Global oil prices played a cruel joke on Nigeria by briefly dipping below $35 per barrel late in December, immediately exposing the country’s fiscal Achilles’ heel. Low prices put in jeopardy the N6.08 trillion 2016 budget that President Muhammadu Buhari presented to the parliament, anchored on an assumed average oil price of $38 pb. Contemporary events point strongly to a very bleak future for any economy relying on revenues from hydrocarbons.
The global oil industry is witnessing unprecedented turmoil. Production levels have breached records and are still rising. The International Energy Agency said recently that global production topped 97 million barrels per day compared to 75.23mbpd in 2013, over 73mbpd in 2010 and 2011, 64.97mbpd in 2002, and 59.42mbpd in 1980. Higher production and falling demand have spelt lower prices and hurt the economies of oil-dependent countries. One of the worst hit, Nigeria must reform its economy away from its over-reliance on crude or implode. Underscoring the predicament are these: the United States, once its chief customer, stopped importing Nigerian crude altogether in 2014 and has recently overtaken Russia and Saudi Arabia as the world’s largest crude producer with almost 11 million barrels per day; China’s economic slowdown from double digit GDP growth to an estimated 6.5-7 per cent, according to the US Federal Reserve Bank, has reverberated worldwide and reduced demand for our Bonny Light that is now being hawked on the volatile spot market. Apart from the surfeit of shale oil from the US and Canada, many countries and regions have in recent years become producers (Ghana, East Africa and Central Europe), while existing producers emerging from war (Libya, Iraq) or sanctions (Iran) have raised global production levels.
After a slight rally, oil prices dipped again last week with the North Sea Brent (comparable to Nigeria’s Bonny Light) sliding from $36.62pb to $35.98pb, even as market analysts brace for much lower prices, though they rose again on Wednesday to $37. Today’s prices are a far cry from the $147pb peak seen in mid-2008, which plunged later that year only to rise to and maintain an average of a $100pb mark that lasted thereafter till August 2014 year, when prices went south. The gravy train has come to a stop and only hard choices remain to be taken. Can we take them?
It was the Arab-Israeli war that sparked the first oil boom when the price per barrel jumped from $3 to peak at $40 in the early 1980s. Declining oil prices witnessed a second boom following the First Gulf War of 1990/91 and a third and prolonged one after the September 11, 2001 terrorist attacks on the US and subsequent wars in Afghanistan and Iraq. Nigeria is paying the price of its failure to prepare for a future foretold. Instead of building up foreign reserves and other fiscal buffers and investing heavily in infrastructure and diversifying the economy, successive governments engaged in a spending binge. Estimates of what the country earned from crude oil vary, but the International Monetary Fund cites a figure of $340 billion (1970-2014). Contrast this with Kuwait, which created the world’s first modern Sovereign Wealth Fund in 1953 and today has $592 billion, the fifth largest. Norway has managed its North Sea Oil resources so well that it has the largest SWF with $882 billion.
Our reliance on oil is such that it funds almost 90 per cent of the federal budget and over 75 per cent of its revenues. The Buhari government’s attempt to reduce this in the 2016 budget is forlorn since it will borrow N1.8 trillion to take up the slack.
Crude oil is fast losing its bite, the result of increased supply, technology and changing economic priorities. Faced with lower revenues, political and economic pressures, Organisation of Petroleum Exporting Countries that, according to the US Energy Information Administration, accounts for 60 per cent of crude exports, can no longer muster the unanimity to impose strict quotas on its 13 members and thereby force prices upwards. Meanwhile, Russia, whose budget is financed 50 per cent by oil revenues, is also producing furiously as it contends with low prices and Western sanctions. Freed recently from crippling sanctions, Iran is set to raise its daily production to about 3.9 million bpd. The glut is completed by the American and Canadian experience where fracking technology has brought much more crude and where the US Congress has lifted a 40-year-old ban on the export of American crude. Nearer home, the number of oil producers in Africa has risen from five to 20.
What does this tell Nigeria? Time has run out. Alternative energy sources are coming on stream. A report by the Economist Intelligence Unit predicts that soon, cars, aeroplanes, machinery will run on ethanol derived from farm products and electric power and solar energy. About 30 models of electric passenger cars are already available worldwide with about one million units of plug-in electric cars sold.
A Bloomberg report said Nigeria will need an average oil price of $120pb to fund its budget compared to Norway that will weather the storm even with $20pb. The United Arab Emirates’ Dubai has become a major global commercial hub and took in 10 million tourists in 2013. Britain, the world’s sixth largest economy, never allowed its North Sea oil to halt the development of its services, financial and technology tradition.
Our oil reserves of almost 40 billion barrels are projected to last for 41 years by EIA, but the world may not need it by then, being only a faction of the 1.48 trillion in global reserves as of 2014. Ironically, Nigeria has other resources, including natural gas and, according to the CIA World Factbook, ranks the ninth largest holder of reserves. Rich in over 400 mineral types, with 34 already made ready for exploitation to drive industrialisation, but under-exploited, it is reputed to have the world’s second largest bitumen reserves.
We should diversify fast, investing heavily in agriculture, mining, heavy industry and education. Even Saudi Arabia, the largest crude exporter, has launched a programme of diversifying its revenue streams after a record budget deficit of $85 billion in fiscal 2015, reducing to 73 per cent, oil’s contribution to the budget, down from 87 per cent in 2014.
Success will depend on unleashing the private sector and attracting considerable Foreign Direct Investment into the productive sectors, especially in agriculture, mining, power, steel, railways and manufacturing. Our target should be to end the begging bowl system that sees the 36 states and 774 local governments lining up monthly for trickles from oil revenues. A liberalised operating environment will stimulate small businesses, exports and job creation.
The Buhari government should jolt the system by opening up mining, railways, downstream petroleum sector, power and steel to reputable global corporate champions to usher in the desired refocusing.
