Oil Shutdown: Why the Panic?
17 min readKhartoum shuts down South-Sudan’s Oil: Possible reasons to the unilateral decision but why should South panic when consequences will be equally weighted?
By Kastro C. Deng.
Okay, to you people that know little but are curious minded about the covert affairs behind North and South Sudan’s political spectrum, allow me to open the political circumference before your eyes perhaps to enlighten your perspectives with a portion of my knowledge. First and foremost, I would like to briefly take into account that the proceeding article is not a professional compilation hence it is open to criticism, all views expressed are pertaining self-opinion. Albeit the purpose of the paper is metaphorically mentioned in the title above, I would like to further reiterate that this paper intents to critically analyse some of the reasons behind temporal termination of South Sudan’s oil (that’s the politics). Henceforth, the position of this article acknowledges and questions that, the termination of oil-flow will have negative impact on both economies, in light of this event, why should South-Sudan be the one that panics? (That’s the economic aspect of the paper). As you can see, the structure of this paper is twofold. We will start our analysis with the scrutiny of the political side of it.
The Politic: Why was the flow of Oil terminated?
Omar Bashir, the chairman of National Congress Party (NCP) and the president of Sudan has made a unilateral decision ordering his government to shut-down flow of South Sudan’s oil to Port Sudan which is located North-East of Sudan, just off the coast of Red-Sea where global buyers receive their purchased crude oil. According to NCP officials, the decision was made apparently because South-Sudan is supporting the Sudan Revolutionary Front (SRF) fighting the NCP government. I would like to stress that, the NCP’s argument is merely propaganda and a represents vague manifestation of truth. Here are the real reasons why the oil got shut-down.
First, the NCP shut-down oil-flow because they are displeased that their “almost well planned” plot to destabilise South failed to persist. About five different South Sudanese rebels/militias Khartoum’s government previously harboured, armed and used to bring/cause havoc to South-Sudan have accepted the general amnesty offered by South Sudan’s president, diverting from Sudan Arm Forces’ (SAF) payroll unto SPLA’s. The former insurgents were heavily armed and have manoeuvred back to South with full capacity, man-power, ammunitions and military logistics given to them by North Sudan. The abolishment of baseless revolutions and the re-unification of former rebels with their country as well as their intentions to support development of the young nation through stability and peaceful co-existence were not seen as patriotic but rather threats to NCP’s interest. Johnson Oliny and Bapiny Monytuel among others are good references for this matter. In due course, North Sudan is still at war, still enduring self-destruction. The rebels fighting the NCP are fighting a legitimate revolution, calling for a regime change of the government that have orchestrated Darfur and Nubian genocides and possibly Abyei’s ethnic cleansing and other undocumented war crimes committed elsewhere in the Sudan. Never before have any rebel group lay down their arms or accept an amnesty offered by president Bashir, instead all rebels fighting NCP have pledged their desires to oust the government by all means. Possibilities of overthrowing NCP are imminent. Can you picture Bashir’s irritation? He ordered his army’s chief of staff to tighten up security in the capital with special paramilitary forces and secret police regulating and oppressing suspicious activities.
Furthermore, shutting down the oil is supposed to make South Sudan’s government weak, incapable to pay soldiers their wages, the motive is that some of them might divert to SAF’s payroll and can be used to practice scotch-earth tactics against people in South. Consider this too, during the course of Sudan’s civil war, it is widely claimed that most people in SAF’s infantry were factions of Darfur, the two Kordofan and Blue-Nile. However, due to changes in political sphere, these factions are the ones that are fighting against SAF, meaning SAF’s man-power haves substantially weakened, this was evident in the invasion Heglig when SAF got miserably defeated by the SPLA. So, in order to keep their infantry numbers up, SAF need some disloyal generals from SPLA to bring them extra troops. You know what else is crazy? How the NCP have the audacity to tell the international community that South-Sudan is supporting SRF thus that is the reason for halting the flow of oil when they are actually doing the same thing. The rebels that have defected from them came back to South with arms, cars and uniforms that are exactly the same with SAF’s military hardware and logistics, in fact one of the Brigade-Generals that deserted from North confessed that his unit was conscripted by NCP and was sendt to skirmish in South Sudan’s territory but instead decided to desert to the SPLA. The facts about proxy wars and who is supporting who are vivid but in order to keep international community’s pressure away from North and directed at South, Omar Bashir had to be the loud mouth.
