Oil price has lost more than one-third of its value sparking fears of a crash similar to the one of 2014 that consequently led Nigeria into a recession in 2016.
The three-year pact between the Organisation of Petroleum Exporting Countries and Russia ended in acrimony on March 06 after Moscow refused to support deeper oil cuts to cope with the outbreak of coronavirus and ramped up production by shale oil producers in the United States of America are factors which have led to oil price slump to a four year low.
People familiar with the matter said Russia believes North American shale producers would reap the benefits from the new attempt to shore up prices and has decided to back out of discussion for deeper production cuts in another stand-off with US shale as happened in 2014. This has led to Saudi Arabia’s unwillingness to take on more cuts without Russia a partner.
“Of course, if there is no agreement, Saudi Arabia will produce whatever the customer asks for,” said one OPEC delegate. When asked if countries were entering into a fight over market share, he said: “It could be.”
Brent crude, the international benchmark for oil prices tumbled to $41.28 dollars per barrel, the lowest since 2016 according to oil price live updates by oilprice.com. This puts oil-dependent countries such as Nigeria and many oil firms under weighty strain and economies around to world respond to the coronavirus outbreak. Nigeria’s economy faces a dire situation.
In the 2020 budget benchmark, Africa’s biggest oil producer assumed an oil price benchmark of US$57. This was factored into Nigeria’s revenue projections of N8.15 trillion to which oil was expected to contribute about a quarter – that is N 2.64 trillion. Additionally, daily production of 2.18 million barrels of oil a day was part of the assumptions.
With slowing demand for oil which is a proxy for slowing economic activities in China, Nigeria has been exposed to external shocks it has little control over and may face severe revenue shortfalls.
When the price of oil fell from highs of about $112 a barrel in 2014 to below $50 in 2015, as is the case now, Nigeria’s economy went into a tailspin and then a recession in 2016. This was because crude oil sales account for about 70 percent of government income and about 90 percent of foreign exchange earnings.
Critics argued that government policies made a bad situation even worse in 2016. A fall in oil prices triggers shortfalls in public revenue which often forces the Central Bank of Nigeria into applying monetary policies that limit the demand and supply functions of markets, such as interventions that defend the naira to avoid currency devaluation.
Two recent reports by BusinessDay last week one on March 03 “Nigeria is missing opportunities to cut petrol subsidy as oil prices decline” and the other on March 06 “Petrol landing cost at 2-year low gives Nigeria leeway out of subsidy” have suggested that the slumping oil price is an opportunity for Nigeria to rid itself of subsidies in the domestic oil market which have continued to hurt the country’s economy.
The global slide in oil prices is bad news for the government because it would lose a sizeable fraction of estimated oil revenue as a result but this also means a thinner petrol subsidy bill at home.
Falling oil price puts pressure on the naira and experts have suggested cutting subsidies on power and petrol to prevent heavy consequences on the economy, the advantages of which are not felt low income earners.
