Since mid last year when the price of oil started plummeting, there have been concerns over its implications for the global economy, especially Nigeria, which is heavily dependent on oil for revenues. There is widespread fear over how far Nigeria can go if the slump in oil prices continues, Assistant Editor EMEKA UGWUANYI takes a look at the situation and what it portends for the country.
The price of oil, like any other commodity, swings. Over the years, there has been evidence that when the price of oil goes up steadily over a long period, the tendency is for a drastic price drop to be expected. It is because of the volatility and politics of oil, which determine the way the price goes, that led to the formation of the Organisation of Petroleum Exporting Countries (OPEC) in September, 1960, to intervene in shoring up prices through production cut when needed.
Such interventions in the past, according to the former Minister of Petroleum, Odein Ajumogobia, had immensely helped in the rebound of prices. For instance, prices had averaged $18 per barrel from 1990 to the end of 1997, but from December 1997 to July 1999 oil prices had fallen from $18 per barrel to about $12 per barrel. In December 1998, the price dipped below $10 per barrel, and by April 1999 the price was just over $11 per barrel. But OPEC intervened by joining forces with non-OPEC producers such as Mexico, Oman, Norway and Russia to cut 2.1 million barrels with effect from April 1, 1999. By the end of April, the price had rallied, reaching about $16 per barrel and $18 by July. It later rose to $20 per barrel.
Also between 2007 and 2008, the world witnessed the greatest level of volatility in the oil market with prices going up from $65 per barrel in 2007, to an all time high of $147 per barrel in July 2008 and many analysts predicted a rise to $200 per barrel, but by October of the same year, it dropped to $32 per barrel. Similarly, OPEC intervened, cut production and price rallied and rose to $70 per barrel. Very few people predicted that oil price would rise soon to $100 per barrel and by the beginning of last year oil prices had gone up averaging about $110 a barrel before the current slump set in mid-last year.
However, the fear that the current price slump may last longer than expected is hinged on the fact that the leading oil producing members of OPEC such as Saudi Arabia and Kuwait have refused to buy into the proposal by other members to cut production. Besides, the United States (US), a major global oil producer and consumer, is accessing its oil reserves apart from the regular production; therefore, it is not buying from external market. Also, oil demand by other big buyer countries such as China has dropped, following a lull in the economy. Therefore, the glut in supply is expected to continue until all members of OPEC reach a consensus to cut production perhaps in their next meeting in Vienna, Austria, on June 5, this year.
There are various unconfirmed reports why the big time oil producers are pushing the commodity into the market despite the low price. For instance, the President of Dangote Group, Aliko Dangote, who spoke on ‘Global Energy Policies and Power Play- Emerging Regional Dynamics,’ at a forum in Lagos, said the topic is about the Gulf of Guinea in general, and Nigeria in particular, now that not a single drop of oil from Nigeria, and only an insignificant quantity from the region in general goes to the US, the traditional market for the bulk of the oil trade from the region. The new trend, he said, is not likely to change in the foreseeable future.
He said until very recently, sustained high oil prices as well as an increasing demand fueled by growth-induced demand in fast growing countries such as China, India and other emerging economies, have encouraged the development of new sources of oil, especially shale oil and gas, as well as the emergence of new oil regions. He stated that high oil prices over the past decade or so have also accelerated the search for alternative fuels and continued improvements in fuel efficiencies. The consequence of these developments have created a significant shift in the supply dynamics and an oversupply situation with the resultant collapse of the oil price which, in just a few months, has seen a 20-25 per cent drop from over $100 per barrel to just below $80 per barrel by November last year. The price further fell to below $50 per barrel by close of the year.
Dangote said: “These demand- supply dynamics however, are not the only drivers of the recent price collapse. Some observers have suggested that global politics and power play are also at work. Could it be the “Swing Producers” flexing their influence? Saudi Arabia, which is capable of pumping 12 million barrels per day versus the US nine million barrels per day appears to have started a price war designed to punish its major competitor (Russia), who is unable to tolerate oil price at levels below $75.
“In October 2014, as oil prices slipped towards $85, the Saudis increased their production and offered discounts to major Asian customers, and this month, with US prices nearing $80, Saudis again offered discounts to their North American customers in a transparent bid to gain the market share.
“United States oil supply un-disputably has contributed to low prices, the question is how soon low oil prices can chase American oil from the market. No doubt, an extended period of low prices would kill projects in oil sands, deepwater and the Arctic, which typically require many years and billions of dollars to develop. But the Saudis are also not able to sustain low prices, as their economy is now accustomed to oil above $100. It is believed that Saudi Arabia needs the price to be above $90 to balance the books, but can live with lower oil price for longer than their competitors.