Secondly, Abyei is due to hold its referendum this October, a self-determination process which gives the region two options whether to remain a part of North Sudan or to join their brothers and sisters in South. Don’t misquote me, by brothers and sisters I mean it in literal terms. In essence, I refer to their Ngok Brothers that resides in Upper Nile, Unity State and Jonglei. Never will you find any Ngok chiefdom in Kordofan let alone other parts of North, so what gave North-Sudan title to claim Abyei? Anyways lets carry on, the plebiscites proposed by the AU and endorsed by the UN general assembly allows only the predominant Ngok tribes to participate in the referendum. The results will inevitably be secession of Abyei from Sudan to South Sudan due to identity, geography, culture and tradition. Not that O’mar Bashir cares about people of Abyei, his primary concern is the potential oil revenues that he will loste if Abyei gets carved into South. So by shutting down the flow of oil, Omar Bashir’s motives are crystal clear. His intentions are to cause panic in South Sudan so that the Abyei issue is forsaken and to bring into agenda the already sealed oil agreement. In doing so, the government of South Sudan is kept busy and subsequently the Abyei referendum gets postponed. It is also worth mentioning that North-Sudan is currently mining an oil reserve that is situated in the heart of Abyei, the secession of Abyei means immediate termination of that oil reserve as it becomes a property of South Sudan.
Thirdly, Bashir government intends to deprive South-Sudan from of accumulating oil wealth in order to stall the development. Fertile land, abundant of oil reserves, youthful population and availability of other natural resources including gold indicates potential long-run economic prosperity. Economic growth in South Sudan would advance all institutions including security apparatuses. South Sudan’s military advancement is considered a threat by Khartoum government bearing in mind less than two years ago Omar Bashir labelled South-Sudan an enemy state.
Fourthly, Omar Bashir haves probably strategized that by shutting down the flow of oil which is South Sudan’s main revenue stream, South-Sudan government will subject to Khartoum’s varies demands including border problems, trade issues, disputed territories, equal representation of Abyei council yet to be established to organise and conduct referendum and possibly an increase in the transit fee among other outstanding yet impossible demands such as calls for SPLA/M to disarm SRF and allowing Misseria tribe to participate in Abyei’s referendum.
Finally, by shutting down the oil flow O’mar Bashir is hoping that South Sudan’s government become financially insolvent since 98% of its bureaucracy’s salaries come from oil wealth. While South Sudan goes broke, Bashir probably prophesised instability in South which could possibly unfold in all sorts of forms. A typical examples would be divergences among SPLM/A hierarchy, politically motivated inter-tribal clashes, possibly road-side ambushes, low military morale, civil disobedience, status-quo losing popularity or even at worse, break out of some army officers (traitors) from their ranks which Khartoum will be willing to accommodate and mobilise as militia forces solely to bring calamities back to South Sudan and to prove what they have always wanted to prove to international community, the incapability of South-Sudan to govern itself.
These are probably not all of the reasons why the flow of oil was halt but I am more than certain that they topped NCP’s policy agenda and possibly lead to unilateral decision to shut-down the flow of oil. But then again, so what if North shuts down the oil? We are both going to suffer anyways. Let’s look at the economic side of things, how will consequences unfold.
The Economics: Oil Shut-Down will impact North-South economies
So the argument goes like this, why should South Sudan be the one that panics due to oil shut-down when the consequences will be equally weighted and placed in shoulders of both South and North Sudan? The transit fee which North receives informs in form of U.S dollars is their main reserve which their traders use to purchase goods from the international markets. The shut-down of oil will be a major blow to North-Sudan because Sudanese pounds will lose value relative to the U.S dollar. The supply of hard currency becomes minimal while their demand remains high. I bet you are wondering by now, how exactly will this affect their economy. First, remember these two economic glossaries.
One: Reserves. In order to conduct an economic transaction, business-men usually buy commodities from other countries and sell them at domestic market. Most of foreign goods are bought with U.S dollars. Every country has a central bank that is run by the government. The central bank controls interest and exchange rates and is responsible for selling U.S dollars. The business-men would use domestic currency to buy U.S dollars which they use to purchase commodities from foreign market. The value of which a domestic currency is worth relative to U.S dollar is important. High value of domestic currency means it can buy more U.S dollars and more U.S dollars increases surplus to buy more commodities in foreign market. Thus, we refer to those U.S dollars as reserves.
Two: Inflation. Refers to an increase in commodity prices, in other words inflation means products become expensive.
So will the oil shut-down affect North Sudan’s economy? It minimises their availability of reserves. We will use the economic model of supply and demand to analyse how the decline of reserves in an economy causes inflation and subsequently leads to public disorder.
First we have to understand the logic of supply and demand. Supply and demand is perhaps one of the most fundamental economic concepts and it is the cardinal pillar of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price. The relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. When talking about how decline of U.S dollars results in inflation, we are talking about the supply relationship assuming other factors of the economy remains constant (ceteris-paribus). The following graph depicts logic behind supply and demand by using the shortage of U.S currency in North Sudan’s economy as a hypothetical case study.
