23January 2016, Lagos – The bus conductor now hears it frequently from his passengers. Just like the roadside shoe mender gets it from his patrons.
In justifying why they cannot pay as much as usual, these customers complain that international oil price has “crashed”. The implication is that this has adversely affected the easy flow of cash among its citizens as Nigeria no longer earns as it used to from sales of crude oil, its major source of foreign revenue. Though widely foretold, the crash has come to characterise the beginning of the new year. But what was responsible for the crash and how much does it affect the common man on the streets as much as the elite?
Causes of the crash
A central factor in the sharp price drops, analysts say, is the continuing unwillingness of the Organisation of Petroleum Exporting Countries (OPEC) to intervene to stabilize markets that are widely viewed as oversupplied. Iran, Venezuela, Ecuador and Algeria have been pressing the cartel to cut production to firm up prices, but Saudi Arabia, the United Arab Emirates and other gulf allies are refusing to do so. At the same time, Iraq is actually pumping more, and Iran is expected to become a major exporter again under the recent nuclear deal.
Brent crude, the main international benchmark, was trading at around $29 a barrel on Tuesday this week, while the American benchmark was at around $28 a barrel. For the last two years, global oil prices have been in free-fall, and no one seems to know when the bungee cord will catch. In June 2014, one had to plunk down $110 to purchase a barrel of Brent crude. By early 2015, that had dropped to $60. Today, it costs less than $30 to buy a barrel of oil – a level not seen since 2004. It is a breathtaking decline.Saudi officials have said that if they cut production and prices go up, they will lose market share and merely benefit their competitors. They say they are willing to see oil prices go much lower, but some oil analysts think they are merely bluffing.
Effects of crash
Some Western companies, Chevron, Royal Dutch Shell and BP for example, have announced cuts to their payrolls to save cash, and they are in far better shape than many smaller independent oil and gas producers that are slashing dividends and selling assets as they report net losses. Other companies have slashed their dividends. At the same time, demand is slowing, especially in Asia where the biggest economy and energy consumer, China, is seeing the slowest economic growth in a generation.
Back home, exchange rate volatility is one of the major consequences of the crash. 95% of foreign exchange earning is tied to oil and with shortened revenue in dollars terms, the naira will be under continuous pressure. Despite devaluation, Nigeria will earn less revenue from oil and gas exports and imports of household items will be more expensive, with the burden passed on to Nigerians.
Declining oil prices also means that Nigeria might not be able to add additional revenue due to pressure from states which also run high recurrent expenditure. This will cause saving stagnation. It might also be difficult for the FG to save funds in the Sovereign Wealth Fund (SWF), considering the austerity measures of the times. Accretion to the external reserve is expected to slow with falling crude oil.
Debt servicing will possibly rise, especially foreign debts, and Nigeria will need more fund to cover budget deficit. With stagnated excess crude account savings, raising debts is the glaring alternative. The legality of this is doubtful and it is equally doubtful if this will be enough to close the gap between shrinking revenue and expenditure.
The haste to spend on recurrent items will remain, as they are fixed charges, unless drastic reforms such as downsizing personnel occur. Capital expenditure performance might be threatened by the lower oil prices as government strives to keep its deficit within the limits of the fiscal responsibility act whilst ensuring it meets its day-to-day obligations. The public sector is still the largest employer of formal labour and with cut in government expenditure due to falling oil prices, new jobs will actually continue on a decline.
Mixed grill: Nigerians as victims
The crash has been a mixed grill for national and regional economies. Russia, one of the world’s largest oil-producers, introduced its dramatic interest rate hike to 17% in support of its troubled rouble (its national currency) which underscores how heavily its economy depends on energy revenues, with oil and gas accounting for 70% of export incomes. Russia loses about $2bn in revenues for every dollar fall in the oil price, and the World Bank has warned that Russia’s economy would shrink by at least 0.7% in 2016 if oil prices do not recover. Despite this, Russia has confirmed it will not cut production to shore up oil prices.
Venezuela is one of the world’s largest oil exporters, but thanks to economic mismanagement, it was already finding it difficult to pay its way even before the oil price started falling. Inflation is running at about 60% and the economy is teetering on the brink of recession. The need for spending cuts is clear, but the government faces difficult choices.
Saudi Arabia, the world’s largest oil exporter and OPEC’s most influential member, could support global oil prices by cutting back its own production, but there is little sign it wants to do this. There could be two reasons – to try to instil some discipline among fellow OPEC oil-producers, and perhaps to put the US’s burgeoning shale oil and gas industry under pressure.
It has been growth in US energy production, where gas and oil is extracted from shale formations using hydraulic fracturing or fracking, that has been one of the main drivers of lower oil prices. Even though many US shale oil producers have far higher costs than conventional rivals, many need to carry on pumping to generate at least some revenue stream to pay off debts and other costs.
With Europe’s flagging economies characterised by low inflation and weak growth, any benefits of lower prices would be welcomed by beleaguered governments. A 10% fall in oil prices should lead to a 0.1% increase in economic output, say analysts. In general, consumers benefit through lower energy prices, but eventually low oil prices do erode the conditions that brought them about.
China, which is set to become the largest net importer of oil, should gain from falling prices. However, lower oil prices would not fully offset the far wider effects of a slowing economy. Japan imports nearly all of the oil it uses. But lower prices are a mixed blessing because high energy prices had helped to push inflation higher, which has been a key part of Japanese Prime Minister Shinzo Abe’s growth strategy to combat deflation. India imports 75% of its oil, and analysts say falling oil prices will ease its current account deficit. At the same time, the cost of India’s fuel subsidies could fall by $2.5bn this year – but only if oil prices stay low.
Like Iran and Iraq, Nigeria, with greater domestic budgetary demands because of its large population size in relation to its oil revenues, has less room for manoeuvre, and is already under pressure from increased US competition. Africa’s biggest oil-producer, Nigeria has seen growth in the rest of the economy but despite this, it remains heavily oil-dependent. Energy sales account for up to 80% of all government revenue and more than 90% of exports.
While the common Nigerian on the street may have an exaggerated impression of the impacts of the crash on him, there is no doubt that the impact will be generally felt as will be seen in lesser revenue from oil and gas exports which will affect both recurrent and capital expenditure, triggering layoffs, mostly in the private sector, and owed salaries in the state civil service. There is also the increase in prices of imports of household items. And the issue of fuel subsidy removal is yet to be clearly defined, neither by the government, industry experts nor critics. It remains to be seen the role the international oil price crash will play in that regard.
- Oghene Omonisa, Vanguard