous two decades, which will affect U.S. economic growth.[2]

An additional concern is how higher oil prices will affect broader U.S. security interests. In his January 2006 State of the Union address, Presi­dent Bush stated his concern that America's dependence on foreign oil posed a security chal­lenge, in part because oil is "often imported from unstable parts of the world."[3] Moreover, much of the world's oil reserves are located in regions or countries that support policies detrimental to U.S. strategic interests. According to BP Global (formerly British Petroleum), the top 10 coun­tries with proved oil reserves as of 2004 are Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates, Venezuela, Russia, Kazakhstan, Libya, and Nige­ria. Nearly all of these lack political freedom, and many have political priorities that are at odds with U.S. priorities, such as the war on terrorism and the expansion of political and economic freedom. As noted by columnist Max Boot, high oil prices also provide expanded resources for disagreeable regimes, providing a "dictatorship dividend."

[This dividend] subsidizes Sudan's ethnic cleansing (it stands to earn $4.7 billion more this year than in 2003), Iran's development of nuclear weapons ($45 billion) and Saudi Arabia's proselytization for Wahhabi fundamentalism ($149 billion). Even in such close American allies as Kuwait ($35 billion) and the United Arab Emirates ($36 billion), odds are that some of the extra lucre will find its way into the pockets of terrorists.[4]

While the threat noted by Boot should not be overstated-the two largest sources of U.S. oil imports in 2005 were Canada and Mexico-reli­ance on foreign energy poses a challenge, and the ramifications of increased resources for question­able regimes should concern U.S. policymakers.

To address these concerns, the President has pro­posed a combination of developing alternative sources of energy and using technology to enhance efficiency to make "our dependence on Middle Eastern oil a thing of the past."[5] More specifically, the White House announced its intention to replace more than 75 percent of U.S. oil imports from the Middle East by 2025.[6] However, even if the President's domestic energy initiatives bear fruit, America's dependence on foreign oil will per­sist for at least the next two decades-a fact acknowledged in the 2006 National Security Strat­egy, which notes:

Most of the energy that drives the global economy comes from fossil fuels, especially petroleum. The United States is the world's third largest oil producer, but we rely on international sources to supply more than 50 percent of our needs. Only a small number of countries make major contributions to the world's oil supply.

…. The key to ensuring our energy security is diversity in the regions from which energy resources come.[7] [emphasis in original]

To some extent, this strategy simply reflects cur­rent trends. According to the U.S. Energy Informa­tion Administration, North Africa and sub-Saharan Africa accounted for 18.6 percent of U.S. oil imports in 2005, compared to 17.4 percent from the Middle East. (See Table 1.) This trend contin­ued through the first two months of 2006, with U.S. oil imports from Africa increasing to 20.1 per­cent and oil imports from the Middle East falling to 15.5 percent.[8]

View Table 1

As important as Africa is as a current source of energy for the U.S., it will continue to grow in importance in the coming years. According to BP Global, Africa accounted for 11.4 percent of global oil production in 2004 and held 9.4 percent of proved reserves. As shown in Table 2, Africa's proved reserves have nearly doubled in the past decade, from 65 billion barrels to 112 billion barrels.[9] Cur­rently, the key oil countries in Africa are Algeria, Angola, Libya, Nigeria, and Sudan. Although these countries are recognized sources of oil, much of Africa's petroleum resources remain underdeveloped or unexplored, particularly in sub-Saharan Africa. A number of Afri­can countries are believed to hold significant reserves and are expected to increase production in coming years. Within the next decade, Africa's production is expected to double,[10] and U.S. imports of oil from West Africa alone are forecast to increase to 25 percent of total U.S. oil imports.[11]

View Table 2

Adjusting U.S. Policy to Reflect Africa's Evolution

Resource-rich developing nations (particularly oil-rich developing nations) have a troubling tendency to be less democratic, less economi­cally free, and more prone to insta­bility. Thomas Friedman has noted several reasons why oil wealth undermines democ­racy. These include:[12]

