It was reported in the news recently that, the international oil benchmark, Brent crude, rose further up to $67 per barrel, what strong likelihood of a further increase.
For Nigeria, which relies on crude oil for about 50 per cent of government revenues and over 90 per cent of export earnings, rising oil price means increased revenue.
The 2021 budget, which was 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 per cent (N2.01tn) of projected revenues is to come from oil-related sources while 70 per cent is to be earned from non-oil sources.
Nigeria’s Petroleum industry the largest contributors to the economic growth, before the recession experienced by the country, in 2016 the growth rate shrank by −13.65%, a more substantial decline than that in 2015 of −5.45%. According to the NBS, This reduced the oil sectors share of real GDP to 8.42% in 2016, compared to 9.61 per cent in 2015.
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 a 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.
Crude oil prices have been trending higher since OPEC informally agreed some times in last year to its first 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.
It’s also worthy of note that, prices are likely to get a further boost if the Saudi Arabia-led OPEC formalises the output-reduction framework at a general meeting last November.
Last October, OPEC invited Russia and other major nonmember 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 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.
Analysts are of the view that, the influence of the oil price shocks on aggregate demand, is one of the basic inputs in manufacturing industries, any positive oil price shock increases the cost of manufacturing. As the cost of manufacturing rises the profit margins on investments fall will influence investors to postpone their irrevocable investments. Reductions in investment causes cuts in production level, consequently exports of the country are negatively affected and economy has to face adverse balance of trade. So also the effect permeates into households, oil price fluctuation induces the consumers to reschedule their expenditures on durable goods. This suggested 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, increase in both oil prices and uncertainty in oil prices is detrimental for the economy.
Practically, an increase in oil price should reflect more revenue dividend for oil-exporting countries as it is expected to enhance foreign exchange earnings and build reserve in the short-run. Conversely, for net-importers of refined petroleum products for instance Nigeria with domestic regulation of oil prices (subsidies), oil price increase may not transform to the anticipated economic advantage, due to fiscal difficulties, restraining government’s ability to finance import in addition to meeting other international obligations
These figures stress the vulnerability of the economy to the impulses of international oil price. The consequences may be unfavorable to economic growth arising from increased domestic production cost and decline in aggregate demand.
For many observers, until Nigeria is able to fix it’s refineries to function optimally, the rise in crude oil price at the global market may not benefit it’s citizens. Their reason for this is simple, The country has the world’s 10th largest crude reserves yet, it has no functional refinery.
Though there have been several promises on fixing the refinary, but the
question is, will fixing the refinery help the oil-dependent economy end the quagmire in the oil sector?
“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 will have gone bad and refineries are like that 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 Dangote refinary comes to 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.