Supply of U.S dollars (2)
Price of
Sudanese pound New Equilibrium Supply of U.S dollars (1)
(P2) 400
(P1) 200 Original Equilibrium
|
|||
Demand of U.S dollars
$50 $100 Quantity of U.S dollars demanded (Reserves)
Okay I sense that some of you are looking at the graph and thinking what the hell is Kastro on about. I do acknowledge that it’s not everyone that knows economics, but I promise you the graph above is not as complex as it seems to be. The oil transit fee North Sudan receives from flow of South Sudan’s oil is its main reserve stream. Shutting-down the oil means terminating liquidity of reserves to North Sudan’s economy, henceforth the reserves decline. The reduction of reserves results in shortages of reserves. Let us epitomise this argument further through the effects of supply and demand by using the graph. The price on vertical Axis of the graph depicts the cost of North Sudan traders to purchase U.S dollar. The quantity on the horizontal axis means the amount of U.S dollars (reserves) North Sudan traders are demanding from Sudan’s central bank.
Now look at the centre of the graph where the demand curve meets supply and both equilibrate at a particular price (P1), we have two equilibriums. Look at the first equilibrium (original equilibrium) this equilibrium tells us that before North Sudan shuts down the flow of oil, it had plenty of reserves coming into the economy in terms of oil’s transit fee. The abundant of reserves in economy makes U.S dollars relatively cheaper to the Sudanese pound. For example in the original equilibrium, it costs Sudanese business-men only 200 pounds to buy $100 U.S dollars in the central bank. The oil shut-down would mean termination of transit fee or decline of U.S dollars. The new equilibrium shows us that, supply of U.S dollars had declined from Supply of U.S dollars (1) to Supply of U.S dollars (2). Pay particular attention to the consequences, as reserves decline what happens to the price in the vertical axis and the level of quantity demanded in the horizontal axis? That is right, the supply and demand curves shows that the economy shifted to new equilibrium. Because price of U.S dollars have increased, the quantity of U.S dollars demanded declined. It now cost Sudanese traders 400 Sudanese pounds to purchase only $50 U.S dollars. The price goes up because the rule of supply and demand tells us that more demand increases price.
What are the implications? First, the policy implication would mean that, in the private sphere, businesses have two options, either to close their doors or borrow money from foreign banks but both options are not usually viable because nobody likes debt. In the public domain loss of confidence in investing in that particular country results, as limitation of reserves discourages potential investors to disregard investing in the country. Such challenges confronted the Asian economies during the 1997 economic turmoil.
Secondly, the weakness of national currency affects the import and export market. As currency devalued, domestic products become cheaper to foreign buyers whilst foreign goods become expensive for domestic traders. This could further cause a budget deficit in regards to balance of trade. If imports are expensive, the price of domestic commodities also becomes expensive because traders increase prices to compensate their costs and to scoop profit. This in general terms means inflation.
Thirdly, according to post Keynesian economics, inflation is also associated with unemployment because worker’s wages goes up as people demand higher wages to match inflation and when prices goes up, firms employ less workers thus unemployment results.
Fourthly, anything that results in inflation or affects employments causes public frustration as we have witnessed it with the EU economies and more recently with Turkey. Nobody likes to pay high costs and of course no one likes being forced out of work.
NCP as I have argued above is already losing political grip and people are eyeing protesting. If NCP government is to let matters escalate economically then public demonstration is inevitable and possibilities of ousting the regime are definitely not miniscule. With political and economic insecurities, NCP is not immune at all. There is no way in NCP’s conscious mind will they let matters escalate to that extent. I doubted the possibilities of O’mar Bashir shutting down the oil pipe-line “forever” as he remarked.
To be honest, I sketched this article the very day President Bashir made his remarks, he stressed and I quote “O Awad [oil minister] tomorrow direct oil companies to close the pipeline and after that let them [South Sudan] take it via Kenya or Djibouti or wherever they want to take it…The oil of South Sudan will not pass through Sudan ever again”. Yeah right, we’ll see about that.
A few days later Sudan Tribune published article titled “Sudan leaves door open for rollback of oil shutdown decision”. In this article, Sudan Tribune wrote that the NCP gave South Sudan 60 days to stop supporting rebels in order for the unilateral decision to be reversed.
Okay, so it’s either am too stupid here or wise enough to pick up some contradictions in NCP’s willingness to shut down the flow of oil forever. I thought Bashir said the oil will “NOT” flow through Sudan “never” again so what is with the sudden change of policy? I can’t answer that question, as the Nigerian saying goes ‘wonders shall never end’.
Least but not last, the process of which the oil flows to Port Sudan requires labourers, some of these technicians being from Sudan. The termination of oil means putting these workers out of jobs. Consequences means losts of tax revenues and angry former miners here and there.