  • A taxation effect in which regimes benefiting from oil revenues are not checked by the need to raise revenues through taxation and can thus ignore demands for more accountability from or participation in government, i.e., no repre­sentation without taxation.
  • Revenues from higher prices create a wind­fall, which governments spend on patronage, repression of opposition groups, and increased internal security. Economic freedom is under­mined because resource-rich governments have little incentive to diversify their economies and encourage development of economic activity outside the resource sector.[13]
  • The "Dutch disease" phenomenon, which often accompanies rapid development of oil and other resources, in which an export-driven appreciation of a country's currency under­mines the competitiveness of other sectors of the economy.
  • The lack of accountability, misuse of resource revenues, and lack of economic opportunities, which lead to a struggle for access to the source of wealth, dramatically increasing chances for political instability. A study by Paul Collier of Oxford University indicates that in a five-year period, chances for civil war in an African country are less than 1 percent if it lacks resource wealth and nearly 25 percent if it pos­sesses such wealth.[14]

What the United States Should Do

The United States and other Western countries are actively promoting policies to increase trans­parency, reduce corruption, improve government services, and promote sound economic policies in an attempt to counter these trends. The Bush Administration has announced that it "will work with resource-rich countries to increase their openness, transparency, and rule of law" with the intention of promoting "effective democratic gov­ernance and attract[ing] the investment essential to developing their resources and expanding the range of energy suppliers."[15] The U.S. should con­tinue this strategy by promoting economic free­dom and political accountability, transparency and accountability in the energy sector, and enhanced security.

Increasing Economic Freedom and Political Accountability. As noted in a Chatham House briefing paper, oil generates few jobs and often con­tributes to instability in countries with relatively low levels of production (less than 50 barrels per head per year), which is the case for most African producers.[16] The key to success in these cases has been to diversify the economy and encourage investment, which is best achieved through increased economic freedom and political account­ability. This includes strengthening the rule of law, enforcing property rights and contracts, maximiz­ing labor market flexibility, lowering tax rates, removing price controls, and improving infrastruc­ture critical to trade and investment such as roads, ports, power, and telecommunications.[17] Specifi­cally, the U.S. should:

  • Encourage resource-rich nations to reduce government control of natural resources. This can be done through privatization or through contracting private management of those resources to reduce politicization and maximize profitability.[18]
  • Discourage new oil producers from joining OPEC. Intergovernmental initiatives to inter­vene in natural resource production, such as the Organization of Petroleum Exporting Countries (OPEC) cartel, discourage the types of market-led reforms that are necessary to maximize development of oil sectors in developing nations. OPEC efforts to maintain high prices generally hurt consumers through increased costs. Additionally, they undermine economic growth in non-oil-producing nations, particu­larly in poor, developing nations-including most of sub-Saharan Africa.[19]
  • Penalize decisions to expropriate businesses or unilaterally renegotiate contracts. Such actions undermine the rule of law, dampen entrepreneurship, and discourage investment, and they should not be rewarded with assis­tance. Assistance should be focused on techni­cal advice and support to assist countries in enhancing economic liberalization, adopting more efficient regulatory frameworks, and strengthening the rule of law.

Increasing Transparency and Accountability. Nigerian President Olusegun Obasanjo estimates, that "[c]orrupt African leaders have stolen at least $140 billion (£95 billion) from their people in the decades since independence."[20] A 2004 African Union report claimed that Africa loses nearly $150 billion annually to corrupt practices-or about a quarter of its annual gross domestic product.[21] Because most resource-rich developing countries maintain control of the resources on the basis that they are common goods that should be used for the broader benefit of the country, they are particularly susceptible to corruption and misuse of revenues. To counter this, the U.S. should encourage greater transparency and accountability by:

