The politics of a plummeting global oil price
Global oil prices tumbled to their lowest point in more than two years after the Kingdom of Saudi Arabia unexpectedly cut prices for crude sold to the United States of America (“U.S”), likely paving the way for further declines in oil production and consequently placing global energy producers under pressure. This action (by the world’s largest oil exporter)has sent very wrong economic signals to most oil-producing as well as oil dependent nations, potentially hindering the pace of global growth.
Saudi Arabia’s decision to reduce the price of crude oil may not be unconnected to heightened worries over the resilience of the U.S oil industry, which has expanded rapidly in recent years owing to the largely driven new production technology used to extract oil from shale-rock formations; otherwise known as the ‘Shale boom’. Although it is generally accepted that lower crude prices stand to the advantage of consumers, who will pay less for petroleum products, the falling price will notwithstanding have the collateral effect of squeezing profit margins of global energy players, particularly smaller firms or those with large debt portfolios.
There is no gain-saying the fact that crude oil is acclaimed to be the largest internationally traded good, both in volume and value terms, creating what some analysts have referred to as ‘a hydrocarbon economy’. Any upsurge in that economy will have a ripple effect on nearly every other sector of the global economy. Such is becoming the case of the recent drop in oil price; to maintain and sustain the sanity of this hydrocarbon economy, many have argued that, it is the responsibility of the Organization of Petroleum Exporting Countries (OPEC). This, experts have cautioned should be the responsibility of the Organization of Petroleum Exporting Countries (OPEC).
OPEC AND ITS CHALLENGES.
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental Organization, created at the Baghdad Conference on September 10-14 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later joined by Qatar (1961), Indonesia (1962)-suspended its membership from January 2009, Libya (1962), United Arab Emirates(1967); Algeria (1969); Nigeria(1971), Ecuador(1973), Angola (2007) and Gabon(1975-1994).
One of the main objectives of OPEC is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations.
However, on the occasion of the recent global decline in the price of oil, it is no longer in doubt that OPEC must stand up to this challenge, cut production to lift prices and seek to create a stable and reliable hydrocarbon market. What is unclear is whether its member countries will allow it to. This was echoed when Venezuela’s foreign Minister, Rafael Ramirez asked to meet with Ali al-Naimi, Saudi Arabia’s Oil Minister at a Climate-Change conference on Margarita Island, off the South American Coast over the decline in oil prices as a direct result of production output. Defensively, Minister Naimi, who had anticipated Minister Ramirez’s request quickly noted that ‘Saudi won’t cut production on its own”.
There is now the fear that unless OPEC stands up firmly, it is foreseen that it (OPEC) may never be in a position to control oil production in producing States unless it can curb the overbearing presence of ‘Shale’ and bring back the good old days. What it (OPEC) will be faced with is a situation where it tries to ‘control’ one of its members by directing a reduction in output consequently leading to a marginal increase in price without making provision for how to address Saudi Arabia’s main concern; curbing the continuous spread of the ‘Shale domination’, bearing in mind that the US is not a member State of OPEC. This will be pretty difficult.
The question therefore is whether the umbrella body, OPEC will be in a position to compel a reduction in oil production.
The above notwithstanding and by a unanimous decision of its founding members under Resolution 11.6 at its second meeting held in January 1961 in Caracas, Venezuela, all Member countries (of which Saudi Arabia is one) submitted to the OPEC STATUTE which stated the principal aim of the organization is to among other things, work together as members to ensure stable oil prices, secure fair returns to producing countries and investors in the oil industry, and provide a steady petroleum supply to consumers.
Similarly, by the provisions of Article 2(b) of the OPEC STATUTE, OPEC “shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations” .There is therefore a big challenge before OPEC as a body to retain its relevance in the global oil industry.
It will be recalled that the US stopped dominating the global market few years after OPEC came into being .With the re-emergence of the U.S. as the biggest producer, OPEC’s relevance may now be on the test.
THE NIGERIAN ECONOMY
The slide in prices of crude oil globally has no doubt re-awakened the Nigerian government to the reality of the need to further and aggressively diversify its economy. This is a country which thrives on the proceeds of crude oil; its major foreign exchange earner. The situation is now worsened by the decline not only in the global price of the commodity but also a systemic decline in local oil production due to frequent shut-ins and shut-downs of trunk lines at various oil terminals, which also has contributed in no small measure to a drop in our revenue. Already, the effect seems to have punctured the accretion of Nigeria’s external reserves , which has fallen to $38.763 billion as at October 29, 2014.
Naturally, the impact of the steady decline in the price of crude oil has compelled the Federal Government to speed up whatever is left of the ‘development of the non-oil sector’ as it is now apparent that an economy diversification is now inevitable..
Although the Federal Government has put in measures such as a cut down of government official travels, proposal to tax luxury goods (some of the items being compiled for heavy taxation included private jets, yachts, alcohol, beverages, cars, choice properties and a host of others.), Federal Government had also increased the revenue target of the Federal Inland Revenue Service (FIRS) from the N75 billion 2014 target to N160 billion in 2015, the Medium Term Expenditure Framework (MTEF) and the 2015 Budget proposal to the National Assembly had also been revised, proposing a benchmark of $73 per barrel to the National Assembly, compared to the earlier proposed benchmark of $78, as a higher oil benchmark could widen fiscal deficit and will not reflect the true position in the international market.
The cheering news however is that not only is government working assiduously to improve its earnings from the Agricultural sector (and other non-oil sectors), the Central Bank of Nigeria has also vowed to continue to defend the Naira.
Tolulope Aderemi