Oil Crash: Is Nigeria’s Economy in ‘Soup’? By Rahma Oladosu

Can we agree less with Wall Street Journal (WSJ)? The American-owned and world-famous media organisation, in a recent report said, as economic pain ripples to the developing world, Nigeria’s dependence on oil puts its economy under severe threat.

The story, which was titled, “Oil Slump, Coronavirus Create a Perfect Storm for Nigeria’s Economy,” was published on Monday April 27, 2020.

Authors of the story, Joe Parkinson and Benoit Faucon, noted that the crash in oil prices and the economic fallout from the coronavirus together pose what could be an existential threat for Africa’s largest economy and biggest crude producer.

According to them, Nigeria, a country of 200 million people, is slashing production faster than any other major oil economy following the precipitous plunge in global prices.

They said: “Cargo ships full of millions of barrels of Nigerian crude have nowhere to go, with much of the world on lockdown. Nigerian oil companies are desperately competing to fill the last few empty tankers still left at sea.

“The result is a twin shock for an economy that has become a symbol of how virus-induced economic pain is now cascading from wealthy nations to the developing world.

Corroborating the WSJ reporters, Kola Karim, chairman of Shoreline, Nigeria’s third-largest oil producer, said, “When there’s no more vessels to load the crude, then the entire world collapses.”

He added, “You will have serious, serious security implications. Unrest.”

Parkinson and Faucon, further explained that, “In Nigeria, where oil accounts for 60% of government revenue and 90% of foreign exchange, the government has already slashed its 2020 budget by $5 billion and approached the International Monetary Fund for $7 billion in emergency funding. Nigeria’s break-even oil price is $133, the highest in the world due to high refining costs and government corruption, according to Fitch Ratings. Now, with prices for several oil benchmarks having fallen below zero, Nigeria is generating losses for every barrel it produces.”

The country, indeed, has weathered a series of oil shocks in the past and has in recent years sought with limited success to reduce its dependence on crude. But the International Energy Agency has warned that Nigeria is considerably less prepared to tackle this slump as gross domestic product has shrunk by almost a third in five years. The economy had been projected to grow 2.5% this year, slower than its population, until the coronavirus tipped it into a likely recession.

Also, Finance Minister, Zainab Ahmed says the collapse in oil prices will slash the country’s revenue by as much as 50pc, causing a 20pc cut to the nation’s capital budget and an additional 25pc cut in annual expenditure.

Ahmed added that the country would have to reduce the amount of federal funding for upstream projects.

“The reduction of the crude oil price from the $57/bl we budgeted for to $30/bl means that we are going to get so much less revenue, almost 45pc less than we planned, and because of that we have to amend a lot of projections in the budget to reflect our current realities,” she said.

But according to Mrs. Rolake Akinkugbe-Filani, an energy expert and finance professional, with a focus on sub-Saharan Africa and emerging markets, “there are no quick fixes for Nigeria, but this may be a good time to plug some of the wastage.

She said the country needs to deregulate the downstream energy with a focus on gasoline subsidies, which promotes rent seeking and has fueled several inefficiencies within the downstream oil network.

“Thus, with little political capital to exploit here, there is probably no better time than this low oil price environment to revisit this issue. Deregulation before the end of 2020, would at least give the current administration the opportunity to demonstrate the longer-term benefits of a liberalized oil market, without the political pressure of high petrol prices,” Akinkugbe-Filani added.

Speaking on the ugly development, Minister of State for Petroleum Resource, Mr. Timipre Sylva, has said that Nigeria would make the necessary sacrifices needed to stabilise the global crude oil market which has been impacted greatly by COVID-19.

Sylva, in statement issued by his Adviser on Media, Mallam Garubadeen Mohammed, explained that the country would join other member-countries of the Organisation of Petroleum Exporting Countries (OPEC) at a meeting on April 9 to discuss the state of the oil market.

He noted that at the meeting, the country intends to maintain its devotion to ‘team spirit’ in helping the market to overcome the challenges of COVID-19.

Additionally, Sylva said the country would consider the stability of its national economy in its interactions with OPEC member-countries.

In the statement, Sylva said the government was watching developments in the oil and gas industry with keen interest.

“Specifically, Nigeria is very mindful and appreciative of the role of Saudi Arabia and other members of the OPEC family. As Minister of State for Petroleum, I will continue to monitor the impact of COVID-19 on our economy and global market,” he said.

According to him, “In our consultations with global industry stakeholders in the lead up to the OPEC+ meeting scheduled for Thursday, April 9, the Nigerian government will take a position that is in the best interest of our short term and long-term economic forecast.

“It is well known that Nigeria has always collaborated with key OPEC members such as Saudi Arabia in maintaining a balanced position that has helped to make OPEC one of the most successful global institutions in recent history. Nigeria intends to maintain this team spirit even as it takes into account the position of OPEC strategic allies such as Russia.”

“As always the driving force of our OPEC policy is first the stability of our national economy as well as the stability of the global economy which is heavily dependent on OPEC and its strategic partners, popularly referred to as OPEC+.

“Nigeria, like the rest of the world has been hit by the global pandemic and is prepared to join the rest of the world in making the necessary sacrifices needed to stabilise the crude oil market; and to prevent what is likely to be a major global economic meltdown.”

Rahma Oladosu, writes from Abuja and can be reached on