Crude oil prices on Friday fell the lowest since November 2018 to $65 per barrel from nearly $70 seven months ago, indicating that Nigeria’s budget assumptions of an average price of $60 may be unrealistic and could threaten revenue projections.
Oil prices have remained volatile since last year buffeted by geopolitical upheavals and trade tensions.
“Worries about the negative impact of trade war escalation on global growth, and thereby demand, coupled with disappointing inventory flow data appeared to be the latest catalysts,” said Ilya Spivak, a senior currency analyst at Daily FX, a currency market resource.
Sanctions on Venezuela and Iran have shut in over 2 million barrels but pressure from the United States President has seen countries like Saudi Arabia pump more crude which has helped to keep prices low. The United States has also cut on inventories helping to keep prices low.
But a weak Nigerian economy is impacted negatively both from a rise and fall in prices. Fall in oil prices leads to depressed earnings and rising oil prices lead to higher spend on fuel subsidy. If oil prices fall lower than the budget benchmark, the economy will go into shocks that will see the
Central Bank apply emergency measures to keep the economy stable.
When oil prices found a floor around $40 in the first quarter of 2016, the Nigerian economy slid into a recession and the CBN began restricting scarce forex for what it considers important items and began to artificially prop the naira to maintain exchange rate stability. The long-term effect of these controls is an economy with a weak growth.
In the 2019 budget, oil was projected to sell at an average price of $60 and national production was projected to grow to 2.3 million barrels. The proposed Federal Government budget estimates N6.97 trillion revenue for the 2019 fiscal year. The oil sector is expected to contribute around N3.73 trillion, while N710 billion will come from the proceeds of government equity in Joint Ventures.
“It is too ambitious,” Taiwo Oyedele, PwC head of tax, said of Nigeria’s projected oil earnings. “Nigeria’s average production figures for 2019 is about 1.9 million, to budget 2.3 million bpd is overly optimistic. I would have loved to see something more conservative but overall budget spending makes sense to me, because it is lower than what was budgeted for last year.”
Crude oil prices averaged $49.49 per barrel in 2015, $40.68 in 2016, $52.51 in 2017 and $71.2 in 2018, according to figures published by the Organisation of Petroleum Exporting Countries (OPEC). Oil prices currently are around $65, with analysts projecting it will remain low for the medium to long-term.
Against this backdrop, the recent move by the Federal Government to sell down its stakes on joint venture agreements with International Oil Companies seems like Nigeria’s best hope to shore up revenue.
The Nigerian National Petroleum Corporation (NNPC), which manages Nigeria’s oil sector, owns a 55 percent interest in its joint venture with Royal Dutch Shell and 60 percent stakes in international oil companies including Chevron and ExxonMobil.
Udo Udoma, minister of Budget and National Planning, last week unveiled details of efforts to boost the nation’s revenue while giving a breakdown of the 2019 budget. He said the president had also directed the Ministry of Finance to liaise with relevant authorities to liquidate all recovered ‘unencumbered’ assets.
ISAAC ANYAOGU
