Nigeria faces bumpy economic times on falling oil price
Oil price has hovered around $60 per barrel in the last six days from a high of $79.83 in October, sending signals of turbulent economic times ahead for Nigeria, Africa’s biggest crude producer.
A combination of higher production from the Organisation of Petroleum Exporting Countries (OPEC) member Saudi Arabia, historical high shale oil production from United States of America and Russia’s increased production meant to offset possible impact of sanctions on Iran contributed to oil glut and falling oil prices.
Also, slowdown in economies such as China, India, South Korea and some of the Asian Tigers has negatively impacted global demand for oil.
“This is a business cycle Nigeria will have to manage carefully. The first hit will be the exchange rate because of our reliance on the import of refined petroleum products. So, the naira will take a beating because we do not have enough foreign reserve to defend it. This is one of the low hanging fruits the Petroleum Industry Governance Bill would have addressed,” Wumi Iledare, professor of petroleum economics, said.
The current dip is the longest falling streak since futures trading began in 1983. But OPEC has remained optimistic about its forecast for the oil market. In its World Oil Outlook (WOO) 2018 released November 14, OPEC said that the world’s primary energy demand will surge by 33 percent from 2015 levels to 365 million barrels of oil a day (boed) in 2040 with developing economies accounting for nearly 95 percent of this growth. It also said that India and China are forecast to be the most important contributors to energy demand.
Nigeria relies on crude oil sales to fund its budget and this is responsible for over 85 percent of its revenue and a fall in revenue will hamper budgetary obligations.
“If oil price continues to fall such as we have seen in the last few days, then there is need for concern. Already when oil price was at $72 per barrel we used about $3 billion of the foreign reserve to defend the naira,” Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited, said. “At $60 per barrel and falling, this will put pressure on the naira, increase inflationary pressure, and reduce the standard of living and purchasing power.”
This means that the impact of the oil price fall has potential to affect the Nigerian economy, cause inflation, destabilise the economy, and cause devaluation of naira and loss of jobs.
“In addition to falling oil price, Nigeria has fewer buyers for its oil. India, China and the USA, which used to buy Nigeria’s crude oil, have turned to other producers in the Arabian Peninsula” Bode Lukal, managing director of Bodeni Energy Limited told BusinessDay.
“Traditional buyers have preferred other producers because of Nigeria’s production and political unpredictability. This has made some oil companies to retrench workers. Lower oil prices will compound the situation,” Lukal said.