  • Requiring recipients of bilateral and multilat­eral aid in areas of natural resource develop­ment to deposit a portion of revenues resulting from the project into independent accounts for use on pre-agreed purposes, such as anti-cor­ruption programs, judicial reform, health expenditures, or other areas to ensure that the windfall from natural resources benefits the wider population. A model for this would be the World Bank agreement with Chad. Prior to the World Bank agreeing to finance part of the Chad-Cameroon Oil Pipeline Project, it required Chad to pass a law directing that the bulk of direct revenue be used for "priority sec­tors" like health, education, and rural develop­ment and creating a Future Generations Fund, which would invest some revenues for use by the country after oil reserves are exhausted. However, once the project was finished, Chad changed the law. The World Bank responded by suspending all loans and freezing access to the escrow account, forcing Chad to negotiate with the World Bank.[22] While the end result of the showdown between Chad and the World Bank is yet to be determined, this type of direct con­sequence provides a valuable external check that can help to prevent imprudent or corrupt use of natural resource revenues and should be emulated.
  • Supporting efforts like the Extractive Indus­tries Transparency Initiative that seek to set standards on transparency and conduct for investors and governments to discourage illicit dealings and corruption. Key elements of EITI are (1) public reporting of oil, gas, and mining payments by companies to governments and of the revenues received by governments from oil, gas, and mining companies; (2) credible inde­pendent auditing of payments and revenues in accordance with international auditing stan­dards; and (3) reconciliation of payments and revenues by a credible independent administra­tor in accordance with international auditing standards, and public release of the administra­tor's reconciliation report including any dis­crepancies discovered.[23]
  • Pressing for open and competitive bidding pro­cedures and clearly identified criteria for win­ning a bid. An independent authority to oversee the bidding process is also essential.[24] Another helpful step would be to include binding com­mitments to abide by international arbitration should either the government or the investor accuse the other of violating the terms of con­tract. If financial penalties result from expropria­tion, improper conduct, or other breaches of contract, these practices are less likely to occur.

Enhancing security. Instability arising from struggles over natural resource revenues can have far-reaching effects. Indeed, The New York Times reports, "Because of these incidents, Nigeria's oil production has fallen by 20 percent, or more than 550,000 bar­rels of oil a day, since the beginning of the year."[25] Rampant corruption has prevented communities in the oil-rich Niger delta region from benefiting from oil revenues, fueled militants in the region, and con­tributed to instability. Resolving problems such as these will require reforms that enhance economic growth and increase transparency and accountability. In the long-term, this will restore confidence among the broader population that the country's people are not being unfairly denied benefits arising from the development of natural resources. However, short-term vulnerabilities to violence require that U.S. and African governments:

  • Increase cooperation, training, and funding to enhance security of oil facilities and pipelines against sabotage or theft.
  • Give oil companies greater latitude to hire pri­vate security to protect their facilities and per­sonnel, train local security personnel, and engage in security operations with African security forces. A statement of principles on the complex issues and norms for this enhanced private security, as well as the necessity for con­ducting such operations, are outlined in the Voluntary Principles on Security and Human Rights, which is endorsed by many oil compa­nies and human rights organizations.[26]

The U.S. strategy promoting economic freedom and political accountability, transparency and accountability in the energy sector, and enhanced security can only succeed if the U.S. continues to interact with and engage resource-rich states and firmly applies this strategy. Excusing misgovern­ment, corruption, and abuse by governments on the basis of promoting short-term stability and access to resources will be counterproductive in the long term.

An additional concern is China's economic emer­gence. Unlike the U.S. and other Western govern­ments, China is unconcerned with representative government, economic freedom, or long-term Afri­can development.[27] Indeed, China often under­mines these goals. Perhaps the most obvious example is China's willingness to protect some of Africa's most egregious regimes (e.g., the govern­ments of Sudan and Zimbabwe) from international sanction. China also dilutes Western efforts-such as withholding aid or placing limitations on invest­ments-to improve human rights or governance by offering aid, investment, or other assistance when Western assistance is withheld.[28] The U.S. should coordinate with other donors to counter China's influence by linking economic incentives, diplo­matic support, and other desirables to progress in economic liberalization, political freedom, and enhanced transparency and accountability.

