Costs of the three weeks old price and volume wars in the global oil market are growing for both Russia and Saudi Arabia, countries with bigger fiscal and financial buffers than Nigeria does.
Russia’s revenues from oil and gas are estimated to be US$39.5 billion (3 trillion rubles) lower than planned due to the tumbling oil prices, according to Anton Siluanov, Russia’s minister of finance. This means that at the current oil prices, of below $30 a barrel, the Russian economy will tip into a deficit, albeit a moderate one at 0.9 percent. The Russian budget, according to the finance ministry, was balanced at a price for the Urals blend of $42.40 a barrel.
In the coming months, Russia’s economy will need about a trillion rubles ($12.7 billion) to emerge stable from the coronavirus pandemic and oil crash, TASS, Russia’s biggest news agency reported. Although Russia’s debt to gross domestic product (GDP) ratio is among the lowest in the world, at 19.48 percent, according to data from the International Monetary Fund.
“The way I see it implies that we should maintain gross domestic product and spend several trillion rubles to stabilise the [economic] situation. For now, we can talk of about one trillion rubles a month,” Alexey Repik, chairman of Business Russia told the news agency in an interview.
For Saudi Arabia, at $30 and below a Brent barrel, the country’s wealth fund will deplete fast and lead to reduced government spending. This will in turn stall projects, bad news for an already suffering private non-oil sector. That is the near-term damage.
The top oil exporter would need oil priced at $80-$85 a barrel to balance its budget an International Monetary Fund official said.
The longer-term damage is the lack of funds for the ambitious Vision 2030 plan of Saudi Crown Prince Mohammad bin Salman, which was already going downhill even before the oil price collapse as the promised multi-billion foreign investment and Saudi investment in “diversifying away from oil” was not exactly flowing to the Kingdom, Tsvetana Paraskova, an energy analyst at oilprice.com said.
“I think we are beginning to see that the vision 2030 is not going well,” Jean-François Seznec, Non-Resident Senior Fellow at Atlantic Council, said on an Atlantic Council press call last week. “But he needs to make a big impact. Now, his big impact is to force the Russians to give up and agree to the cuts, and if at the same time it destroys the U.S. shale industry so much the better,” Seznec noted.
It is now a game between Saudi Arabia and Russia of who will blink first, and in this game, the Saudis seem to have overestimated their fiscal buffers and underestimated the coronavirus-hit enormous demand destruction, Paraskova observed.
No country is more at risk than Nigeria, a country where oil accounts for 96 percent of exports and over 75 percent of government revenues; a country that has absolutely no resilience to oil price shocks.
Nigeria has wobbled into this low oil price environment and faces the novel coronavirus pandemic with fewer buffers than it had in 2008, during the global economic recession.
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, Olu Fasan, a BusinessDay columnist, and a visiting fellow at The London School of Economics said.
Africa’s biggest oil producer has squandered its oil wealth, estimated at $300 billion since the 1970s. Nigeria survived the 2008 global recession thanks to sufficient buffers in the form of external reserves worth $62 billion and excess crude savings of $20 billion.
Nigeria has wavered on diversifying its economy away from oil dependence, ignoring trillions of standard cubic feet of cleaner and cheaper gas in its reserves as the world goes electric, discarding combustion engine.
France, Spain, Greece, Mexico has said they will remove diesel cars and vans by 2025. Norway will phase out conventional cars by 2025, followed by France and the United Kingdom in 2040 and 2050, respectively. Nigeria may be left with crude oil reserves that no one wants.