Speaking of jobs, yeah South Sudan pays its government officials wages and salaries out of the oil revenues but it’s not like South Sudan is the only party that have a bloody bureaucracy. Tell me Mr Bashir, you are broke, just a few days ago the media reported that you are looking into prospects of privatising Sugar plantations leaving cotton as the only key government asset, your country was also reported few months ago to have defaulted on its financial obligations to a particular international economic institution, your credit card rating is very poor making donor, countries incompetent to grant loans, investors don’t have confidence to invest in your country because your financial institutions are often insolvent and you have also accrued external debt which is estimated to be over $40 billion! So how are you going to pay your bureaucrats if you shut down the oil flow forever and how will you reimburse your foreign debt?
Ps your big mouth, historical animosities and incapability to abide by democratic status quo got your government caught up in a controversial diplomacy with international community already let alone irritating oil stakeholders like your key ally China and other parties such as Malaysia. How are you going to explain yourself to them, bear in mind that Abyei’s case might be referred to the United Nations Security Council, are you willing to loste China’s support then? You know too damn well that China is a permanent member of the Security Council right? They have veto power, hurt their corporate interests and they will use sanction powers in any case against you anytime. Nonetheless, have you forgotten how China controls most of the global economic transactions, gradually taking global hegemony, fund and constructed the oil pipe-line and have even conscripted the SAF with military aid? You and your government officials usually mutters incongruously against the West but you are just an insect in their ears, China is all the backing you’ve got considering that Iran is in economic turmoil, are you sure that you want to abandon the Sudan-China bilateral relationship? I didn’t think so.
South Sudan Is Not Stupid to fall for your deceit: More Reasons why Sudan should practice caution
Politically NCP is not in good terms and condition with its citizens in fact it is incontestable to argue that the NCP is losing its political momentum, but let’s make this argument coherent. We have seen multiple media outlets reporting how Sudan often repressed demonstrations, we have witnessed university students clashed with police due to political differences, we have seen the fall out of spy chief and other prominent intelligentce officers from NCP and we have heard of senior party figures boycotting NCP conventions due to disagreement and how most of opposition parties conspired to ought oust the regime.
Furthermore, last year just after SPLA invaded Heglig and shut-down oil supply the move triggered amid public out-cry in Sudan, the implementation of austerity measures for instance the removal of fuel subsidies due to government losing reserves have also resulted in demonstrations which the government successfully repressed, we have seen petition of the Beja people in far Eastern region of Sudan under the auspices of the Beja Congress and they were also silenced, the political climate in Darfur is heated, Kordofan and Blue Nile are also fragile states and not to mention the poor people in the far North of Sudan in the border of Libya which after more than two decades of NCP rule have yet to see provision of basic necessities and infrastructures. Plus the revolution waged by the heroic SRF against the devilish regime is persistent with its course. I think you get the point. Just like the case of Heglig, a loss of transit fee could result in decline of Sudan’s reserve currency. People could demonstrate against, inflation particularly the rise of petrol prices which could potentially escalate into instability.
Though South Sudan will endure similar repercussions, the international community is sympathetic to the new nation. Japan had just offered the new republic $ 8 billion worth of loans. If the country’s chamber of Commerce and economic planning is smart enough, they will prioritise investments on agricultural projects to create jobs, roads for easy transportation of people and goods and access to obscured areas controlled by elements such as rebels for instance Yau-Yau assuming he remains a threat, accessible roads are also desired for the purpose of containing cattle rustlers which is one of the major obstacles facing the new country and also investing in alternative oil pipe line, building ports and other crucial infrastructures such as electricity grids. These conditions as well as law and order are pre-requisites to any firm who is willing to invest in South Sudan and to development. Nonetheless, revenues these sources will generate in 5 years will be more than enough to support the provision of health facilities and high standard education in the country among other necessities such as incentives paid to orphans, seniors’ pensions and disability schemes. Miss-allocation of these funds however would prove detrimental to the prosperity of the country and possibility of defaulting on $8 billion worth of debt, yielding poverty now and many more years to come. $8 billion is more than enough for population of only 8 million people. According to demographic statistics 70% of South Sudan’s population are youth out of that only 40% of them are employed, meaning employment rate is relatively small. If salaries for the employed people were to be subtracted out of that $8 billion U.S dollars there will still be enough funds to support the establishment of those infrastructures outlined above.
To conclude, we have seen that “shutting down oil forever” is not in the best interest of North Sudan at all, it is merely rhetoric, they are just doing so to pressure South Sudan to fall into their demands and to shun international community from paying close attention to Sudan politics. Having said that, I wish I can tell president Bashir that South Sudan is not stupid enough not to foresee your pathetic intentions. If Sudan shutdowns the flow of oil forever, we will surely both suffer but why should South Sudan be the party that panics the most when consequences will be equally weighted and burdened both economies?
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