As some economies are angling to reap bounteously from declining crude oil price, Nigeria and a host of other economies that depend almost solely on proceeds from crude sale to stay afloat may be fatally hurt by a prolonged regime of cheaper oil, fuelling concerns that the price war among giant producers and consumers may ultimately unsettle the still fragile global economy, writes Assistant Editor ADEKUNLE YUSUF
Although it is no longer news that oil prices have tumbled, the gloomy prospects this portends for some economies seem to be causing sleepless nights in many countries. From about $115 for a barrel of Brent crude, the price fell to about $86, a reduction huge enough to send jitters down the spine of some major economies. Since then, panic seems to have gripped many countries, with fears that inability to rake in enough funds to fuel the economy may undermine serious government programmes that have direct bearing on the welfare of the citizens. Without mincing words, this is spewing grave concerns around the world, for if low oil prices last longer than expected, as all available indices show it will, the bill for oil consumers will be about $1 trillion a year lower, amounting to a shot in the arm for a stagnating world economy.
But it is also a scenario that is laced with mixed consequences for the struggling global economy. Since the price of oil is of critical importance to the world economy, given the fact that oil is the single largest internationally traded good, both in volume and value terms, creating a hydro-carbon economy, the prices of energy-intensive goods and services all over the world are also linked to energy prices. Therefore, any abrupt changes in the prices of fuel are laden with far-reaching consequences for both oil-producing and oil-consuming countries. So, for some governments, especially powerful ones such as the United States and its major allies, a new regime of cheaper fuel would be a rare opportunity the more product while its lasts, if not a boon for millions of its citizens who depend on oil to power their industries. However, for others, especially Nigeria and a host of other economies, mainly critics of the US diplomatic interventions, it is a formidable threat to their national economic survival.
A tracking of main factors that caused low oil prices in the last seventeen years shows four things: increasing Iraqi oil exports, reduced oil demand due to severe economic crisis in East Asia, a warmer-than-normal winter (1997-1998) in the Northern Hemisphere, and the agreement by the Organisation of the Petroleum Exporting Countries (OPEC) (1997) to raise the group’s production quota by 10 per cent. According to analysts, if low oil prices continue for a prolonged period of time, it could result in long-term reductions in OPEC oil exports, which would also force member countries to embark on difficult economic, social and political trade-offs.
Many losers, few winners
According to experts, the continued fall in the price of crude oil in the past three months is largely traceable to unexpected developments in chaotic Libya, which pumped 40 per cent more oil in September than it did in August, and Saudi Arabia’s boosting of its output as its own way to bulwark its market share and reduce the influence of American shale oil producers. Though no one would have thought that the emergence of Islamic State (IS) would have increased oil prices, Brent crude oil prices have plummeted since July, trading at its lowest price since 2012, all due to surging supply led by U.S. fracking production, stagnating European demand, and a strengthening dollar. While declining prices could have a negative impact on oil-producing economies around the world, some have significantly more risk than others. In a capsule, countries feel the effects of oil prices in radically different ways.While every major producer is likely to suffer as a result of the price decline, countries with lower production costs and budgetary expectations are expected to fare better than those with higher costs and expectations. At $115 per barrel, the world produced about $3.9 trillion a year at 90 million barrels per day. But at $85, the total amount is $2.8 trillion. So any country consumes more than it produces gains from the $1 trillion tranfer, mostly importers. Here are the like scenarios that may emerge if the cheaper oilregime lasts longer than envisaged:
Nigeria
A steep decline in oil prices is straining the budgets of Nigeria, where the economy is almost totally dependent on proceeds from oil exports, posing a potentially grave security challenge for a country that is already struggling to finance its major projects. Though a major oil producing country (Africa’s largest producer), Nigeria is not a major force in determining the prices of oil, which is responsible for a huge chunk of its revenue. In other words, Nigeria is not immune to oil price shocks. The plummeting price of oil has exacerbated the dwindling oil revenue accruing to the country, a situation exacerbated by rising oil theft the country is battling with. This has resulted in a decline in what accrues to all the tiers of governments from the Federation Account, a negative trend that started last year but which the federal government hardly wants to talk about, ostensibly in order not to create fears that the country is broke. Already, some states are at their wits’ end on how to pay salaries, let alone finance development projects or provide services that can impact meaningfully on the citizenry.
Imo State Governor Rochas Okorocha, speaking on behalf of his colleagues in the All Progressives Congress (APC), lamented recently that the dwindling resources coming to the states from the Federal Account Allocation Committee (FAAC) on every month mean that most states may be unable to afford to pay salaries.
“This has become a very serious concern to us as governors and we felt that issues that affect the lives of our people must never be politicised. We refuse to accept that this nation is broke. I thank God that the Federal Government is not broke, if the nation is not broke, what is due to states as revenue should be paid to the states. This idea of cutting down what should go to states does not in any way promote democracy and democratic dividends and so we, as progressive governors, do call on the Federal Government to look into the issue of dwindling resources or convince us as to why the states should not get what is due to them,” Okorocha said recently.
