Ahmed Adamu, PhD
The outbreak of the Coronavirus caused a
reduction in the global demand for oil, resulting from a slowdown in the
production and shutdown of factories and airports for safety and preventive
purposes. The resultant reduction in demand for fuel and energy inputs led the
oil price to plunge to as at today’s Brent Value of $35 per barrel of crude
oil. This is a $22 deficit per barrel compared to Nigerian anticipated oil price
in the 2020 fiscal plan. This means a reduction in the fiscal performance of
the country amidst the social and economic crisis.
The situation exposes Nigeria’s economic
vulnerability to oil shocks, and now that Nigeria’s savior, OPEC, is losing its
market influence. In the past, even individual OPEC countries could easily influence
the market. OPEC played an influential role in dictating the global economy
through its production quota system in the past. Now, the era of OPEC's influence
is shrinking, and Nigeria may not be protected by OPEC.
The continuous domination of Non-OPEC countries
in the global oil supply and the emergence of new unconventional reserves has
left OPEC stranded and powerless. As of last week, OPEC could not cut supply enough
to influence the price without contribution from Russia and the USA. For OPEC
to raise oil prices up, it needs cuts from other non-OPEC countries. Otherwise,
they (OPEC) will lose market share and lose revenue if they are to go for the
solo cut. To achieve the OPEC’s market target, other non-OPEC countries must
cut production by minimal 500,000 barrels per day for a period of 3 months.
The unanticipated coronavirus outbreak led to the
flooding of the oil market with excess supply, no one planned for any fall in
demand and oil was already produced enough to meet the normal demand, but now
due to this emergency, the fall in demand has caused excess supply. As a result
of these excesses, even if there are production cuts, it will take up to two
months for the market to respond. This adds to the odds for countries like
Nigeria.
Russia refused to agree to any cut, and this
undermines the OPEC effort to raise the price. And if Saudi Arabia is to punish
the Non-OPEC countries through a price cut and increased production, the
situation will get worst for some OPEC countries like Nigeria. Saudi Arabia can
produce more and sell its oil at a cheaper value in order to displace Russia
and the USA in the supply schedule, making them (the Non-OPEC countries) lose market
share, and without buyers, they have to cut production. This is exactly what
Saudi Arabia is doing at the moment, because lowering the oil price below the
USA and Russian marginal cost of oil will make their production unprofitable,
and therefore have to shut down production.
Though this is a reactive measure and it is
already plunging the oil price further down in the short term, evident by the sharp
price drops since from last week, and anytime Saudi Arabia decides to sell at a
higher price, the Non-OPECs will take over again, and this cycle continues and
thereby sticking the price at a low level. This means Nigeria would have to
device other means to sustain its foreign earnings, as oil revenue is no longer
reliable.
The idea of borrowing to fund Nigeria's
increasing fiscal deficit should not be welcomed, Nigeria should not be sinking
into the debt trap, otherwise, any possible future oil gains will go down the
drain and the Nigerian prospect will go dim. With the future of oil becoming
more uncertain, there is a possibility that Nigeria will not be able to service
its debt and may fall into sovereign default. Now is the time to look into the
future and save it.
There should be an alignment in Nigeria's
fiscal measures, borrowing to fund ambitious and unnecessary government
liabilities is not wise. Increasing the minimum wage and increasing VAT reduces
the value of the additional income while adding more weight to the government.
Limiting land border importation will not stimulate the economy without the
prerequisite conditions for such natural stimulation. Costing the economy
without its attendant benefits is a huge leakage. The economy can grow without
being constrained. The Nigerian economy needs allowance and incentives to boost
activities so as to prepare for the next global economic and energy shift.
The increasing volatility of oil price and its
sharp sensitivity to socio-economic issues is already speeding up the evolution
and development of oil alternatives. This makes the world preparing for a new
energy era, moving away from oil. The question is who is the next king after
oil? Who is going to be the leading country in terms of this transition? Is
Nigeria going to be a leader of this new transition or a follower? Without oil,
would Nigeria have any comparative advantage on future fuels? To lead, these
questions must be answered, otherwise, the fate of Nigeria is uncertain.
Potentially, if China, India, Japan, Russia, and
the USA would together shift in one direction, the rest of the world will
follow. But the unity and reliability of the transition are still in question.
There is still room for Nigeria to make it right. Despite the current decline
of oil prices, there is hope for demand and supply convergence at higher oil
prices. With prices going down further, some countries cannot profitably
produce, and cutting out the higher marginal cost producers in the schedule
will raise the price up. However, no high oil price will prolong nowadays, so, this
decline will be temporary. So, the time to take drastic shift is now, this is
the last call for Nigeria. The best thing is to lead in the new energy
transition.
Because of the global appeal and convenience of
oil, the new transition could be delayed, but it will definitely come, and it
is possible one of the fossil fuels will take the lead, especially the Gas. So,
Nigeria should build enough gas infrastructure to save itself from a catastrophic shock that awaits it if oil prices continue slumping.
Dr.
Ahmed Adamu
Petroleum
Economist, Nile University, Abuja.
ahmadadamu1@gmail.com
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