The harsh implications of cheap oil on Uganda's economic prospects

By Doris Acheng Odit

Cheap oil and oil-biproducts is an oil consumer’s idea of an ideal world. Why, I was among the very many people who had begun entertaining the idea of purchasing a car and going on a 1200 Km road trip, just for the sake, which save for purchasing the car, would cost me close to peanuts.

However, thanks to the merry-making and the opportunities the free falling oil prices have given us, especially with regard to cheap driving, very few of us have had a chance to look at the bigger picture and to reflect on the implications of cheap oil on Uganda’s economic prospects, especially with a focus on the oil and gas extractive industry. 

With the oil industry projected to double Uganda’s current GDP and to facilitate Uganda’s growth from its current low income status to middle income status within only 10 years of commercial production, -which by my estimation is a projection of exceedingly fast economic growth- it is clear that the current trend, with regards to free falling oil prices per barrel leaves a lot at stake. How so?

Those of you who have been following the news already know that Oil production has within the past few months dropped significantly from approximately US$115 per barrel of crude oil as of last year, to its current US$47 per barrel, signifying a drop of prices by about 70%. 

The implications are far reaching as it impacts on all players in the extractive industry value chain, with the most detrimental impact being on oil producers, such as the three extractive companies working in Uganda’s oil sector; with implications for their projected profit margins and their propensity to engage in transfer pricing; and on the government of Uganda’s projected earnings on corporate tax from the industry.

My layman analysis is as follows;

First the pre-financial feasibility appraisals of oil production by the three oil drilling companies operating in Uganda must have justified their heavy capital investment on returns calculated on average oil revenues per barrel of crude oil over the last say 10-20 years, on the assumption that they would break even and achieve profitability soon enough.

The lower current historical drop in oil prices could have an impact on the profitability levels of these companies and hence force them to reduce on operational expenses, including reduction on labour costs, which in the long run could have a significant impact on the number of jobs the industry will provide for local Ugandans.

Second, a drop in anticipated profitability levels by oil drilling companies could exacerbate the practice of transfer pricing among multinational drilling companies with the intention of tax avoidance on their already little profit margin.

In layman’s terms, a clever way multinationals use to reduce their taxable income through devising means of transferring their tax burdens to their subsidiaries in countries that have lower corporate tax, inadvertently paying less that they should have paid in the country of operations. With lower profit margins already, and a high corporate tax of 30%, the current downturn in oil prices might be an incentive for these companies to engage in the a fore mentioned tax avoidance practices.

The bigger picture for Uganda’s economy in general?, less profit margin means less taxable income, less taxable income means less earnings for the country from taxes, less taxes means less contribution from the oil and gas extractive industry to the country’s coffers, and hence less contribution to the country’s GDP. The implication? Maybe the economy will grow fast enough thanks to oil and gas production but not as fast as projected.

My layman’s solution, don’t put your eggs in one basket.

Again, as many have advocated, diversify the economy, focus on industry development and modernisation and development of the agricultural sector and maybe, just maybe, we won’t find ourselves in the pickle of drowned anticipation in 10 years to come.

The writer is a freelance management and ICT consultant