Oil rally yields insignificant market advantage for Nigeria

As of today, Nigeria owns four oil refineries located in Warri, Port Harcourt and Kaduna, respectively. Sadly, none of these plants operate at a decent level of output efficiency.

While Nigerians have called for the government to revamp the fast deteriorating public assets or transfer them to private hands that will efficiently run the enterprises, no positive response has been received. Instead, Nigeria’s leaders have continued to depend on processed crude oil from abroad, whose importation costs far more than the crude product leaving Nigeria.

As oil prices continue to rally more recently, Nigeria’s expenses on fuel importation continue to dampen potential market advantages attached to the price increases. Increased global price of crude oil may not feed into significant economic outcomes for Nigeria since the country’s financing on the imported resource is unsustainable and domestic refineries are currently aground.

Hence, the current rally in global oil prices has left Nigerians with mixed feelings: the anticipation of a revenue boost through increased foreign exchange earnings and uncertainty in the face of current fiscal indiscipline and revenue leakages.

Nigeria’s 2022 proposed budget stands on N16.30 trillion planned spending for the fiscal year. This budget estimate is based on the anticipation that the exchange rate will be N410.15/$1, GDP growth will be at 4.2 percent per annum, and the inflation rate will average 13 percent. Also, the expected crude oil benchmark price of $57 per barrel and a daily oil production estimate of 1.88 million barrels (including condensates of 300,000 to 400,000 barrels per day) are gauged as the minimum expected average against which the 2022 budget was prepared.

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With these estimates upon which next year’s national budget was prepared and compared with the current budget status-quo, the recent oil price surge should buffer the Federal Government’s expenses and revenue base. However, with a current heavy consumption attitude and a much worse forecast programme for FY 2022, the expected difference may not be felt.

In late September, Brent crude climbed 0.86 percent to $80.22 per barrel. This price shoot represents the most significant boost since Q4 of 2018. The global oil benchmark reached a 3-year record in the face of increasing demand for the commodity worldwide. This price surge came after the OPEC and OPEC+ member nations opted against production surpluses, which prompted speculative thoughts favouring an oil rally towards $100 per day.

Early October, plans to retain existing production capacity among the OPEC and OPEC+ communities supported further increases in global oil prices. The International Brent Crude futures reached $81.74 per barrel, up more than 0.5 percent for the session. Relatedly, the US Texas Intermediate (WTI) stood at $77.92.

These price increases reflect a turn in global experiences as post-pandemic demand begins to surge beyond supply rationings. Also, the rise in oil price follows a shift in demand volume for alternative energy sources like natural gas, as their prices surge. Already, factories and power plants in parts of Europe and Asia are increasingly opting for cheaper energy sources, and the most accessible option is crude oil.

While global oil prices continue to experience a northward trend, Nigeria’s potential to turn the outcome towards a home advantage may not be realised, according to the Minister of Finance, Budget and National Planning, Zainab Ahmed. According to her, Nigeria earns too little from the oil price surge because of corresponding expenditure largesse.

Speaking with Bloomberg, the federal minister recounts, “the high price of oil means that we would be able to earn more revenue and $85 per barrel is way above the $40 per barrel we have on our 2021 fiscal projections.”

“But we also have the challenge of having to buy petroleum products for use in-country because we do not have functional refineries. So that eats into the revenues we would have otherwise realised,” she further explained.

In addition to low earnings from oil sales, Nigeria records a shortage in crude oil production. In August, for instance, production fell to 1.239 million barrels per day from 1.327 million barrels per day in July, according to reports from OPEC.

With an investment of nearly $35.38 billion over landmass coverage of about 250,000 hectares, the Federal Government, in connivance with billionaire businessman, Aliko Dangote, hopes to raise the country’s oil earnings through an ongoing refinery project located in Lagos.

Currently, the federal government spends about 40 per cent of its foreign exchange earnings on petroleum imports, thus, putting much pressure on the naira. However, with full-scale operation in place, the FG hopes that the refinery will be a major FX savings source for the country, according to the Central Bank of Nigeria’s governor, Godwin Emefiele.

When completed, the refinery will be expected to produce gasoline, polyethylene and polypropylene products as major output and export earners for the country.

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