Between 2010 and mid-2014, world oil prices had been fairly stable at around $110 per barrel until they plunged to less than $50 per barrel. That is bad news for Nigeria for a number of reasons.
First, energy sales account for up to 80% of all government revenue and more than 90% of the country’s export. What this means very simply is that we now earn about 54.5 percent less than what we used to in oil revenue. That is a 54.5 percent loss in a sector that accounts for 80% of all government revenue!
Second, Nigeria is not well equipped at the present moment to handle this fall in revenue. Although the exchange rate of the naira to dollar is influenced by a number of economic details, one can see the effect of our reduced earnings in oil from the way our naira weakened against the dollar. We went from about 160 naira a dollar to 200 naira a dollar.
What are implications? Government’s ability to pay salaries and maintain social welfare would shrink badly, at least to the tune of its losses in oil revenue. In order to keep up with its financial obligations at home and abroad, the government may have to take some far reaching decisions in the short term. It may ‘print’ more money, risking inflation as well as devaluation against the dollar. And then to curb inflation, interest rates on loans might be hiked.
Generally, we won’t be able to buy as much as we previously did with the same amount, especially goods imported by dollar. The economics of that is simple. Our income is on a decline, and dollar products are increasing in value relative to our currency. Demand, the willingness and ability to buy products, would fall. In turn, this would force supply to decline to the level of demand. These are signs of a possible recession. As falling demand compels supply to fall, the problem of increasing unemployment would come along.
Why do we have such grim scenarios staring at us in the face? We can answer that question from two angles. The first would be the facts on ground. That is the world prices of oil have fallen to less than half of what they used to be. For us who rely so much on earnings from oil, we are especially vulnerable to financial imbalance when the prices dip.
One other fact on ground is that the days when oil producing countries could effectively influence a rise in the price of oil are almost over. This brings us to the second angle of understanding why Nigeria is and will be deeply troubled by such a decline. In 1973, the Organization of Petroleum Exporting Countries, OPEC, wielded enormous power over the global market for oil. By its actions at the time, the global price of oil quadrupled to the shock and dismay of oil consuming countries, especially the United States and her European counterparts.
At that time, these western countries were vulnerable to oil price fluctuations because they produced very little fraction of world oil while they consumed about half of globally produced oil. This economic fact gave OPEC plenty of power to wield over these consuming nations.
Unfortunately for us, while we were consumed with the excitement of having so much petrodollars flowing into our country, our customers were busy at finding ways of weaning themselves off our oil exports, and becoming major oil suppliers themselves.
Here is what President Obama had to say about U.S effort along these lines in 2011:
“America is better prepared for supply disruptions than we used to be. Today, we use 7 percent less oil than we did in 2005, even as our economy has grown since then, partly because our economy as a whole is more efficient. We are adapting. We’re producing more oil and we’re importing less. Now, the hard truth is, as long as our economy depends on foreign oil, we’ll always be subject to price spikes. So we’ve got to get moving on a comprehensive energy strategy that pursues both more energy production and more energy conservation.”
Mr. Obama made that speech in March 2011. The national fuel efficiency standard his country was adopting, he said, would save it 1.8 billion barrels of oil. Then he set a new goal for America. That by 2035, 80 percent of their electricity will come from energy sources like wind and solar and homegrown biofuels along with natural gas, clean coal and nuclear power.
That was in 2011. By 2014 the U.S had developed its own energy sector that it no longer buys oil from Nigeria! So we haven’t just lost 54.5 percent of oil revenues in that global price fall, we have also lost a big customer, and the income that comes from there.
The losses we now face have not occured suddenly. Unlike the global financial bubble burst of 2008, this one was so predictable and as a country we could have prepared for it. In subsequent articles we’d see how we could have prepared and what we can yet do to save our future.
Study Materials Used:
*Tim Bowler, ‘Falling oil prices: Who are winners and losers?’ Jan., 19, 2015.
*Remarks by the President on America’s energy security, Mar., 30, 2011