Nigeria as victim of oil boom and burst

Analysts believe that Nigeria is currently paying the price for the failure of the leadership elite to diversify the economy and expand the country’s revenue base. Since the country discovered oil in 1958, it has been curiously labelled a victim of the curse of oil, resulting in indolence, the emergence of a rentier class, a squandering of riches and the alienation of the poor by the rich.

According to experts, every country afflicted by the curse of oil has found it difficult to escape from the obscenity. In Nigeria’s case, it appears to be worse. Crude oil accounts for 90 percent of Nigeria’s exports, 70 percent of Federal revenue and about 15 percent of GDP.  Over the years, concerned Nigerians have alerted that without oil, or with great falls in the spot price of the Brent crude, Nigeria will be in trouble. This might as well have been told to the marines because as they say, ‘oil money is cheap.’

Following OPEC’s decision last November for an oil supply cut, effective January 1, this year, Nigeria is assumed to be better placed to pursue programmes aimed at increasing its crude oil production capacity and growing national reserves and exports.

Although pipeline vandalism reduced daily production, sometimes to as low as 1.4 million barrels, Nigeria’s daily production averages about 2.1 million barrels. The country’s aspiration has been to raise that level to about 2.3 million barrels and build national reserves of about 30 billion barrels.

These are some of the benefits the country stands to gain as one of the three countries – out of the 14-member Organisation of Petroleum Exporting Countries, OPEC – granted special concessions from the group’s decision to cut crude oil production by about 1.2 million barrels per day.

Nigeria Minister of state for petroleum Ibe Kachikwu is optimistic that crude oil prices, hovering around $55 a barrel since last December will to climb by about $10 in the coming months as OPEC-led measures to curb a glut take hold. “Ultimately, the effects over the next few months will get us to where we want to be, which is in the mid-$60s,” he declared.

But whether oil price has risen or plummeted, the citizens have been worse off, as the surplus is siphoned by the ruling class while the citizens are meant to go through belt tightening when the price falls. Either way the curse of oil is largely felt by the masses. Over the years, Nigerians have been made to pay more on fuel price than any country in Africa even when crude oil price was $100 per barrel.

This is why Nigerians are hardly optimistic about the rising price of oil in the international market.

Recently a Professor of Economics, Ode Ojowu, warned the Mohammadu Buhari government should not to be deceived by the rise in oil price and abandon the diversification of the economy, saying the money from crude oil sales was not reliable and very unpredictable.

Also Director, Centre for Petroleum, Energy, Economics and Law, University of Ibadan, Professor Adeola Adenikinju told SHIPS & PORTS DAILY that the extent to which Nigeria will benefit from the increase in the price of crude oil will to a large extent depend on the degree to which the key signatories in the OPEC supply cut agreement will comply the decisions reached. He said that in the past certain agreements have been reached which were not kept by the parties involved and advised the government to focus on diversifying the economy.

Experts have generally pointed out that diversification is the way out of Nigeria’s economic woes. The biggest problem has been with the leadership being sincere enough to take advantage of the rising price of oil to boost the economy and improve the welfare of citizens.

In June 2008, crude oil peaked at $147.42 a barrel, the highest in the history of the world. Nigerian foreign reserve likewise grew from $45 billion to $63 billion in September 2008 before the global economic situation hit the embattled nation in November 2008, when oil price dropped to $32.40 a barrel.

The problems of Nigeria’s economy were further compounded when U.S oil production increased, and therefore stopped importation from Nigeria in 2014. In December 2014, India (who had replaced the U.S) also reduced its importation by 38 percent to 5.3 million barrels — from 13.7 million in October and 12.4 million in November. China did not import a single barrel for the said month after initially reducing its importation by 50.3 percent.

There were several effects on the economy of Nigeria for two reasons: firstly, Nigeria only had contractual agreements with a few countries and as such sell on “spot”, and secondly the country overly depends on crude oil to finance capital expenditures.

