Social Login

Remember me
News

Politics Of Global Oil Price And The Nigerian Economy Featured

Post by
06 February 2015
Rate this item
(0 votes)

The free fall of oil price in the international market has been attributed to international politics. In this piece, Bukola Idowu and Chika Izuora, examine its implications on the Nigerian economy, which is heavily dependent on oil as its major source of foreign exchange.

The proposed 2015 appropriation bill as presented to the National Assembly last year is no longer realistic considering the persistent decline of crude oil price in the international market. Supply had outrun demand as new producers joined the supply chain and the United States of America, a major oil importer joined the exporting trade to drive down the price of the commodity.

The price of crude oil which started out last year at $110 per barrel began a steep decline in June 2014 and contrary to some opinions that the oil price would not go beyond $50pb, it has continued its freefall to $46pb as at Wednesday last week.

The politics of global oil prices
Oil price had always been an instrument of power as the formation of the Organisation of Petroleum Exporting Countries (OPEC) had formed a cartel that triggered the first real rise in price of oil in 1973. From around $1pb to $40pb.

Likewise, the crash of the oil price since June has been linked to a glut in the oil market and the politics of global power. According to the managing director and chief executive of Sterling Bank, Mr Yemi Adeola, “the fundamentals of oil industry do not justify what has happened. What has happened I can tell you authoritatively is purely political.

“The fundamentals of oil industry does not justify the sharp fall in oil price that we have seen and it will get to a point after all the political issues have been resolved, it will bottom out and it will start bouncing back.”

For senior consultant and chief executive with RTC Advisory Services Limited, Mr Opeyemi Agbaje, “we are seeing a replay of the oil glut of the ‘80s and the oil cartel OPEC has lost market because it now accounts for around 30 per cent of the global supply and it cannot dictate the oil price with that percentage.

“Just as before there is an over-supply of the commodity because of new technology, aggressive oil exploration across the world, the United States, the USSR and other non-OPEC members and today they are the largest suppliers. The fundamental is by the Saudis and my hypothesis is that the Saudis strategy is equally by politics and economics.

“They have decided to let the price fall. It wants to put shale oil and gas out of the market, it wants to make those other oil wells that are expensive to produce unbuyable so that all those shale producers will collapse. There is also the politics side of it undermine Iran, undermine Nigeria for geopolitical reasons help America undermine Russia.”

Representatives of Saudi Arabia, the United Arab Emirates and Kuwait have stressed many times in the past six weeks that the group will not curb output to halt the biggest drop in crude since 2008.
Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want and are achieving further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.

Crude fell 48 per cent last year and has declined 35 per cent since OPEC affirmed its output target on November 27. That decision, while squeezing revenues for OPEC members in 2015, aims at preserving their market share for years to come.

According to analyst at consultants IHS Inc. in Washington, Jamie Webster, “the faster you bring the price down, the quicker you will have a response from U.S. production that is the expectation and the hope. I cannot recall a time when several members were actively pushing the price down in both word and deed.”

Nigerian economy takes the heat When the co-ordinating minister of the economy Dr Ngozi Okonjo-Iweala, presented the 2015 budget before the National Assembly last year November, she was optimistic that the price of crude oil in the international market will hover around $65 and $70 per barrel, thus the oil benchmark was fixed at $65 and oil production was estimated at 2.27 million barrels per day.
Acknowledging that the 2015 budget had been difficult to prepare, the CME envisaged “that prices might still fall further but we do not intend to revise the price further down as price intelligence indicates that prices might average between $65 and $70pb in 2015.”
The income from oil according to the budget presented by the finance minister is put at N1.918 trillion or 53 per cent of the N3.602 trillion estimated revenue for the year based on the $65 benchmark, while the remaining N1.684 trillion or 47 per cent will be sourced from the non-oil sector.

This declining price of oil at the global market has however, made the current appropriation bill that is yet to be passed unrealistic as the country’s estimated revenue which has shrank by 30 per cent and is still shrinking when the benchmark of $65pb is compared to the current price of $46pb.

Okonjo-Iweala presenting the budget to the National Assembly last year explained that the $65pb benchmark represents a $13 drop per barrel from the $78pb, which is about N142 billion of FGN budget revenue, originally proposed to the National Assembly.

“To partly make up for this, we have taken steps in this Budget to introduce some short-to-medium term revenue and expenditure measures. Most of these measures are designed to kick-in towards the beginning of second quarter 2015 and will considerably boost the ratio of non-Oil revenues to Oil revenues.”

While the budget proposes a fiscal deficit of N755 billion, the CME said there would be a drop in domestic borrowing from N571.9billion last year to N570 billion this year.

However, with the new tax initiatives coming on board by the second quarter of the year, that is after the general elections, there will be a funding gap. This will invariably call for more borrowing.
Debt has in recent times been rising, calling for caution so as to avoid the repeat of the Paris Club debt which in not too long a past was forgiven. Nigeria has also been subtly accumulating debts in recent times, with domestic debt rising from N4.55trillion in 2010 to N7.65trillion as at September 2014.

In like manner debt servicing fees have also taken an uptick trend rising from N828 billion in 2013 to N943 billion in 2015, gulping an alarming 22 per cent of the aggregate expenditure.

