CONTACT KATSINA POST

NEW TURKEY PAINT AT HAMDALA MULTI-LINKS

CLICK HERE TO SUBSCRIBE NOW!!!

ALBHUSTAN HOTELS KATSINA

GAFAI COMMNICATIONS KATSINA Call 08035947436

MAIDABINO INVESTMENT LTD.

Home Opinion Corona-Oil Crisis: The Nigerian Fate- Dr Ahmed Adamu
Corona-Oil Crisis: The Nigerian Fate- Dr Ahmed Adamu

Corona-Oil Crisis: The Nigerian Fate- Dr Ahmed Adamu

0

Corona-Oil Crisis: The Nigerian Fate

Ahmed Adamu, PhD

The outbreak of the Coronavirus caused a reduction in the global demand for oil, resulting from a slowdown in the production and shutdown of factories and airports for safety and preventive purposes. The resultant reduction in demand for fuel and energy inputs led the oil price to plunge to as at today’s Brent Value of $35 per barrel of crude oil. This is a $22 deficit per barrel compared to Nigerian anticipated oil price in the 2020 fiscal plan. This means a reduction in the fiscal performance of the country amidst the social and economic crisis.

The situation exposes Nigeria’s economic vulnerability to oil shocks, and now that Nigeria’s savior, OPEC, is losing its market influence. In the past, even individual OPEC countries could easily influence the market. OPEC played an influential role in dictating the global economy through its production quota system in the past. Now, the era of OPEC’s influence is shrinking, and Nigeria may not be protected by OPEC.

The continuous domination of Non-OPEC countries in the global oil supply and the emergence of new unconventional reserves has left OPEC stranded and powerless. As of last week, OPEC could not cut supply enough to influence the price without contribution from Russia and the USA. For OPEC to raise oil prices up, it needs cuts from other non-OPEC countries. Otherwise, they (OPEC) will lose market share and lose revenue if they are to go for the solo cut. To achieve the OPEC’s market target, other non-OPEC countries must cut production by minimal 500,000 barrels per day for a period of 3 months.

The unanticipated coronavirus outbreak led to the flooding of the oil market with excess supply, no one planned for any fall in demand and oil was already produced enough to meet the normal demand, but now due to this emergency, the fall in demand has caused excess supply. As a result of these excesses, even if there are production cuts, it will take up to two months for the market to respond. This adds to the odds for countries like Nigeria.

Russia refused to agree to any cut, and this undermines the OPEC effort to raise the price. And if Saudi Arabia is to punish the Non-OPEC countries through a price cut and increased production, the situation will get worst for some OPEC countries like Nigeria. Saudi Arabia can produce more and sell its oil at a cheaper value in order to displace Russia and the USA in the supply schedule, making them (the Non-OPEC countries) lose market share, and without buyers, they have to cut production. This is exactly what Saudi Arabia is doing at the moment, because lowering the oil price below the USA and Russian marginal cost of oil will make their production unprofitable, and therefore have to shut down production.

Though this is a reactive measure and it is already plunging the oil price further down in the short term, evident by the sharp price drops since from last week, and anytime Saudi Arabia decides to sell at a higher price, the Non-OPECs will take over again, and this cycle continues and thereby sticking the price at a low level. This means Nigeria would have to device other means to sustain its foreign earnings, as oil revenue is no longer reliable.

The idea of borrowing to fund Nigeria’s increasing fiscal deficit should not be welcomed, Nigeria should not be sinking into the debt trap, otherwise, any possible future oil gains will go down the drain and the Nigerian prospect will go dim. With the future of oil becoming more uncertain, there is a possibility that Nigeria will not be able to service its debt and may fall into sovereign default. Now is the time to look into the future and save it.

There should be an alignment in Nigeria’s fiscal measures, borrowing to fund ambitious and unnecessary government liabilities is not wise. Increasing the minimum wage and increasing VAT reduces the value of the additional income while adding more weight to the government. Limiting land border importation will not stimulate the economy without the prerequisite conditions for such natural stimulation. Costing the economy without its attendant benefits is a huge leakage. The economy can grow without being constrained. The Nigerian economy needs allowance and incentives to boost activities so as to prepare for the next global economic and energy shift.

The increasing volatility of oil price and its sharp sensitivity to socio-economic issues is already speeding up the evolution and development of oil alternatives. This makes the world preparing for a new energy era, moving away from oil. The question is who is the next king after oil? Who is going to be the leading country in terms of this transition? Is Nigeria going to be a leader of this new transition or a follower? Without oil, would Nigeria have any comparative advantage on future fuels? To lead, these questions must be answered, otherwise, the fate of Nigeria is uncertain.

Potentially, if China, India, Japan, Russia, and the USA would together shift in one direction, the rest of the world will follow. But the unity and reliability of the transition are still in question. There is still room for Nigeria to make it right. Despite the current decline of oil prices, there is hope for demand and supply convergence at higher oil prices. With prices going down further, some countries cannot profitably produce, and cutting out the higher marginal cost producers in the schedule will raise the price up. However, no high oil price will prolong nowadays, so, this decline will be temporary. So, the time to take drastic shift is now, this is the last call for Nigeria. The best thing is to lead in the new energy transition.

Because of the global appeal and convenience of oil, the new transition could be delayed, but it will definitely come, and it is possible one of the fossil fuels will take the lead, especially the Gas. So, Nigeria should build enough gas infrastructure to save itself from a catastrophic shock that awaits it if oil prices continue slumping.

Dr. Ahmed Adamu
Petroleum Economist, Nile University, Abuja.
ahmadadamu1@gmail.com

LEAVE YOUR COMMENT

Your email address will not be published. Required fields are marked *