Since the drop in oil price globally, the Central Bank of Nigeria (CBN) has adjusted its exchange rate more than five times, even after the introduction of tight forex.

In the past months, most states have reportedly failed to pay their worker’s salary, a situation termed a disgrace by the president Buhari who was forced to devise a bailout of $3.4 billion to offset the deficit of the affected states — in an effort to curtail further civil actions from civil servants.

The Nigeria GDP rose to $594.3 billion for the first time in 2014 and became the biggest economy in the whole of Africa.  According to report from National Bureau of Statistics (NBS), the service sector contributed the most, 42.6 percent to the total GDP, while industry was 25.6 percent, agriculture and oil sectors made up 20.6 and 11.2 percent respectively. The report shows that service is the fastest growing sector followed by industrial sector. The agricultural sector growth rate has been hindered by lack of finance and limited skilled labour; many preferring to work in the lucrative oil sector of the country.

The economy has been impeded by lack of a diversification strategy that could leverage its vast resources and man-power for growth. Excessive focus on crude oil has created a one-way foreign revenue channel, that any slight fluctuation in global oil price which is beyond Nigeria’s control, impacts the entire nation. It is obvious that Nigeria cannot continue to depend on oil for growth. The NBS report has shown that oil growth was only 6.3 percent and contributed only 11.2 percent to the entire GDP, the lowest among the sectors. The truth is Nigeria is currently surviving on sectors with less focused attention, but one wonder why due diligence is not done to elevate those sectors in order to create a permanent solution to oil’s unpredictable nature.

Nigeria’s Minister of Science and Technology, Ogbonnaya Onu, is hopeful that the price of crude oil will soon get back to levels that justify the true value of the commodity.

“We do believe that the price should be higher than what it is today. A more fair and reasonable price would be good for both the seller and buyer of the commodity,” he said in an interview at the OPEC Secretariat o shortly after paying a courtesy call on the Organization’s Secretary General and countryman, Mohammad Sanusi Barkindo.

Uncertainty surrounding the future direction of oil prices has led to Nigeria adopting a conservative budget for 2017 set around a crude export price of $42.5 a barrel and a production target of 2.2 million barrels/day, the same output level set for 2016. However, security issues and technical problems have prevented this output level from being reached.

Asked about this situation, Dr. Onu pointed out that Nigeria is fortunate to have during this challenging period a President in the person of Muhammadu Buhari whose commitment to secure his country to the best of his ability is acknowledged globally.

Regarding militancy in the Niger Delta area, where most of the country’s oil and natural gas is produced, he said the President and federal government were working very hard to ensure that the region is stabilized. “We are very hopeful that before long the security situation will improve so that our full OPEC oil production level will be realized,” he affirmed.

Despite executive hopefulness, wide fluctuations in oil prices have been known to play an important role in driving recessions and even regimes collapsing—which is why oil price movements are closely watched by economists, investors, and policymakers.

The two recent cycles of historic highs and lows suggest that the world economy is unpredictable. In 1973, Egypt and Syria waged a surprise war on Israel, which soon divided many countries into supporters of either side. Subsequently, several oil-exporting Arab nations curtailed oil production (known as “the oil embargo”), quadrupling oil prices within a quarter. This oil crisis was one of the biggest factors that pushed some oil-consuming, industrialized nations such as the United States and the United Kingdom into an economic recession that lasted over a year.

History repeated itself when disruptions in Iran’s oil production during the Iranian revolution, followed by the Iraq-Iran war, caused oil prices to skyrocket in 1979–80. This time, in addition to a supply shock, increased inventory demand in anticipation of supply shortages and rising global demand contributed to the oil price rise. The price shocks had a substantial impact on US GDP, and the US economy went into a recession.

It goes without saying the current economic diversification agenda by the government remains the way out of unpredictability of the price of oil and a better way to secure the future of citizens.