Conclusion

Implementing the strategy of diversifying the sources of America's energy imports will require securing access to and encouraging increased pro­duction of oil resources in Africa. However, such efforts should avoid placing too much emphasis on enhancing stability to ensure short-term access. In the longer term, securing stable access to these resources requires the U.S. to encourage oil-pro­ducing states in sub-Saharan Africa to increase eco­nomic freedom and political accountability, bolster the rule of law, enhance transparency, and diversify their economies away from overreliance on oil and gas exports. Failure to do so will invite future insta­bility and humanitarian crises that will harm the people of Africa and undermine the reliability of and access to vital resources.

Brett D. Schaefer is Jay Kingham Fellow in Inter­national Regulatory Affairs in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Stud­ies, at The Heritage Foundation.



[1] BP Global, "Statistical Review of World Energy 2005," June 14, 2005, at http://www.bp.com/genericsection.do?categoryId=92&contentId=7005893 (June 12, 2006).

[2] "Steady as She Goes: Why the World Is Not About to Run Out of Oil," The Economist, April 20, 2006, at http://economist.com/displayStory.cfm?story_id=6823506 (June 12, 2006).

[3] George W. Bush, "The State of the Union," January 31, 2006, at http://www.whitehouse.gov/stateoftheunion/2006/index.html (June 12, 2006).

[4] Max Boot, "Filling Tanks, Funding Dictators," Los Angeles Times, op-ed, May 3, 2006, at http://www.latimes.com/news/opinion/com­mentary/la-oe-boot3may03,0,3377186.column?coll=la-news-comment-opinions (June 12, 2006).

[5]  Ibid.

[6] The White House, "The Advanced Energy Initiative," May 24, 2006, at http://www.whitehouse.gov/infocus/energy (June 12, 2006).

[7] The White House, The National Security Strategy of the United States of America, March 22, 2006, p. 28, at http://www.whitehouse.gov/
nsc/nss/2006/nss2006.pdf
(June 12, 2006).

[8] U.S. Energy Information Administration, "U.S. Imports by Country Origin," updated May 23, 2006, at http://tonto.eia.doe.gov/dnav/pet/pet_move_impcus_
a2_nus_ep00_im0_mbbl_m.htm
(June 12, 2006).

[9] BP Global, Putting Energy in the Spotlight: BP Statistical Review of World Energy 2005, June 2005, pp. 4-19, at http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_
english/publications/energy_reviews_2005/STAGING/local_assets
/downloads/pdf/statistical_review_of_world_energy_full_report_2005.pdf
(June 12, 2006).

[10] Anthony H. Cordesman and Khalid R. Al-Rodhan, "The Geopolitics of Energy: Geostrategic Risks and Economic Uncertain­ties," The Center for Strategic and International Studies, revised March 20, 2006, pp. 29-30, at /static/reportimages/DAF384F9D6BF9E4F598AE1FC67424D86.pdf (June 12, 2006).

[11] The National Intelligence Council predicted that "West Africa will play an increasing role in global energy markets, provid­ing 25 percent of North American oil imports in 2015." This estimate understates Africa's future role, as it does not include North Africa or other regions of the continent that possess or are believed to possess significant reserves. National Intelli­gence Council, "Global Trends 2015: A Dialogue About the Future with Nongovernment Experts," National Foreign Intel­ligence Board, December 2000, at http://www.dni.gov/nic/NIC_globaltrend2015.html#link8c (June 12, 2006).

[12] Thomas L. Friedman, "The First Law of Petropolitics," Foreign Policy, May/June 2006, pp. 31-32.