Although spin doctors in President Goodluck Jonathan’s administration have often played down the effect of crash crunch, maintaining that Nigeria will not be affected by the shocks in the global market, government is said to be quietly scrambling to confront the plunge in prices. Barely a week after insisting that its economy was immune from fluctuations occasioned by the continued slide in the international price of crude oil, the government made a volte-face, admitting it is affecting the revenue base of the nation. The Minister of Finance and Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala, announced last week that the country would have to draw down on the Excess Crude Account (ECA) if oil price dips below $78.
“Nigeria has two to three months of rainy day savings to cushion it while contingencies are put in place should world oil prices continue to fall. Our intention is not to run in there and raid it, but even if prices continue to go down we can survive sufficiently for two to three months. That is the time needed to get other measures in place. What you don’t want is a hard landing. Our buffers are slimmer this time,” she said.
The minister also promised, rather nebulously, that the federal government is already putting in place stricter measures to cushion the effect of the drop on the economy. She also disclosed that there is about $4 billion in the ECA at present, $2billion short of what the International Monetary Fund (IMF) had recommended, adding that the country needs to ramp up our non-oil revenues on the fiscal side. According to her, McKinsey, a global consulting firm, has been engaged to carry out an extensive review of revenue services in order to identify potential gains.
“In an oil country, you can never feel at ease exactly. But I feel we can master this situation because we have a diverse base. We will have to look very hard at recurrent expenditure, and identify overlapping agencies. When the price is heading down, everyone sees the necessity but that doesn’t stop them hating you,” she said. The minister was, however, hopeful that lowers oil prices may even provide a stronger incentive for the government to breathe life into efforts to revive the stalled oil sector legislation to stimulate production, and rein in oil theft, which has cost billions of dollars a year.
Last week, India led the way by announcing an end to diesel subsidies. Fears are rife that other countries may soon follow the Indian example. In Nigeria, for example, attempts to remove the fuel subsidy, a scandalous sum supported through the Petroleum Support Fund, managed by the largely unaccountable Petroleum Products Pricing Regulatory Agency (PPPRA), have been met with stiff resistance from many segments of the Nigerian society because of varied interests.
In this year’s budget alone, a whopping N971.1 billion is earmarked for oil subsidy, while record shows that subsidy payments in the last ten years have gulped more than N10 trillion – all shrouded in controversy and corruption.
So if the low price persists longer than anticipated, Eze Onyekpere, lead director, Center for Social Justice, says the economy is in for a crisis of its life. While United States and other big global economies are re-evaluating to stem the tide of the looming economic crisis, Nigerian leaders, who appear not to be bothered by the danger signals, are busy strategising for political relevance ahead of the forthcoming 2015 polls. According to a recent survey, seven of the 12 OPEC members, including Iraq, Iran and Nigeria, now need far higher oil prices to cover their budgets.
In July this year, OPEC had cut down on its prediction of future demand for crude oil from the 12-member cartel next year by 300,000 barrels per day against the backdrop of surging supply from non-OPEC producers, particularly the United States. The U.S. overtook Saudi Arabia and Russia to become the world’s biggest producer of oil as extraction of energy from shale rock strengthens the nation’s economy, Bank of America Corporation said in a report. For this year, Nigeria had projected a budget of N4.5tn, while setting the benchmark at $74 per barrel. The government had projected oil production of 2.383 million barrels per day in the 2014 budget, but the National Bureau of Statistics (NBS) put the actual production figure for the second quarter of the year at 2.21mbpd.
And with Nigeria’s economy, estimated to be over 80 percent dependent on imports, economic experts say fiscal deficits seem very likely in the months ahead. According to them, chances are that this will have a serious effect on Nigeria’s short-term economic and fiscal growth.
Already, government has hinted at a cash crunch, with an appreciable decline in the revenue accruing into both the Excess Crude Account (ECA) and the Federation Account. Onyekpere says there may also be delays in salary payments across the states as a result of dwindling revenue from oil, a problem he blames on government, which has paid lip service to the diversification of the economy. Revenue statistics show that the non-oil sector accounts for only 10 percent of total revenue, which means the impact of declining oil prices on monetary policy and foreign capital inflows may be huge, if the slide persists. As regards monetary policy, since the traditional disposition of the Central Bank of Nigeria (CBN) is to defend the nation’s currency through increased supply of foreign exchange, there may wrenching impact on Nigeria’s external reserve, which has also experienced a decline in recent months.
If new economic realities force the CBN to respond to the current dip in oil prices by tightening monetary policy, it may further push up interest rates, up the cost of funds to investors in the economy and limit access to investible funds. Already, reports indicate that the falling oil prices have unnerved global investment markets, with many investors already seeking the relative safety of government bonds, driving their prices higher and their yields lower – leading to a slump in business activity and weak consumer spending. But there is good news: it will bring down the cost of fuel importation, which has always taken a big chunk of the country’s revenue. Overall, government at all levels may be constrained to embrace the new realities as another wake-up call to diversify the economy, seek alternative sources of revenue and ensure better management of national income.
