What if there is another oil boom?

Two years ago, oil prices crashed. That plunge, from $100 per barrel down to less than $30, rattled the global economy especially oil producing and oil dependent countries like Nigeria.

As the oil prices plummeted, the Organization of Petroleum Exporting Countries (OPEC), the cartel that accounts for one-third of global output, stood by and watched, unable to reach a decision on how to react.

However, a lot has changed over the past two years. US production has fallen from 9.6 million barrels per day down to 8.6 million barrels per day amid the price crash. Nearly $1 trillion in oil investment worldwide has dried up. Iran returned to the oil market after EU and US sanctions were lifted as part of the nuclear deal. Saudi Arabia, the lynch pin of the oil cartel, has been hurt badly by the price crash as the country has already burned through more than $100 billion worth of foreign exchange reserves and has been forced to cut social services to compensate for lower oil revenues, threatening stability in the kingdom.

Amidst all these changes, the oil cartel was able to reach a deal recently to cut their oil production by 1.2 million barrels per day in order to raise global prices. OPEC nations currently produce 33.7 million barrels of oil per day, total. Under the deal, they will bring that down to 32.5 million barrels per day, with Saudi Arabia, Iraq, UAE, and Kuwait making the biggest cuts.

Saudi Arabia will cut about 486,000 barrels per day by reducing output to 10.06 million bpd. Iran plans to freeze output at close to current levels of 3.797 million barrels per day. Kuwait, UAE, Iraq, and Venezuela will also cut production. Libya and Nigeria were exempted, as their output has been hurt by unrest and violence.The deal also hinges on non-OPEC countries contributing an additional 600,000 barrels per day worth of cuts, with about half of that coming from Russia.

Global oil prices have since surged 15 percent since the announcement of the OPEC production cut deal, with Brent crude inching towards $60 per barrel. Though, a boom is still far-fetched, it cannot be entirely ruled out.

During the oil boom era, Nigeria’s agricultural sector was the most hit. Rural-urban migration increased, as people attempted to reap or benefit from the windfall from oil. Production of agricultural commodities for export declined. Food production became a problem and the country became a net importer of basic foods. Huge foreign exchange earnings were utilised in importing food.

But that should not be the path for Nigeria to thread again if another oil boom happens. When you are in a commodity-dependent economy and the commodity is in boom, the way forward is to save significant part of your earnings and use that savings to attract other savings from abroad and make investment in other areas of growth.

Rather than increasing the oil benchmark for the budget, the National Assembly should come up with a realistic benchmark that is far below the surging oil prices while the rest should go into a Stabilization Fund, while the excess should go into a Future Fund (Sovereign Wealth Fund) so that the country will also be investing the Future Fund. In addition, this is the time to make haste on the Petroleum Industry Bill (PIB) and the various forward-looking hydrocarbon policies that are in the making.