Is OPEC Toast, Is Nigeria Broke? By Bámidélé Adémólá-Olátéjú

By Bámidélé Adémólá-Olátéjú

World’s demand for oil grew from 58.47 million barrels per day in 1973 to 92 million barrels per day today. Nigeria has largely squandered its earnings through looting of the treasury and corruption. The time for reckoning is now here. Compared to other oil exporting countries, Nigeria has nothing to show for the huge oil earnings from 1973 till date. Meanwhile, Nigeria’s population has tripled within the same time frame. By next year, the United States will be the world’s largest oil producer, displacing Saudi Arabia. Before now, political turmoil in the Middle East or sabotage in the Niger delta, meant disruption in global oil supplies and higher prices.

That is now history! OPEC is now a paper tiger! Instead, oil prices have been falling by more than 25% in the last few weeks. That is a remarkable change and a 180 degree turn from the 40 year old pattern. OPEC and other foreign producers of oil can no longer use oil as a political and economic bargaining chip. The United States is now a net exporter and China’s economy is cooling off.

I had predicted this crash in oil prices in my column on May 28, 2013.

Sadly, all the three factors I predicted that could crash oil prices have converged in one fell swoop. In September, signs of global oil glut started developing because of economic slowdown in China and rapid increase in U.S. Shale oil production and other alternative energy sources. At the same time, Saudi Arabia increased daily production to 9.6 million barrels a day. The Saudis action, pushed OPEC’s output production to 31 million barrels per day – a year high for OPEC. As Summer wore on, the United State stopped buying Nigeria’s Brent Crude totally.

To protect its market share in India and China, Saudi Arabia lowered prices by offering discount to its Asian customers on October 1, 2014. Iraq and Iran followed suit. This action crashed the Brent crude price from $115.71 a barrel on June 19 to $82.60 a barrel on Oct. 16, the lowest price in four years. In many American cities, gas prices have fallen to less than $3 a gallon.

With its liberating energy independence, America is not about to stop extracting its oil with its superior technology. Americans long suffering at the pump, are beginning to enjoy tremendous savings from lower gas prices. Soon, the cascading effect will start translating into higher domestic output and lower prices.

On the political front, politicians will tell Americans that increased domestic oil output is helping to fight terrorism by importing less foreign oil from the Middle East. Now that the United States has overtaken Saudi Arabia as the number one oil producer and Russia as the number one natural gas producer, OPEC will find it difficult to dictate the world price of oil again. America is well-positioned for energy supremacy for decades to come.

Can the Saudis withhold oil from the market and drive prices upward in the short term? Theoretically yes, but their growing youth demographic puts pressure on them to earn more to keep them from getting rebellious. Besides, they know, U.S. output will continue to rise – it has risen 65% in the last 5 years. This means lower prices to consumers in the future. Since the Saudi economy is 90% dependent on oil, it makes no economic sense to hoard oil only to sell it later for a lower price.

Nigeria’s story as a mono product economy is not too different. International Monetary Fund (IMF) estimates an annual average price of $83.60 a barrel for the Saudis to balance their budget. By the end of last week, Brent crude averages this year is $106, well above Saudi break-even price. They can still afford the price war but Nigeria cannot. While Saudi has spare capacity of 2.5million barrels, Nigeria is barely able to meet its quota. Oil theft has escalated, the Federal Government has defaulted in its cash-call obligations with oil majors in upstream joint ventures. Prof. Pat Utomi in an interview with the Guardian revealed a Federal Government deficit in excess of $60 billion! That means; Nigeria is in double jeopardy if falling prices and falling reserves! Oil majors are downsizing operations, explorations, slashing rig counts and laying off workers!

Will sustained lower prices will hurt the U.S. shale production? I doubt it. Although the International Energy Agency says exploration of shale using hydraulic fracturing and sideways drilling costs anywhere between $50 to $100 a barrel, compared to the pumping costs of $10 to $25 a barrel in the Mideast and Africa. However, only 4 percent of U.S. shale oil production needs prices above $80 a barrel and that can be left untapped or the cost evened out. Shale oil is 55 percent of U.S. output. Either way, the United States still wins and OPEC loses. Saudi is the gorilla glue that holds OPEC together and it us demonstrating that by the current price war. Its oil reserves runs to about 270 billion barrels with a daily output of up to 12.5 million barrels a day. With increasing U.S output, the OPEC cartel is suddenly confronted with increasing production from U.S and Canadian shale wells and from Russia.

What does this mean for Nigeria? Unlike Nigeria ($43billion in foreign reserve and $4.5billion in Excess Crude Account), Saudi Arabia has $735 billion in foreign reserves. It is positioned to withstand a prolonged downturn than most OPEC countries. Nigeria is already on the financial tenterhooks, a price war will do serious damage because Nigeria needs about $75 to break even. Below this price Nigeria’s budget will begin to bleed.

The slowdown in China and Saudi Arabia’s price war is expected to hurt Nigeria big time because Nigeria is without sufficient cushion. Although the government is denying that the country is broke, but the country is B-R-O-K-E! States are not getting their full allocations anymore, oil theft costs the nation 800,000 barrels per day, contractors are being owed, salaries are not getting paid and the profligacy continues. The recipe for civil unrest is almost complete. Weaker members of OPEC are hurting. Recently, Venezuela called for an emergency meeting of OPEC nations, with an agenda to hike prices but the request was ignored by Saudi Arabia and Kuwait. OPEC’s next meeting is on Nov. 27. There are no good options out thereon the table for Nigeria. Unfortunately!

Bamidele maintains a weekly column on Politics and Socioeconomic issues every Tuesday. She is a member of Premium Times Editorial Board. Twitter @olufunmilayo