“Another scenario: Could this be high stakes poker by world powers? USA and Saudi Arabia playing the oil card against Iran and Russia? Think about this a minute: “the Obama administration wants Teheran to come to their position over its nuclear programme. It also wants Vladimir Putin to back off eastern Ukraine. After recent experiences in Iraq and Afghanistan, the white House has no desire to put American boots on the ground to force their position. Instead, it is in alliance with Saudi to drive down oil price by flooding an already weak market with crude?
“As the Russians and the Iranians are heavily dependent on oil exports, the assumption is that the economic impact of sanctions and significantly reduced oil revenue, will make them easier to deal with. So have the US and Saudi Arabia found a common cause to use oil as the leverage? Saudis want to put pressure on Iran and to force Moscow to weaken its support for the Assad regime in Syria. As oil and gas account for 70 per cent of Russian exports and its budget does not add up unless the oil price is above $100, the US is able to bring deeper economic pressure on Russia in addition to sanctions. Could this be another dynamic?” He noted that the increasing instability as a result of the terrorist activity in Nigeria also worsens the impact of crude price fall.
Also, some stakeholders said the oil price crash is a deliberate arrangement besides increasing shale oil output. They said some militant groups, such as the Islamic State in Iraq and Syria (ISIS), access crude oil illegally and sell it through informal channels at very low prices to fund their activities. But with low oil prices, it would be difficult to find buyers, which will affect them negatively or weaken them, a reason such groups have resorted to kidnapping and asking for ransom. There are speculations too that the fall in price is also deliberate to punish Nigeria for not legalising same sex marriage and giving freedom to homosexuals.
However, Ajumogobia and the former President of the Nigerian Association of Petroleum Explorationists (NAPE), Mrs. Adedoja Ojelabi, said increase and decline in oil price are normal, noting that what matters is to manage the revenues from the period of high price well to make up for that of low price. It is important to save for the rainy day, they said. Ojelabi said the falling oil price shouldn’t have been a concern if the necessary precautions were put in place. She said in any normal market, prices are expected to rise and fall, but the fact is that as a country, we don’t anticipate issues that will drive prices up or down. She stated that although Nigeria doesn’t have control over oil price because it is internationally determined through the forces of demand and supply, but it can mitigate the effect locally through building of relevant infrastructure such as refineries and electricity, among others.
“If we have self-sufficiency, the effect will trickle down to other sectors of the economy. Imagine if Nigeria doesn’t import products, but produces and refines more than it requires locally, in a period of continued drop in prices, it can export refined products and create jobs and value in-country. Also if proceeds from oil have been sufficiently invested in making power available to Nigerians, the benefits should be unquantifiable because uninterrupted power supply will boost industrialisation, manufacturing and technology development,” she said.
Challenges
The greatest challenge that crude oil price crash poses to Nigeria, according to analysts, is the inability to fund the budget for smooth running of the economy and government. For instance, Dr Austin Nweze, a lecturer at the Pan Atlantic University, Lagos and governorship aspirant in Ebonyi State under the Social Democratic Mega Party, said Nigeria runs a rental economy where commodities such as oil, which account for 80-90 per cent of the nation’s revenue, are exported. Therefore, there is no in-country value creation, which could have been if the crude oil is substantially refined in the country.
He said as the 2015 budget stands, it is undecided with oil benchmark of $65 per barrel, while oil price is below $50 per barrel. If there is no money to fund the budget, it means there will be no implementation of capital projects and workers’ salaries will be difficult to pay. There was such a scenario in 1998 when the price of oil was very low and salaries could not be paid and teachers were out of school because schools were closed.
Nweze noted that although, the government has the option of borrowing to fund the budget, but it should know that it has paucity of infrastructure from where money could be generated to pay back. Besides, the foreign exchange reserves have dropped significantly. He said when borrowing, countries consider their percentage debt to Gross Domestic product (GDP). This consideration is critical, he noted. He said that countries with high GDP such as the U S can go as high as 80 per cent but because Nigeria runs a rental economy, its percentage debt to GDP should not be more than 10 per cent even though the standard acceptable limit is 40 per cent, adding that currently Nigeria’s percentage debt to GDP is well over 20 per cent.
He also said if the oil price slump persists for so long, many economic activities and projects may be put on hold and that implies job cuts, retrenchment and downsizing of the workforce.
