Anxiety in Nigeria over decline in crude oil prices

14 October 2014, Abuja – As the prices of crude oil continue to decline, there is anxiety over the impact of this development on the nation’s economy.

Global oil prices fell again Monday, amid worry about slow growth and reports that the Organisation of Petroleum Exporting Countries (OPEC) wants to maintain current output levels.

Crude Oil

Brent crude fell to a near four-year low of $87.74 a barrel earlier, before recovering some ground to $88.46.

According to the Energy Information Administration (EIA), total production of crude oil and liquid fuels rose by 10 per cent in the last five years, from 83.3 million barrels per day (bpd) in early 2009 to 91 million bpd in mid-2014.

In recent years, demand has been losing strength. The United States, Europe and Japan have reduced their consumption of oil since 2008 by around 10 per cent or four million bpd, due to improvements in energy efficiency and low Gross Domestic Product (GDP) growth.

Economic experts believe that the continuous drop in the price of crude oil would affect Nigeria’s 2014 budget benchmark price of $77.50 per barrel.

They believe that for an economy that is 95 per cent dependent on oil for its foreign exchange earnings, and 85 per cent dependent for revenue, this development should be a cause for concern.

The experts say that the current trend with oil price poses major downside risks to some key macroeconomic variables and the general economic conditions.

The Lagos Chamber of Commerce and Industry (LCCI), hinted that current drop in oil price would impact negatively on government fiscal operations, naira exchange rate, capital flow reversals, stock market, foreign reserves, inflation and interest rate.

Executive Director, African Heritage Institution (AfriHeritage), Dr. Ifediora Amobi, said: “To date, crude oil prices have dropped 15 per cent since 1st January 2014, and at a current price of less than $91.60 a barrel versus $115.70 a barrel on June 19, 2014, if this declining price trend continues, Nigeria’s 2014 budget benchmark price of $77.50 per barrel will become more and more jeopardised, thus having a serious effect on Nigeria’s short-term economic and fiscal growth.”

In an interview with The Guardian yesterday, Amobi said that Nigeria’s revenue was over 90 per cent dependent on crude oil, adding that any disruption in the international market would affect the country adversely, thus a 1.2 per cent drop in the price of crude oil decreases Nigeria’s foreign exchange earnings by 1.0 per cent.

He noted that shale gas technology was fast catching on, and in the near future, the country’s other major trading partners would follow suit. “This is a reality check because we have been paying lip service to diversifying the economy and have never achieved more than 10 per cent revenue from the non-oil sector in over 35 years.”

He explained: “The global economy driven by the industrial countries of the west is now stabilising after the financial crisis of 2008. As a consequence, unemployment is falling and the risk of an imminent deflationary crisis has been reduced in the United States and parts of Europe and Asia. The current global economic cycle is moving into a phase in which simulative central bank policies, which were created in a desperate attempt to sustain the global economy and led to the crude oil price boom of the past four years, is being gradually reversed.”



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