OPEC oil output reduction and Nigerian Economic Recession

By Dr. Ahmed Adamu

In the face of economic recession in Nigeria, perhaps a good news came out from Algiers this week, where Organisation of the Petroleum Exporting Countries (OPEC) agreed to implement the first oil production cut in nearly a decade. This if implemented may likely raise the price of crude oil, which means more revenue for countries like Nigeria, Saudi Arabia, Venuezuela, etc. This agreement has already started to affect the price of the oil, where the Brent crude surged to $50.19 per barrel as at 30^th September, 8% increase within just three days. Arbitrators and speculators may continue to increase the demand and push the price up even before the November OPEC meeting, when we will see if this unlikely deal will see the light of the day at all. This may turn out to be a mere verbal intervention to create market sentiments.

Even if the output is eventually reduced, OPEC member countries may still be faced with lower revenue unless if the percentage change in oil price is much higher than percentage change (reduction) in the output. The elasticity of the oil price will not be the same as in the past due to the emergence of major supply alternatives. Russia (not a member of OPEC) produced 11.1 million barrels in a day in September, which was 4% increase from the month of August. Russia may not care about the interest of OPEC, it may continue to pump more barrels as buyers switch their supliers from OPEC countries to Russia and/or America. OPEC supply 40% of the world oil, making it directly uninfluential in the larger proportion of the oil supply. However, with Saudi Arabia and other low marginal cost producers in OPEC, the action of OPEC will definitely affect the price.

OPEC output reduction will mean decline in supply of low cost oil, which means high cost producers will have their chance to maximise profit, which will automatically push the price of oil up. However, the Saudi Arabia’s management of its quota can still affect other OPEC members. If Saudi Arabia reserves its usual 2 million barrels per day spare capacity, the price will surged significantly. However, if it becomes apprehensive about the market share and compete with major non-OPEC members, and peak its quota, the price will not increase significantly.

The Nigerian recession will come to an end soon, as the oil revenue will increase due to the imminent cut in oil output. Even though, the proposed 740, 000 barrels daily reduction by OPEC will not affect supply significantly, it will affect the cost of production of the oil supplied.  Russia and America will ramp up to fill the gap, but will not produce as cheaply as Saudi Arabia, Kuwait and Iran (all OPEC members). The increase in oil price will bring to the stream high cost producers like UK, Brazil and Canada, which will make the minimum oil price to at least $52.50 per barrel. This will mean, Nigeria will get a minimum profit of $21 per barrel. Even if Nigeria reduce production to maximum of 2 million per day, it will mean $42 million profit per day.

This will then increase supply of dollars and lead to possible appreciation of Naira, reduce the cost of factor inputs, and reduce inflation. It will make investment cheaper and increase employment.

Dr. Ahmed Adamu,

Petroleum Economist and Development Expert,

Pioneer Global Chairperson of Commonwealth  Youth Council,

University Lecturer (Economics), Umaru Musa Yar’adua University Katsina.

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