W hen it rains, it pours. The price of crude oil plunged below $30 last week, plumbing to a low last seen in December 2003. On Saturday, the United States and the European Union lifted the sanctions on Iran. That, alongside the direct and the proxy battles for regional supremacy between Iran and Saudi Arabia, will further increase the glut in the global oil market. Though there are desperate calls by Nigeria and other hard-pressed members of the Organisation of the Petroleum Exporting Countries (OPEC) for an emergency meeting and a supply slash, Saudi Arabia, United Arab Emirates (UAE) and other more comfortable members of OPEC are adamant. All things considered, the prospect of crude oil selling at $20 per barrel or lower, as projected by the International Monetary Fund (IMF), Morgan Stanley and others, may just be a mere spit distance away. And the earlier we adjusted to that possibility, the better our chances of weathering the present storms.
The Minister of State for Petroleum, Dr. Ibe Kachikwu, doesn’t see or would not want to see oil selling at or below $20 a barrel. On the side-lines of a meeting on energy in Abu Dhabi, he told CNN that he was hopeful not only of an emergency meeting by OPEC and a change of strategy by the oil cartel but also of the price of crude stabilising around $30, then climbing to $50 before end of 2016. Yesterday, President Muhammadu Buhari left for the UAE for a three-day meeting on energy futures. Two things can be safely speculated: one, the president, who is also the lead minister for petroleum, will spend some time to lobby Saudi Arabia, UAE and other recalcitrant members of OPEC to consider supply cuts; and two, he will be hopeful that his shuttle diplomacy will yield the desired result.
It is good to be hopeful. But hope is not a strategy. There are too many moving parts in this oil business and most of them are out of our hands. Things may turn out the way we hope for, but it is more realistic to anticipate and base our plans on the worst case possible and focus on the things within our control. At the moment, the global oil market is a buyer’s, not a seller’s market. The interplay of demand and supply does not favour oil sellers, especially those, like us, that depend almost exclusively on sale of crude oil. On the demand side, the slowdown in the economies of China, India, Brazil, and Western Europe has negatively impacted the demand for oil. On the supply side, the production of shale oil in the United States and from Alberta oil sands in Canada, has not only led to major cuts in oil imports from both countries but has also added to excess supply in the oil market. Add to this the increased production from Iraq and expected supply from Iran post-sanctions, then it is easy to fathom why the price of crude nosedived 72% from $110 a barrel in June 2014 to below $30 last week and will probably keep falling.
OPEC is a powerful cartel that can bend the market in its favour as its members have 81% of world’s proven oil reserves, about 40% of global oil production, and about 60% of traded oil supplies. However, despite that some of its members like Nigeria and Venezuela are hard hit by the dramatic slump in oil prices, OPEC has decided to maintain its production quota, with the hope of driving prices to a level that expensive shale-oil production will become unprofitable. This strategy has made some dent, but shale oil production has proven more resilient than anticipated. It is also no secret that the US is keen on reducing its energy dependence.
Also, it is important to bear in mind that while low price may affect new investments and long-term supply, oil at $30 still covers the short-term costs of even shale oil producers. Another very important factor is that OPEC members are in different situations and with different interests. While Nigeria and company are in dire straits, Saudi Arabia and company have enough savings to tie them over the slump and they are more interested in market share than in actual price or survival. And Saudi Arabia, the largest producer in OPEC with 9.7 million barrels per day or 32% of OPEC’s output, can hold on for so long in pursuit of its strategic interests of gaining market share and checkmating Iran because its cost of production is said to be below $10 per barrel. We might be able to persuade the Saudis and other Gulf states to factor in our interests, and Russia and other hard-pressed non-OPEC members might agree to a coordinated cut in supply, but geo-political interests are rarely calculated on the basis of pity. Also, we hold none of the aces.
So, it is more realistic to focus on what we can control. A starting point is to reconcile ourselves to the fact that oil at $20 or below is not as strange as it sounds, and use that to locate where we lost our way. The yearly average price of crude oil per barrel in 1999 was $17.44. As a matter of fact, oil sold for $9.80 per barrel in December 1998. Read that again: oil sold for less than $10 not so long ago, and that was just 17 years ago. In May 1999, when we embarked on this latest democratic experiment, oil sold for $15.22 per barrel and only crossed the $20 mark in August of that year ($20.17). Fuelled by unprecedented growth in China and the crisis in the Middle East, oil prices moved in the boom zone, hitting the $70 mark in April 2006 ($70.44), the highest level throughout the eight years of President Olusegun Obasanjo. It is important to note that despite the fact that oil never sold beyond $70 a barrel between 1999 and 2007 and our supply was constrained by Niger Delta militancy, the Obasanjo administration paid off $12 billion in external debt and left more than $60 billion in external reserves. That robust cover allowed us to weather the global recession of 2008/2009 with minimal impact.
