|Image from Sunnewsonline.com|
I believe we are about to experience something Nigerians have never been through before (I sincerely pray and hope that I am wrong). This is November 2014. Global crude oil prices hover around $78 – $80 per barrel. In September 2014, crude oil was selling at $100 per barrel. In 2009, crude oil sold for as high as $140 per barrel, a massive rise from its price of around $50 per barrel in 2005. In 2003, crude oil sold for around $20 -$30 per barrel and it was a very painful experience for Nigerians.
For a country full of PhD holders, Harvard, and Yale educated professors, many proffered a very simple solution to these severe austerity measures of the mid-2000 – Diversify our economy and move Nigeria away from being a monolithic economy. 2002 – 2014 is 12 good years and Nigeria still earns 95% of its income from crude oil exports! International forecast is that the trend towards a downward price for crude oil is not just for a short term.
Every economics student understands the concept of Demand and Supply, and the Price Elasticity of Demand. Wikipedia defines the Price Elasticity of Demand as “… a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income). Price inelasticity is the exact opposite.
Why am I concerned about this particular dip in crude oil prices? I am concerned for the following reasons:
1. This is not a short term bleep
The demand for fossil fuel is reducing very sharply. The global trend is for less consumption of fossil fuel. All western economies (particularly in Europe) have introduced strict and challenging target for reducing their emission by as much as 20% by year 2020. This article by Mike Scott on Forbes will shed better light on where this may be heading in the next few years.
The world did not have this global emission reduction drive in 2003. Therefore all indications are that the requirement for our main produce will continue to dwindle.
Additionally due to this drive to reduce fossil fuel consumption global auto manufacturers are now outdoing each other on who produces the best non-fossil fuel vehicles. TESLA cars are selling so fast that you have to wait about a year for one of its “S” model and over a year for its new “X” model. TESLA is a 100% electric car manufacturer! Honda, Toyota, Mitsubishi, Mercedes etc are all working towards making 100% electric vehicles.
2. The Price of crude oil
As noted previously global crude oil prices as of today is around $78- $80 per barrel. Our Minister for Finance has warned Nigerians to brace up for serious tough times ahead. In September 2014, crude oil was selling at $100 per barrel. In 2009 crude sold for as high as $140 per barrel, a massive rise from its price of around $50 per barrel in 2005.
3. Nigeria’s production level has been below expectations Nigeria was doing 2.41 million barrels per day as at June 2010 and still doing 2.47 million barrels as at July 2014! Despite a multi-million dollar contract awarded by the government to a known South – South militant to “help” safeguard the country’s oil installations!
So let’s summarise these two points so far – You have a product that is seriously on the downward slopes in terms of demand coupled with your inability to even meet the small demands you currently have.
|Image from Sweetcrudeoil.com|
4. Impact on Foreign Reserves and Excess Crude Account
The impact of a falling crude oil price coupled with lower than expected production level is the gradual depletion of our Excess Crude Account (ECA). The ECA stood at $4.11 billion as at end of September. Governors have now called for a further $2 billion withdrawal which will reduce the balance to $2.11billion by the end of this month.
The country’s external reserves (which is managed by the CBN separately) stands at $39.1 billion as at October ending, compare this to its level of $45 billion same time last year!
The pressure on the Naira is likely to lead to it loosing quite a bit of its value, with a resultant increase in the prices of goods and services for the majority of Nigerians since we are primarily an import dependent people. The parallel foreign exchange market today was trading at $1 – N168 Naira! The rate in June of 2012 was $1 – N157.
5. Discovery of Shale Gas: The Real Game Changer
This is the single most worrisome factor for Nigeria’s revenue. The USA discovered Shale gas around 2000 and has invested massively in new technology for the exploration of this game changing natural resource. As a result the USA which used to be our number one importer of crude oil no longer buys crude oil from Nigeria. A visit to Wikipedia reveals that “In its Annual Energy Outlook for 2011, the US Energy Information Administration (EIA) more than doubled its estimate of technically recoverable shale gas reserves in the US, to 827 trillion cubic feet (23.4 trillion cubic metres) from 353 trillion cubic feet China is another major Shale Gas territory, Wikipedia expresses that “the volume of technically recoverable shale gas in China has been estimated to be 1,115 trillion cubic feet, the largest of any country in the world.” It is projected that even countries like Australia are on the edge of big time shale gas discovery.
6. Increasing External and Internal Borrowings
Our current external borrowings stand at just under $10 billion and domestic debt is around N7.6 trillion (over $46 billion!) this does not include the debts of states that total around $10 billion.
What this means in real terms is that local industries will continue to be starved of funds required for manufacturing and industrialisation as government continues to borrow in the local market to fund its operations.
|Image by Afolabi Banjoko; sourced from Businessdayonline.com|
The writing has been on the wall for a very long time, a nation almost totally dependent on oil as its sole revenue earner is at the mercies of many masters – OPEC, US, Russia, and the almighty fuel users- China.
Our leaders are running round to find solutions to this “sudden” 30% reduction in revenue, could it be a case of closing the stables door after the proverbial horse has already bolted?
Like a very respectable mentor of mine would always say “just because you have gone to school does not mean say your head is correct.” Could this be an indictment that all of our intellects are failing us? Sorry, we just thought to give my view before the cards come crumbling!
Jide Iyaniwura is the Founder of NigerianAffairs- www.nigerianaffairs.com