• Wednesday, May 29, 2024
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BusinessDay

How the oil price war will affect homes, businesses and what you should do

Oil slumps to 18-year low of $22, as more crude tsunami expected

Sale of crude oil accounts for at least 85 percent of the government’s earnings and the bulk of these earnings is used to pay salaries of civil servants. The government’s activities including how it spends or save money affects businesses so everyone has a good reason to be paranoid over this price war among producers.

Why the price war

The bulk of the world’s oil or 10million barrels a day is bought by China, representing a third of all supply is consumed by factories in China. Since the outbreak of the Coronavirus, these factories have been shut down and flights to China has been cancelled. So there are more oil than buyers.

This led to a fall in oil demand which affects prices – law of supply and demand. So to keep prices high, a club of oil producers known as the Organisation of Petroleum Exporting Countries (OPEC) and some other producers who are not part of OPEC, including Russia, …. Met to reduce their production.

OPEC led by Saudi Arabia proposed cutting production by 1.5million barrels a day but Russia refused to go along. These are the two big boys in the agreement.

Russia said more cuts will allow US shale producers flood the market with their own oil which is actually more expensive to produce and cede the market to them.

Saudi Arabia gave Russia a day to think about what it wants to do, but the Russians have had enough vodka and made up their minds.

So Saudi Arabia decided to flood the market with oil and bury everyone else along just because it can. Saudi’s crown prince, is young and needs to prove something.

But Putin is watching the market uneasily. Russia’s budget is based on $40 dollar oil but it has $560bn reserves, Saudi needs it at $80 but can produce oil at $3. So the war is on.

A report by research firm HIS Markit says oil producers like Nigeria face the biggest drop ever in demand for their product with forecasts now suggesting demand collapse levels that will be steepest on record and far worse than the during the 2008 global financial crisis.

The 2020 budget, was based on oil production of 2.18 million bpd with an oil price benchmark of $57 per barrel. The government is indicating it may review this projection.

How it will affect businesses

For businesses, this is a painful time to be alive. Nigeria’s foreign exchange reserves is seeing a decline and this could set off fiscal crisis, adding pressure on the Naira.

Businesses are already struggling to get access to foreign exchange due to decline in dollar earnings. This will endanger their ability to replace raw materials and meet the demands of their customers.

The oil price war and the coronavirus have also led to the fall of stock markets across the world. This has severally impacted the stock price of shares of many businesses. Some will be forced to merge or others will be forced out of business.

For business the situation is complicated with the border closure compounding the woes of companies in the country.

How it will affect households

For individuals and households, a difficult business climate will lead to fall in incomes and many companies will be forced to lay off staff thereby increasing the poverty situation in the country.

It will trickle down to basic commodities as they will likely see a rise in prices including cost of transportation. This will raise inflation numbers and may yet trip the country into a recession if the economy continues to strain under the weight of low oil prices.

Analysts say Nigeria should ramp up efforts to diversify the economy as over reliance on crude income exposes the economy to shocks.

“We need to take efforts to diversify the economy more seriously and implement policies that help us get private capital because it’s the way to go,” Muda Yusuf, director general of the Lagos Chambers of Commerce and Industry recently told BusinessDay.

But each year, data from the National Bureau of Statistics still show the country is yet to wean itself from dependence on oil as it accounts for 90 percent of dollar earnings.