• Thursday, March 28, 2024
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BusinessDay

Despite oil rally, concerns for Nigeria’s future linger

Oil prices gain

Even though Nigeria will benefit from oil rally in the short term, concerns are rising regarding what would become of the country as the world moves beyond oil as a major source of fuel for vehicles and towards electric cars.

Higher oil prices have often meant Nigeria, Africa’s biggest oil producer, can earn more in foreign exchange and fund its budget deficit. This is because oil accounts for 90 percent of Nigeria’s foreign exchange. The most recent exports are led by crude petroleum which represents 76 percent of the total exports of Nigeria, followed by petroleum gas, which accounts for 13.8 percent.

Hopes have been rising for the country as oil price last week hit a five-month high of $70 per barrel thanks to political tensions in Libya, USA sanctions against Iran and Venezuela and the continuing OPEC+ supply cuts.

Brent crude, the international benchmark, traded at $71.03 as of 5:15pm local time on Monday. This represented a 0.98 percent increase. The West Texas Intermediate (WTI) traded at $64.17 as of 5:15pm Monday, up by 1.73 percent.

While this is welcome news for Nigeria given how a handsome chunk of export revenues are sourced from oil sales, fears for the country’s future earnings linger as the world embraces alternative sources of fuel.

Electric cars outsold fossil fuel vehicles for the first time in Norway last month. The announcement from the Norwegian Electric Vehicle Association makes it the first time that more than half of the cars sold in the Norwegian market were fully electric.

“While appreciating oil prices provide foreign exchange stability, ability to implement 2019 budget and economic growth, it still leaves the country vulnerable to external shocks,” Lukman Otunuga, analyst at FXTM Research, said in a note to BusinessDay.

“Nigeria still needs to break away from oil to derive growth from other sustainable sources,” Otunuga said.

Again, the factors driving oil rally have limits and cracks are emerging in the Organisation of Petroleum Exporting Countries and allied countries (OPEC+) ‘Declaration of Cooperation’ to cut oil supply by as much as 1.2 million barrels. Saudi Arabia is having a hard time convincing Russia to stay much longer in the OPEC-led pact cutting oil supply, and Moscow may agree only to a three-month extension, three sources familiar with the matter said.

The United States of America’s Shale production reached a global record of 12.2 million bpd in March and concerns over plateauing global growth are stimulating fears of reduced demand for crude; the current upside on Brent crude may be limited.

“Any fresh signs of world growth cooling or global supply outpacing demand may end up dragging prices back below the $70 per barrel level,” Otunuga said.

The challenge for Nigeria is not necessarily what happens now, but what happens when oil price crashes to its barest minimum with increasing attractiveness to produce electric cars from Europe to America and Asia.

A majority of these advanced countries are also considering a ban on the sale of petrol-powered cars, which could lead to lower oil demand and excess crude oil supply, a situation that will automatically crash oil prices.

 

STEPHEN ONYEKWELU