The recent consistent fall in oil prices due to the surge in US shale supplies presents a new multidimensional challenge to the industry, weaker producing nations, less liquid oil companies and, more significantly, to the world’s largest legal cartel OPEC currently being rendered irrelevant. OPEC’s current position is untenable. It is generally understood that for a cartel to be effective, strong homogeneous discipline among members, a dominant market position and effective barriers to entry to non-members are essential. In its present situation OPEC seems to lack all three key factors.
With the new supplies from US shale and Canadian tar sands pushing North America out of dependency while simultaneously cutting OPEC market share and its failure to stabilize prices at its last meeting, the prevailing opinion is that OPEC has significantly weakened itself, while the more controversial school of thought believes OPEC is effectively non-existent. As a consequence, the ripple effects of this recent failure will be long-lasting and profound to the detriment of the weaker peripheral nations like Nigeria and Venezuela.
The origin of this crisis goes back to July 2013 which marked a major shift in market dynamics from being demand-driven to being supply-driven, thereby precipitating a consistent drop in prices; an especially bad time to be in the shoes of Diezani Allison-Madueke.
As the price of this commodity drops due to a supply glut, mono-product economies like Nigeria will feel the pinch but will also be forced into out-of-the-box thinking necessary to diversify, protect and ultimately save their economies. Multiple studies suggest oil crashes can and may instigate systemic financial crises in commodity states which might significantly affect the global economy. This coupled with a forecast global liquidity, asset and futures markets stress will result in major oil companies cutting back on projects with breakeven costs below estimates.
However, it isn’t all bad news. The situation outlined will present significant challenges in the short to medium term but better management, prudence and a diversified economy are the benefits countries like Nigeria hanging on the brink may yet have to gain in the long term. The near future for the planet sees no alternative to oil. Even with double-digit growth rates over the next couple of decades, alternative energy sources – still being subsidized and not yet economic in their own right – will still be largely insignificant in the world’s total energy mix.
Die-hard optimists have debunked claims that the earth’s fossil energy supplies will run out in a couple of decades on the basis of technology revolutionizing production and exploration costs – Nigeria may yet have some time to clean up its act.
Nze Ibekwe-Uche