The Group Managing Director, Nigerian National Petroleum Corporation (NNPC), Dr Joseph Dawha, corroborated Nweze’s view on loss of jobs and projects stagnation when he spoke at a conference in Lagos on January 20 this year. The ongoing decline in crude oil price, according to him, will cause delay of about three deep water projects in Nigeria.
Dawha, who spoke through the Group General Manager, National Petroleum Investment Management Services (NAPIMS), Mr. Jonathan Okehs, said that many companies had serious cash flow challenges due to oil price decline, which has reduced their capital expenditure. “To many healthy companies balance sheet these will result in delay of economically viable projects. Delay in major projects will now be featuring in many companies’ projects and progammes, especially for offshore projects.”
He said a number of deep water projects will suffer delays or outright cancellation including one in Angola, three in Nigeria and one in Ghana. In shallow water, two projects in Angola, one in Nigeria and two in Ghana may also suffer delays. According to him, in Nigeria the challenge for the industry is how to manage major projects through both price and physical uncertainty.
The President of NAPE, Chinwendu Edoziem, also expressed concern that the oil price crash may lead to stopping exploration for discovery of new oil fields. He said that it is the price of crude that determines whether an oil firm will go and drill or not. Search for oil is often driven by price of crude, so let’s pray the price rallies.
Solutions
Dangote said international relevance and influence in any geo-political interaction and power play depend fundamentally on the internal social cohesion, economic strength, and political stability of the player nation. In other words, international political prestige and clout depend on the legitimacy and transparency in governance and socio-economic development of the country. For Nigeria to achieve its aspirations in the global arena, two imperatives must be vigorously pursued: significant improvement in governance and broad based inclusive socio-economic development.
Nigeria, he noted, must increase its local processing and consumption. This has been the goal of the government for many years. But the progress has been impeded by lack of investment in the downstream petroleum sector as well as a very outdated policy and regulatory environment for the oil and gas sector.
He said despite Nigeria’s GDP rebasing, which brought it to the 26th largest economy in the world and the largest economy in Africa, its GDP per capita still remains low at $ 2,688 and ranks her as 121st in the world (South Africa has a much higher per capita GDP of $7507 and ranked 69th in the world.
The much anticipated Petroleum Industry Bill (PIB), according to him, needs to be passed as it affects the source of the bulk of national foreign exchange earnings. “This is critical to the transformation of the sector and its repositioning to play an effective role in the new economy. The removal of Petroleum Fuel Subsidy is also critical because it benefits the more affluent, which is a small minority of the population,” he added.
Nigeria’s inability to monetise its enormous natural gas resources, according to Dangote, is a major challenge. Gas, he said, has great potential to accelerate economic growth, adding that the huge deficit in the nation’s energy consumption especially electricity, which has constrained our economic growth, can be easily eliminated if gas is fully utilised. “The key is to adopt a pricing regime for gas that will encourage investment in gas infrastructure,” he added.
The Executive Secretary of Major Oil Marketers Association of Nigeria (MOMAN), Mr. Obafemi Olawore, also confirmed that the percentage reduction in pump price to N87 per litre from N97 by the government last week was not commensurate with reductions in some countries across the world. He said if the country doesn’t import products and the value of naira didn’t go down, with crude price of less than $50 per barrel, Nigerians could have been buying the product far less than it is now. But because we import the petroleum products in dollars with current pressure on naira, reducing the pump price further may not be in the interest of the country, economy and Nigerians, because the subsidy will still soar despite low price of crude. There is need to shore up the value of the naira.
Nweze said because of dwindling oil receipts resulting in the decline of government revenue, it can borrow to fund the budget but must try to develop infrastructure that will be generating money to pay back the debt. Such infrastructure, he said, should be developed under public, private partnership for prudent management and sustainability. For private sector to participate in building of refineries, he stated that government should encourage investors by giving them robust incentives and removing subsidy. This, according to him, will engender competition and investors who feel that importation is cheaper than refining in the country, will import and price of products will crash.
Ajumogobia said the government has to address the issue of pipeline vandalisation, oil theft and militancy, develop the culture of maintenance of critical infrastructure in the oil and gas industry, make the existing refineries operational and encourage construction of new ones, meet its funding obligations in oil and gas projects, and ensure that policies that guide the oil and gas industry are stable and properly implemented. Most importantly, oil revenues must be properly managed to care for the rainy days.
Former Group Managing Directors, Jackson Gaius-Obaseki and Funsho Kupolokun, among others also backed the handover of the existing refineries to the private sector.
