In 1973, OPEC demonstrated its power to raise oil prices. By its actions, crude oil price quadrupled in less than a year and stabilized around that price level for several months following. This brought unforeseen wealth to crude oil exporting countries, and deep losses to western countries who heavily depended on importing crude oil.
What in fact held OPEC’s power in place and that made it’s actions effective in determining oil prices and keeping up its oil revenues was the dependence of its customers.
Unfortunately, it appears by our unpreparedness that we have been blind to see our dependent buyers have been developing their capacity to become independent of our supplies.
Nigeria has directly felt the impact of such development in the United States. In October 2014, news got round that Nigeria completely stopped selling crude oil to the U.S. We should have seen that coming. In 2011, U.S president, Barrack Obama, remarked, “we use 7 percent less oil than we did in 2005 even as our economy has grown…last year (2010) American oil production reached its highest level since 2003…for the first the in a decade, imports accounted for less than half of what we consumed.”
Two years after President Obama’s remarks, in 2013, Nigeria’s Minister of Petroleum Resource made a speech, titled, ‘Nigeria’s oil and has strategy in the next five years: A new dawn to boost investment and production.’ She recognized the oil and has sector plays a critical role towards Nigeria’s economic well being as it is today. Then she went on to define what our energy future would be: “Nigeria has set for itself the ambitious target of achieving 4 million barrels of production by 2020.” She shared the fiscal and crude oil investment strategies the country was to use in achieving this target.
Oddly, the Minister’s speech did not give any regard to adapting our oil industry to the realities of globalization which usually push prices of goods down, most especially raw materials.
Globalization usually brings about a glut of capital and products in the global market lines, and they transform price givers into price takers. These things come about by the interplay of new discoveries, free market entry, ease of capital flow and development of disruptive technology. These were the very changes springing up in the U.S and elsewhere, yet there wasn’t a mention of it or a plan to respond accordingly in the Minister’s speech.
In Africa alone, in recent years there have been discoveries of huge and commercially viable oil fields in a number of countries. This in itself would draw capital away from established oil fields to the development of new ones. In turn, we now have an overall increase of this product in the market. Hence we see more sellers, more quantity of the product, and a consequent decline in price.
Given these developments it is unlikely that the price of oil would ever recover to anywhere near $100 a barrel. Nigeria must look for ways to rebuild its revenues by adapting the oil sector to fit into current realities. Here are a few suggestions.
As the price of crude oil itself declines, countries involved in refining and selling the finished products would begin to get greater marginal profit. The government should consider mobilizing its resources now to start refining oil in large enough quantities to export.
No doubt we have access to the entire African market space. We may seal this trade opportunity by forming partnerships that guarantee free and assured access to our target markets just like the free trade agreements often negotiated between countries America, Europe and Asia. Thankfully, there aren’t many African countries that refine their own oil, yet all depend on the finished product.
The government should urgently review its priority for seeking more investment in drilling for crude oil. It is more profitable to seek investments in alternative energy. Clearly Nigeria can generate enormous power from wind and solar energy, and biofuels.
In the near future, there would be exceeding great demand for machines that require less oil to get work done. It is good therefore to also seek investments in automobile industry to produce (assemble or build) vehicles that are fuel efficient or even run on cheaper power sources. This is where we really should be directing new fiscal incentives, not fresh oil exploration.
As I said earlier, our primary markets would be our neighbouring African countries.
The decline in fuel prices has definitely lead to a rise in unemployment, inflation and tightening of cash flow in our country. But what would happen if we do nothing, hoping and waiting for the price of oil to recover? It will not. We can, however, turn the situation around now for our good, bring about new energy and manufacturing industries, create more jobs, and fund other revenue streams in the country, leading to even more jobs and better standards of living.
The earlier we get our planning off ground the better.