In the past four months, there has been a sustained decline in the prices of crude oil in the global markets. The price of Bonny Light crude (Nigeria’s high quality benchmark crude) has dropped from $114.60 in June to $86.95 as at October 31, 2014 (CBN, 2014), representing a 24.13 percent decline in just four months!
Among the key factors responsible for this trend is the increasing level of output in the United States – a major importer and player in the global energy market. With current domestic production level of about 8.5 million barrels per day (that is a 50 percent increase – or roughly 3 million barrels per day [b/d] – compared to 2011), the US crude oil output is hitting its highest in three decades, and is even projected to hit over 9.7 million b/d by 2017.
Weak demand from China whose economy is also experiencing slowing growth rate is another factor to the falling crude oil prices. And quite paradoxically, the geo-political unrests in the Middle East have also resulted in abundance of oil in the world market. In order to be able to fund its public-friendly budget, the Kingdom of Saudi Arabia has recently indicated it has no plans to reduce production and supply despite concerns expressed by OPEC. Surely, other OPEC producers are likely to follow the kingdom’s lead.
Consequently, except for strong adjustments which may occur in the US due to the possible production cut in its shale oil resulting from its very costly operational requirements, making it unprofitable in the face of falling prices, and except also OPEC plays a strong leadership role in managing production and/or supply from its member nations, the trend of falling prices may last in the short to medium term.
Therefore, with crude oil exports constituting over 70 percent of Nigeria’s total government revenue and over 90 percent of the nation’s foreign exchange earnings, there is no doubt that the falling crude oil prices in the global oil market portends a clear and present danger to the Nigerian economy – both on the monetary and fiscal policy fronts – in the short-medium term.
I have read or listened to a number of assuring comments by the Nigerian government, especially from Ngozi Okonjo-Iweala, minister of finance and coordinating minister for the economy, to the effect that Nigeria has alternative ways or assets with which we can handle the problem, and I have wondered what these other ways are except by going deeper into public debt undertakings. Or do we also intend to embark on some form of asset stripping?
When I read the assurances made recently by Abubakar Sulaiman, minister of national planning, at the National Defence College, Abuja, I began to sense that our government is beginning to toe the line of self-deceit. While presenting a paper on ‘National Planning and Vision 20:2020: An Assessment’, the minister reportedly said the fall in the price of oil would not negatively affect the economy. “All we need do is just to explore other areas. The Customs have surpassed their target, the same with Federal Inland Revenue Service (FIRS). We need to block all loopholes, which is what we are doing now as a government. We can do without oil to survive because there are nations which do not have oil and are pretty surviving. So, what are we talking?” he was reported to have said.
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While the government has the right to make assurances to its citizens in the face of an impending economy crisis, it would amount to self-delusion, grand deception, and wishful thinking to contemplate that our economy is safe in the face of the dwindling oil prices, especially considering Nigeria’s over-dependence on the energy sector. Even without the oil price decline, there are already serious strains on our economic indicators, which we have had enough trouble battling with.
The nation’s external reserves had depleted from $43.61 billion as at December 31, 2013 to $36.70 billion as at June 04, 2014, representing a $6.91 billion or 15.84 percent depletion in just five months prior to the oil price fall. This could have been a result of the subsisting hard battle to defend the value of the nation’s currency against global currencies, especially the US dollar, the euro, and the pound. While inflation had maintained a single-digit position, domestic demand had remained suppressed – seeming like the cause and consequence of the single-digit achievement.
Fiscal challenges had persisted making the national government take foreign loans to support important expenditure items (fiscal and re-current expenditures inclusive). Unemployment rate has remained above 30 percent in 2014 (with youth unemployment hovering around 70-80 percent). Extreme poverty has persisted in Nigeria with over 45 percent of citizens reported to live below $1.25/day (World Bank, 2014).
Though economic growth rate has remained impressive at above 6.0 percent, making Nigeria one of the 10 fastest-growing economies in the world, the growth has been less than inclusive and has not yielded much prosperity in the lives of the individual citizens. It has been termed jobless growth due to its inability to generate jobs for the labour force. This is largely due to the mono-cultural and unbalanced structure of the economy.
There is every reason, therefore, for a well-informed citizen to be worried about the realities faced by the Nigerian economy in the face of the current dwindling oil prices. Just in two weeks between October 15, 2014 and October 29, 2014, the nation’s external reserves lost about 1.8 percent of its value from $39.47 billion to $38.76 billion with the trend expected to continue. This will ultimately affect the nation’s ability to continue to defend the value of its currency, and also tighten our balance of payment position. One would expect an ultimate (imminent) return to a net-importer or negative balance of payment position.
On the fiscal front, the nation’s struggle with fiscal deficit positions would clearly worsen. Prior to the fall in prices, Nigeria used to sell a barrel of its crude oil at above $110 against the budget benchmark of $77.5/b, but volume of export which has averaged about 1.8 million b/d had remained well below the budget estimate of 2.39 million b/d – offsetting the gains made in higher prices. But with the fall in prices, the low level export quantity (below benchmark) and low prices (nearing budget benchmark) would definitely result in inadequate revenue to fund the nation’s budget!
Orji Udemezue