It is equally important to note that though we had an external debt overhang of more than $30 billion when oil sold for $20 less than two decades ago, we were not in the extremely desperate situation that we are in today. With oil boom of the 2000s, we lost our heads and massively expanded the size of government. We equally forgot the elementary lesson of commodity market by failing to take advantage of the boom times to save for the bust times and to insure ourselves against boom-bust shocks by diversifying our economy. If Obasanjo can be excused because he at least saved up enough to protect us from the effect of the global recession, the administrations of President Umaru Musa Yar’Adua and President Goodluck Jonathan deserve proper knocks.
This is not only because they witnessed first-hand how capricious the oil market can be, but also because oil sold at record prices during their terms. The yearly average price of crude oil under President Yar’Adua was as follows: $69.04 in 2007; $94.1 in 2008; $60.86 in 2009; and $77.38 in 2010. For President Jonathan, the yearly average price of crude oil was: $77.38 in 2010; $107.46 in 2011; $109.45 in 2012; $105.87 in 2013; $96.29 in 2014; and $50.95 in 2015. Despite that oil sold consistently above $100 for at least three years under Jonathan and for an average of $91.23 for the entire period under his watch, we were in trouble the moment oil price started tumbling in June 2014, with neither enough cover nor a diversified economic base. Clearly, there are questions to be asked but a more critical task is to ensure that if and when oil prices rebound, the situation of near-zero cover for the raining day will not repeat itself.
In the immediate, there are some urgent tasks. One, the executive arm needs to take a hard look at the 2016 budget proposal. Oil price benchmark at $38 is increasingly looking unrealistic, except we want a budget that will be good on intentions but un-implementable. The problem is not the expansionary nature of the budget or even the 37% deficit, but how some provisions square with the reality of a country in serious economic trouble. Borrowing to build infrastructure that will create jobs and increase the productive capacity of our people can be rationalised. But not borrowing to dash people money, build new houses for government officials and buy new cars. If there is a time all those can wait, this is it. There can be a better time that calls for sacrifice from the top. Since it is still a proposal, the budget can always be changed by the executive, following due process of course, before and as the legislature works on it.
Another very important area to look at is our current foreign exchange regime, which apart from not working and not being sustainable can get us into deeper troubles. Our FOREX problem is not just because our earnings from oil have plummeted. It is also because, as part of the madness of the recent oil boom, we expanded our appetite for imports and because our somersaulting FOREX policies have further constrained supply of foreign currencies into the economy. According to the Central Bank of Nigeria (CBN), our average monthly import bill was N148.3 billion in 2005 when oil was selling at about $50 per barrel and N917.6 billion on a monthly average in the first nine months of 2015 when oil was selling at about $33 per barrel, an increase of 519%!
Having a “demand management” approach that results in more than 50% difference between official rate and the black market rate will not decree the more than 500% increase in demand out of existence, nor will it save our foreign reserves, which according to the CBN has declined from $37.3 billion in June 2014 to $28 billion at present. We have created a disincentive for people who earn FOREX to bring it in officially or at all and a N100 subsidy on each dollar to those lucky to get it officially, a perverse incentive for corruption and a total waste of scarce resources at a very difficult time. If we continue to deplete our reserves at this rate, we might end up not only with balance of payment problems but also end up pleading with IMF for a stabilisation fund. It is better to allow the naira to find its level, close the gap between official and parallel rates and redenominate by removing two zeros if that will make us feel better. Following Simon Kolawole’s argument on this page yesterday, I will say it is also better for governments to earn N300 rather than N197 to a dollar when oil is selling at $20.
We also need to take advantage of this crunch to reset our economy, politics and lifestyle. We need to fully dispense with different forms of wasteful and badly-targeted subsidies, as even a Saudi Arabia with its cradle-to-grave welfare system is cutting subsidies on water, petrol, electricity etc. Security votes, sponsorship of pilgrimage, state banquets, bloated civil service, retinue of aides and long convoys etc. need to go. The focus on agriculture and solid minerals need to go beyond slogans. The private sector, especially the SMEs, need to be incentivised to be the real engine of growth. We need to improve revenue collection, eliminate graft, improve accountability and manage our economy more effectively. We need to expand the oil value-chain, especially refining capacity, which will reduce pressure on our reserves. These and more we need to use this crisis to do. If you think it is pouring at the moment, wait until oil tumbles to $20. And that time is possibly close by.
THI
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