[13] "The Paradox of Plenty," The Economist, December 20, 2005, at http://www.economist.com/business/displaystory.cfm?story_id=5323394&no_na_tran=1 (June 12, 2006).

[14]  Ibid.

[15] The White House, The National Security Strategy of the United States of America, p. 29.

[16] Keith Myers, "Petroleum, Poverty and Security," Chatham House Briefing Paper, June 2005, at http://www.chathamhouse.org.uk/pd
f/research/africa/BPpetroleum.pdf
(June 12, 2006).

[17] The U.S. and other donor nations have spent over $550 billion on development assistance (2003 dollars) since 1960 to help poor countries in sub-Saharan Africa attain economic growth and prosperity-with little success. See Brett D. Schaefer, "How Economic Freedom Is Central to Development in Sub-Saharan Africa," Heritage Foundation Lecture No. 922, Febru­ary 3, 2006, at http://www.heritage.org/Research/TradeandForeignAid/hl922.cfm.

[18] For additional information, see Ariel Cohen, Ph.D., and Gerald P. O'Driscoll, Jr., Ph.D., "The Road to Economic Prosperity for a Post-Saddam Iraq," Heritage Foundation Backgrounder No. 1633, March 5, 2003, pp.7-8, at http://www.heritage.org/Research/MiddleEast/bg1633.cfm.

[19] "While escalating oil prices represent a unique opportunity for many oil-producing countries, including those in Africa, these upward moving prices are definitely a serious challenge for net oil importers on the continent, as their recent economic progress and development may be rolled back." African Development Bank Group, "Can Struggling African Economies Sur­vive Escalating Oil Prices?" May 2006, at http://www.afdb.org/portal/page?_pageid=473,1036251&_dad=portal&_schema=PORTAL (June 12, 2006).

[20] Basildon Peta, "Africa's Leaders Stole $140 Billion," The Independent, June 14, 2002.

[21] As reported by George B. N. Ayittey, Ph.D., "Nigeria's Struggle with Corruption," testimony before the Subcommittee on Africa, Global Human Rights, and International Operations, Committee on International Relations, U.S. House of Repre­sentatives, May 18, 2006, at /static/reportimages/64D676DFF2D5D697CC7B4E375C557BAD.pdf (June 12, 2006).

[22] World Bank, "Where Do Things Stand in the World Bank's Dealings with the Government of Chad?" at http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/
AFRICAEXT/CHADEXTN/0,,menuPK:349881~pagePK:141159~
piPK:141110~theSitePK:349862,00.html
(June 12, 2006).

[23] For more information, see Extractive Industries Transparency Initiative, "EITI Priniciples and Criteria," at http://www.eitransparency.org (June 13, 2006).

[24] For additional information, see Cohen and O'Driscoll, "The Road to Economic Prosperity for a Post-Saddam Iraq," pp. 7-8.

[25] Jad Mouawad, "Eight Oil Workers Abducted from Rig off Nigeria," The New York Times, June 2, 2006, at http://www.nytimes.com/2006/06/02/world
/africa/02cnd-nigeria.html
(June 13, 2006; registration required).

[26] U.K. Foreign and Commonwealth Office, "The Voluntary Principles on Security and Human Rights," statement by the Govern­ments of the United States of America and the United Kingdom, at /static/reportimages/0F982309440D3C30689048F66611B156.pdf (June 13, 2006).

[27] For more information, see Peter Brookes and Ji Hye Shin, "China's Influence in Africa: Implications for the United States," Heritage Foundation Backgrounder No. 1916, February 22, 2006, at http://www.heritage.org/Research/AsiaandthePacific/bg1916.cfm.

[28] China has been strongly engaged in supporting and investing in oil-rich African countries including Angola, Nigeria, and Sudan despite questions over repression and corruption. It has also engaged countries like Ethiopia, which has been criti­cized because of election irregularities and its border dispute with Eritrea.

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