A prolonged collapse in oil prices, ships dilly-dallying at sea with unwanted oil cargoes, and traders getting creative about where to stash oil will become the new face of the global oil market and they are set to leave indelible mark on oil dependent countries like Nigeria.
Put on your seat belt. The next chapter in the oil crisis is now about to unfold: great swathes of the global petroleum industry are about to start shutting down, government treasury management will be challenged and revenues for Nigeria’s government will be squeezed to levels not before imagined.
The economic impact of the coronavirus has ripped through the oil industry in dramatic phases according to Bloomberg. First it destroyed demand as lockdowns shut factories as well as aviationand kept drivers at home. Then storage started filling upas OPEC nations resorted to under-cutting one anotherand traders resorted to ocean-going tankers to store crude.
Now shipping as well as tank storage prices are surging to stratospheric levels as the industry runs out of tankers — a sign of just how distorted the market has become and why it will be long before relief can come the way of producing countries.
The price of Bonny Light is well below cost of production at $15 a barrel and thespecter of the collapse in the revenues of federal, state and local governments in Nigeria and its impact on jobs and dislocation in social services should spur fast thinking in Abuja and across state capitals in Africa’s most populous nation.
The scale of the coming crisis dwarfs government capacity in Nigeria which has perennially suffered from bad government on account of failing to put its best foot forward and thus limiting the level of thinking deployable.
So far, government efforts in Nigeria are failing to stop the decent of the continent’s largest economy into the abyss, with the associated Coronavirus challenge showing up all the old cracks that have held back the rise of an African giant.
Little Ghana, which for almost half a decade has attracted more FDI than Nigeria annually, is now also rated the number one country when it comes to the number of Covid-19 tests done per million population.
Oil prices were diving below zero last week, shut-downs of oil wells are now a reality in Nigeria. It’s the worst-case scenario for Nigeria.
“We are moving into the end-game,” Torbjorn Tornqvist, head of commodity trading giant Gunvor Group Ltd., said in an interview with Bloomberg. “Early-to-mid May could be the peak. We are weeks, not months, away from it.”
The impact of the oil price shock will be particularly intense for Nigeria which among the OPEC countries has one of the lowest investment rates. This has been made worse by the socialist inclination of the government of President Muhammadu Buhari which has failed to save and leverage private capital to develop the country. The result is that today the country’s fiscal buffers are at their weakest in decades – fast depleting foreign exchange reserve, an unimpressive size of the sovereign wealth fund and an empty excess crude oil account!
When then President Goodluck Jonathan sought to put cash aside in the sovereign wealth fund, some state governors fought back, saying, “it is already the rainy day.” Now the rain is truly pouring and Nigeria is absolutely helpless because of this lack of foresight, according to economist Ken Biachi.
There is, some say, the lack of good fortune which means the nation will be afflicted by two devastating economic contractions in five years. On the back of poor management, Nigeria’s oil sector has been contracting even in the good times when other nations grew theirs to amass huge cash in their reserve and sovereign wealth funds.
The erudite governor Kayode Fayemi of Ekiti who chairs the Nigerian governors’ forum has already said he expects cash available for the monthly FAAC allocation to thin out in a month. No one is going to be able to dodge this bullet.
Saudi Arabia can afford to cut state spending by just 5% as it raises more $100bn from the debt market while other OPEC peers Qatar and Abu Dhabi have already raised $10bn and $7bn respectively from the debt market. Three years ago, oil producer Algeria had $96bn in its foreign reserves while war-ravaged raq had a reserve level of $68bn by last year. Nigeria’s is half that.
“Our economy is in crisis”, finance minister Zainab Ahmed told local television two weeks ago, estimating that Nigeria’s economy could shrink by as much as 3.4% this year without massive stimulus.
This crisis is only likely to deepen now that the price of Bonny Light is in free fall, said Nonso Obiliki, BusinessDay’s Chief Economist in an interview with the Financial Times.
According to him, “the big difference between $20 oil and $30 oil is that we might actually have to start shutting down wells”, he said. “In terms of the dynamics of fiscal and monetary policy it just aggravates what was already a dire situation.”
Any fiscal stimulus less than 7-10% of Nigeria’s GDP will be like a drop in an ocean. That Nigeria pull back from tapping the debt market last quarter is sure sign of how things have fallen apart already.
In its full bloom, the impending economic crisis in Nigeria will inflict massive job lay-offs, unpaid salaries will mount leading to hefty depletion in the disposable income of Nigerians, widening poverty pit and even social unrest. There will big hits to the equity market and the real estate sector with the jobs held in the sector.
Titi Omobude, Senior Analyst
