Soaring energy prices pose economic risks for Nigeria – World Bank

Nigeria has been listed among countries to be negatively impacted by soaring global energy prices.

Energy prices soared in the third quarter of 2021 and are expected to remain elevated in 2022, adding to global inflationary pressures and potentially curbing growth in energy-importing countries including Nigeria, according to the World Bank.

In the Washington-based lender’s latest Commodity Markets Outlook, energy prices are expected to average more than 80 percent higher in 2021 compared to last year and will remain at high levels in 2022 but will start to decline in the second half of the year as supply constraints ease.

“The surge in energy prices poses significant near-term risks to global inflation and, if sustained, could also weigh on growth in energy-importing countries like Nigeria,” Ayhan Kose, Chief Economist and Director of the World Bank‘s Prospects Group, said.

“The sharp rebound in commodity prices is turning out to be more pronounced than previously projected. Recent volatility in prices may complicate policy choices as countries recover from last year’s global recession,” Kose said.

Kose further stated that in 2021, some commodity prices rose to or exceeded levels not seen since the spike of 2011. For example, natural gas and coal prices reached record highs amid supply constraints and rebounding demand for electricity, although they are expected to decline in 2022 as demand eases and supply improves.

He however added that additional price spikes may occur in the near-term amid very low inventories and persistent supply bottlenecks.

However, non-energy prices, including agriculture and metals, are projected to decrease in 2022, following strong gains this year.

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In its latest development update on Nigeria, the World Bank estimates annual economic losses from lack of reliable power at USD25bn (5-7% of GDP). These estimates are anticipated to soar in 2022.

Nigeria had the world’s largest energy access deficit, with 45% (90 million) of its population lacking access to electricity, according to the 2021 tracking SDG7 report as of 2019.

Nigeria held the same position in 2018.

Joy Ogaji, the executive secretary for the Association of Power Generating Companies alleged that Generating Companies (Gencos) have recorded a loss of N1.66tn in seven years due to non-payment of deemed capacity. According to the association, deemed capacity is the capacity that should have been delivered, but for the system operator’s instruction for the Genco to reduce its capacity to achieve grid balance and stability.

Between 2015 and 2019, the World Bank estimated cumulative shortfalls of N1.7 trillion. In 2019, total FGN support hit NGN524bn and the federal government has earmarked NGN300bn to subsidise electricity next year. This was disclosed at the recent public presentation of the FY ’22 budget proposal.

Crude oil prices (an average of Brent, WTI, and Dubai) are expected to average $70 in 2021, an increase of 70 percent. They are projected to be $74 a barrel in 2022 as oil demand strengthens and reaches pre-pandemic levels. The use of crude oil as a substitute for natural gas presents a major upside risk to the demand outlook, although higher energy prices may start to weigh on global growth.

Analysts opine that on the back of this development, as global growth softens and supply disruptions are resolved, metal prices are anticipated to fall 5 percent in 2022, after rising by an estimated 48 percent in 2021. Following a projected 22 percent increase in 2021, agricultural prices are expected to decline modestly next year as supply conditions improve and energy prices stabilize.

John Baffes, Senior Economist in the World Bank’s Prospects Group stated that “high natural gas and coal prices are impacting the production of other commodities and pose an upside risk to price forecasts.”

“Fertilizer production has been curtailed by higher natural gas and coal prices, and higher fertilizer prices have been pushing up input costs for key food crops. The production of some metals such as aluminum and zinc has been reduced due to high energy costs as well,” Baffes said.

“More broadly, the events of this year have highlighted how changing weather patterns due to climate change are a growing risk to energy markets, affecting both demand and supply. From an energy transition perspective, concerns about the intermittent nature of renewable energy highlight the need for reliable baseload and backup electricity generation,” he said.

“These will increasingly need to be from low-carbon sources, however, such as hydropower or nuclear power, or from new methods of storing renewable power. At the same time, the surge in natural gas and coal prices this year has made solar and wind power even more competitive as an alternative energy source. Countries can benefit from accelerating the installation of renewable energy and reducing their dependency on fossil fuels,” he added.

The report notes that forecasts are subject to substantial risks-including adverse weather, the uneven COVID-19 recovery, the threat of more outbreaks, supply-chain disruptions, and environmental policies. Furthermore, higher food prices, along with the recent spike in energy costs, are pushing food-price inflation up and raising food-security concerns in several developing economies like Nigeria.