The dire consequences of crude oil prices free-fall are looming large on Nigeria, as Brent crude continues its slide from a peak of $112.42 per barrel June 1, to its current level below $68.13 per barrel on Tuesday.
Some analysts say oil prices have come under intense pressure from oversupply of global oil; weak economic growth in developing economies; improvements in alternative shale gas technology, as the U.S. intensifies effort to achieve oil independence and recent global political tensions around major oil producing regions.
The final chance to moderate supply through Organisation of Petroleum Exporting Countries, OPEC, by cutting production quotas, was missed last week, as the group resolved to keep output at its 30million barrels per day.
For Nigeria, the reality of the crisis is that we cannot escape the repercussions of wasting years of boom in the era of high oil prices. Since 1973, Nigeria has experienced six circles oil booms, including 1981, 1990, 2002, 2008 and 2011. The country has been left in shock for these years of wastage without accurate explanation of how the oil booms were managed.
Amid another boom, Nigeria’s external reserves stood at about $62.07billion as at September 2008. One wonders why the country was scraping to manage $37billion at a time when oil prices hovered above $100 per barrel for 41 consecutive months.
Today, the excess crude account has come under intense pressures from another round of distribution with its current balance at about $4.11billion.
At the last Federation Accounts Allocation Committee, FAAC, meeting in November, the states had submitted request for another $2billion from the account to offset debts to contractors for ongoing projects.
The Central Bank of Nigeria, CBN, Monetary Policy Committee, MPC, document for October 2011 expressed concern about the genuineness of the country’s huge appetite for petroleum imports.
In 2014 alone, oil marketers have spent over $7 billion of foreign exchange on importation of petroleum products, resulting in the depletion of the country’s external reserves. The Committee said the demand may have been fuelled by rent-seeking and subsidies.
By consciously refusing to tackle the scourge of crude oil theft, reform the state oil company, NNPC, by passing the Petroleum Industry Bill, PIB, and allowing theft of fuel subsidy to flourish, Nigeria has found itself in an open goal situation with no players in her defence.
Other countries that understand the volatility of oil and the need to invest revenues from the wasting asset have built a cushion in Sovereign Wealth Fund, SWF. However, Nigeria has managed to build a similar fund with a balance of $1.55billion, considered grossly inadequate, compared to Angola ($5billion), Algeria ($77billion), Saudi Arabia ($763billion), and Qatar ($1trillion).
Implications for the Budget
The CBN governor, Godwin Emefiele, said at the end of the MPC meeting on November 25, that setting oil price benchmark at $73 per barrel was grossly optimistic.
The oil price benchmark and oil production target is what governments at all levels use in determining how much revenue would be shared.
When oil price nose-dived in the wake of global financial meltdown, Nigeria’s “conservative” $45 per barrel oil benchmark of 2009 had resulted in a lesson that is still being reviewed and debated..
Some believe falling revenues from crude oil exports should help out the devaluation of the naira from N155 to N168 to the dollar. Technically, the government should now earn N16,800 on every $100 receipt from crude oil exports, instead of N15,500 under the old order.
But, history, has, however, proved otherwise. Gross revenue of the Federation dropped by 38.5% from N7.87trillion in 2008 to N4.84trillion in 2009 despite the CBN devaluing the exchange rate from N117.98 to the dollar (January 2008) to N150.85 to the dollar (November 2009). Worst still, Nigeria’s external reserve was at its peak of $62.08billion in September 2008. Today, it has declined by 5.4 per cent to $36.763billion on December 1, compared to the $38.763 billion in November.
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