Lower oil prices put pressure on Nigerian economy

08 October 2014, Lagos – With insurgency in parts of the North still taking a toll on agriculture and other economic activities in the region, the fall in the global oil prices, which began in June, is posing further threat to the country’s economy.

Oil prices have declined by 12 per cent from $105 per barrel a few months ago to about $92 currently. The price of OPEC basket of 12 crudes, which include Nigeria’s Bonny Light, stood at $90.33 per barrel on Friday, compared with $90.40 the previous day, according to the Organization of the Petroleum Exporting Countries’ secretariat calculations.

Crude oil prices 1

The decline is coming at a time when the Nigerian oil and gas industry is encumbered with several challenges, including oil theft, pipeline vandalism and the non-passage of the Petroleum Industry Bill that seeks to overhaul the industry.

“This current lower price trend is going to have a major impact on Nigeria if the trend continues for say about three months,” energy analyst at Ecobank, Mr. Dolapo Oni, told our correspondent, adding “The trend is likely to continue until the market adjusts the volume of oil supply available. OPEC is likely to make a major adjustment in November. Until then, the market is likely to remain over-supplied and prices could remain below $100 till then.”

“Lower oil prices have reduced the fiscal buffers of the Nigerian economy. Essentially, the amount entering the Excess Crude Account is going to shrink and can put some pressure on federal allocations, which often have to be supported with withdrawals from the ECA,” he further said.

The country relies on the oil and gas industry for around 95 per cent of export dollar earnings and up to 80 per cent of its revenue.

Revenue from crude oil has seen decline in recent times owing to large-scale oil theft, production shut-ins and the rise of shale oil production in the United States, resulting in sustained cutbacks in the US imports of Nigerian crude.

In August, the country’s total revenue fell to N601.6bn from N630.3bn in July. The decline in federal revenue in the month, according to the Federation Accounts Allocation Committee, was due to the force majeure declared by Shell and a series of shutdown of trunklines and pipelines at various terminals.

A Professor of Law at the Thurgood Marshall School of Law, Texas Southern University, US, Emeka Duruigbo, said in an emailed response, “Drop in prices translates into lower returns for the Nigerian treasury, possibly leading to budget deficits and a decreasing ability of the government at all levels to deliver on essential social services. Simply put, the economy suffers.

“When the economy is affected, the political arena invariably feels the impact. I would worry if I were President Jonathan or any other incumbent seeking re-election in the next few months.”

Duruigbo said prices were likely to go up if the Middle East producers felt comfortable about their social environment to cut down on production as well as if the economies of Europe and China recorded more robust growth and the US shale revolution hit a speed bump.

He, however, added that none of these was likely in the next few months.

Noting that the price of oil was expected to rise and fall, the President, International Association for Energy Economics, Prof. Wumi Iledare, said, “I must state unequivocally that the threat to the Nigerian oil and gas industry, and by association, the economy, is the lack of a pragmatic oil and gas policy to drive investment in the sector for sustainable economic growth.”

The Minister of Finance, Dr. Ngozi Okonjo-Iweala, had said in an interview with Bloomberg TV Africa on Saturday, “Knowing what we know about the volatility of oil prices and about the need to make sure that we capitalise on a diversified economy, we have been working hard.”

She said budgeting much lower than the market price and saving whatever was above would give a cushion, with about $4.11bn now in the Excess Crude Account.

For 2014, the Federal Government had projected a budget of N4.5tn, based on a benchmark oil price of $77.5 per barrel.

Okonjo-Iweala said, “Oil will continue to be important as a source of revenue, but we really need to drive the economy away from where we have 70 per cent of revenue in oil and 30 per cent from other sources.

“We want to drive it to where a third of our revenues come from oil and two-thirds from the non-oil sector. That is the vision for this economy. That is when we can see that we are capitalising on our very diversified base.”



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