Before last week’s oil-price crash, there were several warnings about the perilous future of oil and the potential catastrophic consequences for oil-dependent countries. At best of times, oil is problematic for most oil-dependent countries as they are at the mercy of oil market vagaries and buffeted by oil price and oil revenue volatilities. But no country is more at risk than Nigeria, a country where oil accounts for 96 per cent of exports and over 75 per cent of government revenues; a country that has absolutely no resilience to oil price shocks. The truth is, if Nigeria’s future is tied to oil, it will be a catastrophic future indeed!
In her book Reforming the Unreformable, Dr Ngozi Okonjo-Iweala, two-time finance minister, said: “The Nigerian economy earned the dubious distinction of being rated one of the world’s most volatile”, adding that “Nigeria’s volatility was more than twice the median volatility for almost all the important economic variables”, such as terms of trade and per capita real GDP! Nigeria is Africa’s largest oil producer, yet it’s also the most vulnerable to oil price shocks. With over 75 per cent of government revenues coming from oil earnings, it’s not surprising that Nigeria’s economy is always out of kilter after an oil price crash.
In 2014, oil prices collapsed, with Brent crude falling from $140 per barrel to $40. Two years later, in 2016, the falling oil prices, coupled with economic mismanagement, sent Nigeria into a recession, the first time in 24 years. Now, another oil price plunge. Last week, the price of Brent crude tumbled from $68 per barrel to about $30 and may fall even further. That puts Nigeria’s fragile recovery at risk and may result in the devaluation of the naira. But the immediate consequence of the oil price crash is on the government’s budget, given that oil earnings account for over 75 percent of government revenues.
Facing falling oil prices and dire financial straits, oil-dependent governments can take three immediate actions. First, those with large foreign reserves can dip into them, but, with less than $37 billion, Nigeria has no appreciable financial buffers. Second, they can increase domestic oil prices, but the government is unwilling to remove the petroleum subsidy. Lastly, you can reduce government spending. Well, the Minister of Finance, Zainab Ahmed, has warned that the N10.594 trillion ($34.6 billion) 2020 budget, which was based on an average $57 oil price, would be “drastically reduced”. That’s inevitable, although what the government cuts from the budget would be interesting – recurrent or capital expenditure?
But President Buhari will also use the oil crisis as an excuse to borrow more. Even before last week’s oil price crash, his government asked the National Assembly for approval to borrow $22.7 bn to fund infrastructure projects. To be sure, the economic rationale for the proposed borrowing and spending sprees is questionable, not least because the proposed projects would have limited impact on economic diversification and growth, and none of them involves critical social expenditure, such as on education and health. But leaving that aside, how sensible is it for a country that faces diminishing earnings from a product that accounts for 96 percent of its export to be massively increasing external borrowings?
The truth is that Nigeria is at the mercy of oil prices. With a production quota of 1.776 million barrels a day, which, according to a recent report, could drop by 35 per cent, Nigeria is too insignificant to drive world oil prices; it is simply subject to the vagaries of the world oil market. Secondly, Nigeria is too irrelevant to shape global oil politics. The key players are Saudi Arabia, Russia and the United States. For instance, the current oil price crash was caused by a powerplay between Saudi Arabia and Russia. Following Russia’s refusal to coordinate production cuts with OPEC, Saudi Arabia retaliated with a “volume war”, threatening to increase crude output from 9.7 million barrels a day to 12.3 million, which would, of course, flood the market with oil and depress its prices.
But Saudi Arabia has the advantages that Nigeria doesn’t have. For a start, it’s production cost is very low at $7.50 a barrel, including capital expenditure; without capex, it’s as low as $4 or $5 per barrel. But “the best of Nigerian production is $17 per barrel”, according to Mele Kyari, the Group Managing Director of the Nigerian National Petroleum Corporation, NNPC. “Today, there are countries which cost of production is classified at $30 per barrel and we are one of them”, Kyari said, adding: “If the oil price is $30 or $32 and you are producing at the cost of $30, you are out of business”. Indeed! With its high production cost, Nigeria certainly can’t compete on low prices.
Yet, a more serious problem is Nigeria’s lack of resilience to oil price shocks. External shocks are inevitable. The question is whether a country can cope with them. Saudi Arabia can survive an oil price war and low prices for a long time because of its large foreign exchange reserves of $502 billion. Russia said it has firepower to survive the price war, referring to its $570 billion foreign reserve and its $150 billion national wealth fund. But what about Nigeria? Of course, Nigeria has no financial buffers; it squandered its oil wealth, estimated at $300 billion since the 1970s!
Today, everyone talks about Norway as an example of a country that has used its oil money well. Norway’s Norges Bank Investment Management is the world’s largest sovereign wealth fund. It was set up almost 25 years ago to manage Norway’s oil wealth; although it started with just $200 million, it is today an investment behemoth with $1.2 trillion in assets, with equity holdings equating, on average, to 1.4 percent stake in every listed company globally! By contrast, Nigeria can’t even save for the raining day, let alone invest in assets or run a successful sovereign wealth fund.
But the future is very bleak for oil-dependent countries. This is because of three challenges. First is the “age of oil abundance”, with a massive supply overhang as more reserves are identified. The surplus supplies would keep oil prices down.
Second, Western countries are investing heavily in green energy to tackle climate change. And as alternatives, such as electric cars, become readily available and cheaper, oil will become unattractive. Third, as we have seen with the effect of the Coronavirus on oil demand, oil is acutely susceptible to demand shocks, and this will increasingly happen as population growth slows in the West and as demand shifts in favour of more environmentally friendly energy.
Given the above factors, the IMF warned recently that “global demand for oil will peak by 2040” and said that “governments in oil-producing countries are dangerously under-prepared for global shift away from fossil fuels”. This is certainly not alarmist. The Bible talks of “when money failed in the land of Egypt”. Well, oil too will soon fail and countries with oil reserves will be sitting on “stranded assets”. Venezuela is a classic example of an oil rich country – Latin America’s richest country – that became a humanitarian basket case due to the collapse of oil prices and, of course, economic mismanagement.
The IMF warned that “oil-exporting countries must be ready for a post-oil future sooner rather than later”. Sadly, Nigeria is doing virtually nothing to prepare for that future. Oil has been a curse rather than a blessing for Nigeria. First, it spurred massive corruption and a rentier economy. Then, due to the so-called Dutch Disease, it shifted attention away from the non-oil sectors, such as agriculture and manufacturing. But the age of oil is over, and unless Nigeria prepares for a post-oil future, it is utterly doomed!