To most oil-producing countries like Nigeria, the report that oil prices have crossed $70 per barrel for the first time in over a year would be great news. However, the reason for the increase is not a very palatable one. This Monday, Houthi rebels attacked a major oil facility in the world’s largest oil exporter, Saudi Arabia, forcing the increase. Brent crude gained $1.14 to $70.47 a barrel.
Earlier, the devastating winter freeze that hit Texas and other parts of the Southern United States last month, knocking out production of roughly 4 million barrels per day (bpd) of U.S. oil, equally pushed oil prices above $60 a barrel.
For Nigeria which relies on crude oil for about 50 percent of government revenues and over 90 percent of export earnings, rising oil prices like this means increased revenue.
Recall that the 2021 budget, signed by President Muhammadu Buhari on December 31, was based on an oil price benchmark of $40 per barrel and a production level of 1.86 million barrels per day.
According to the budget, 30 percent (N2.01tn) of projected revenues is to come from oil-related sources while 70 percent is to be earned from non-oil sources.
Meanwhile, reacting to the increase in oil price, the Federal Government of Nigeria described as a welcome development the rising price of crude oil in the global market, saying, “this is good omen for Nigeria”.
The Minister of Finance, Budget and National Planning, Dr Zainab Ahmed, made this known recently in Abuja when she addressed State House correspondents on the state of the nation’s economy under the Buhari-led administration.
According to her, gaining more revenue from the sale of crude will yield more revenue for the government as well as reduce the country’s rate of borrowing.
On the other hand, rising oil price also translates to increased cost of petroleum products as the country depends heavily on imports, due to a lack of domestic refining capacity.
This is a case of mixed blessings as whatever is gained from the increase goes with massive importation, as well as other complexities that can affect prices of goods and citizen’s welfare.
The consequences may be unfavorable to economic growth arising from increased domestic production costs and a decline in aggregate demand.
For many observers, until Nigeria is able to fix her refineries to function optimally, the rise in crude oil price at the global market may not benefit her citizens. Their reason for this is simple.
The country has the world’s 10th largest crude reserves, yet it has no functional refinery. “Promises about fixing the refineries have been made several times”, says former Group Finance Manager, Nigeria LNG, Victor Eromosele. “They’ve all made promises and set targets and they all failed. If you parked your car for a long period, even when you put in a new battery, you may not be able to start that car because of something called regression.”
Rehabilitating the poorly performing refineries seems like a good strategy on paper, but it doesn’t make any economic sense to fix them, says Eromosele, who now consults at Vita Veritas.
“Too many things would have gone bad and refineries are like any car if parked for a long time. The only way to fix the refineries is to rebuild them from the start. We need to change that model completely and find ways to rebuild the refineries from the ground up”, he says.
Nigeria has four refineries in Port Harcourt, Warri, and Kaduna with the capacity of refining 445,000 barrels per day. Going by available data, consolidated capacity stood at 2.14% based only on the Kaduna facility, while the other three are offline.
However, analysts believe that if the ongoing construction of the Dangote refinery comes to a conclusion, the country will begin to benefit from rising prices of crude oil at the global market. This is because Nigeria will no longer be importing fuel again.
It is quite interesting that the efforts of OPEC and other oil-producing countries to check the sliding price of crude oil have yielded some remarkable results. Crude oil prices have been trending higher since OPEC informally agreed sometime in last year to its production cut in eight years. Lending momentum to the price trend is the fact that Russia, a major non-OPEC oil producer, is moving closer to joining the cartel in easing output.
Last October, OPEC invited Russia and other major non-member oil producers to talks in Vienna aimed at winning their cooperation in adjusting production. Before then, the oil cartel agreed at an extraordinary general meeting to cap the total output of the 14-member countries at 32.5 million to 33 million barrels a day. Russian President Vladimir Putin was quick to express his willingness to cooperate with the group, whose daily output hit a record high of 33.39 million barrels in September last year.
Those developments temporarily lifted oil prices above $50 per barrel, nearly twice the $26 level seen in February last year. If Russia agreed to adjust production in tandem with OPEC — which produces 40% of the world’s crude — around half of global output would be affected.
Apart from Nigeria’s peculiar case of low refining capacity, analysts are of the view that any positive oil price shock increases the cost of manufacturing in all economies across the globe, including Nigeria. As the cost of manufacturing rises, the profit margins on investments fall. This will influence investors to postpone their irrevocable investments. Reductions in investment engender cuts in production level. Consequently, exports of the country are negatively affected and the economy has to face an adverse balance of trade.
So also the effect permeates into households. Oil price fluctuation induces consumers to reschedule their expenditures on durable goods. This suggests that oil price shocks have serious concerns for all types of economies as aggregate demand is reduced from both consumption and investment sides. For these analysts, an increase in oil prices and uncertainty in oil prices are detrimental to the global economy.
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Practically, an increase in the oil price should reflect more revenue dividends for oil-exporting countries as it is expected to enhance foreign exchange earnings and build a reserve in the short-run.
Conversely, for net-importers of refined petroleum products like Nigeria, and with domestic regulation of oil prices (subsidies), an increase may not transform to the anticipated economic advantage owing to fiscal difficulties, which will restrain the government’s ability to finance import, in addition to meeting other international obligations.