Considering the percentage that recurrent will be gulping from the total expenditure, it is without doubt that part of the recurrent expenditure in the 2015 Appropriation Bill will be funded with debt.
The budget deficit, which should mainly finance capital projects in line with the provisions of the Fiscal Responsibility Act (FRA) is higher than the capital expenditure budget. This means, as presented, the executive is seeking approval from the NASS to borrow N387 billion to finance the entire capital budget and the remaining balance, about N368 billion of the proposed deficit, will be spent on recurrent items.

The government is also planning to draw down N80 billion from the excess crude account (ECA), which is only possible if the oil price rises above $65 per barrel oil benchmark proposed in the budget.
In other words, if oil prices stay below $65 per barrel, there will be more borrowing. If the volume of crude oil sold falls short of targets, there will be more borrowing. If the overly optimistic non-oil revenue generation target, which the government has failed to raise successively, falls short, government’s borrowing spree will continue, to meet its obligations.

Impact on the Naira
The nation’s currency will also face a bashing as the naira currently trades at around N185 to the dollar at the interbank and close to N200 at the parallel market, a wide gap compared to the CBN rate of N168 to the dollar.

While many Nigerians are hoping for a better tomorrow for the local currency, the outside world and analysts are seeing the naira falling to as low as N250 to the dollar this year.

Forward trades in the United States are currently hedging the naira at around N243 to the dollar. Consequently if the value of the naira falls that low, Nigerians should expect even a more difficult time.
The perception of the Nigerian economy is also not helped by the political tension that has gripped the country.

Inflation has been on the rise, with December consumer price index rising to 8 per cent from 7.9 per cent and it is expected to further rise.

As an import dependent country which has yet to diversify its economy, the country will be facing a serious dilemma aside the political outcome if the oil prices continues on its free fall.
Already some economic analysts such as the Lagos Chamber of Commerce and Industry have anticipated that the country’s inflation rate will cross the double-digit mark in the first half of 2015 as the combined austerity measures introduced by the government and tighter monetary policy of the Central Bank of Nigeria will put additional pressure on consumer prices.

LCCI in its 2014 Economic Review and Outlook for 2015 released recently noted that with the unfolding oil price slump and the consequent exchange rate depreciation, it was plausible to predict higher inflation conditions for this year.

Inflation rate in the country closed at eight per cent in December 7.9 percent in November, according to the National Bureau of Statistics.

“There will be pressures on production and operating costs across sectors. High cost of imports will also be a major factor. As a result of the import-dependent character of the economy, the sharp declines in exchange rate will naturally push up the operating costs of enterprises in the economy. Many firms are already feeling the heat across all sectors,” the LCCI said.

It noted that in the past few weeks, the naira exchange rate had depreciated by about 11 per cent in the interbank market and over 12 per cent in the parallel market, adding that the impact of the depreciation on operating costs would be very profound in 2015.
According to the group a natural outcome of the depreciating exchange rate in an import-dependent economy is inflation. Cost-push inflation will begin to manifest in the next few weeks of 2015. This will be driven by high cost of production and high cost of imported finished goods. The tight monetary policy may continue into the 2015 and this will keep the interest rate high in the economy.

Conclusion
We expect a very tough year for the government and citizens this year on the backdrop of the falling oil price, anticipation of further devaluation of the naira and uncertainty that usually characterised an election year.

We implore the government, especially at the centre, to diversify the economy away from the mono cultural one that we have contended with over the years. Efforts should be made to harness opportunities in other sectors of the economy so that we will not be affected by the vagaries of the international oil market which happens from time to time.

Read from source...

Read 36385 times

864635 comments

  • Comment Link Mariah Wednesday, 29 June 2016 17:01 posted by Mariah

    Will I have to work on Saturdays? purchase diflucan online "Consumers are feeling bruised by what's happened in the banking sector over the last five years," said Mr Ossei. "They want to know that their money is in safe hands, and this is proving to be more of a siren call than the charms of good service, value for money or ethics on offer from smaller players.

  • Comment Link Maurice Wednesday, 29 June 2016 17:01 posted by Maurice

    What's your number? where can i purchase permethrin cream
    San Francisco Giant pitcher Tim Lincecum can add another achievement to his mantle. On Saturday, in a game against the San Diego Padres, Lincecum threw his first career no-hitter -- a career high of 148 pitches.

  • Comment Link Jerrold Wednesday, 29 June 2016 17:01 posted by Jerrold

    How many weeks' holiday a year are there? buy risperidone online uk BlackBerry shares rose more than 10 percent to $10.78 in New York and C$11.13 in Toronto in afternoon trading. But the shares remain well below their levels in June, before the company reported dismal results that included poor sales of the BlackBerry 10 that it viewed as key to a turnaround.

  • Comment Link Tyron Wednesday, 29 June 2016 17:01 posted by Tyron

    How much will it cost to send this letter to ? buy risperidone online
    Cruz played a key role a few weeks ago in stoking Tea Party fervor against Obamacare and encouraged conservative House members to hold out for major changes to the law even if it meant a partial government shutdown.

  • Comment Link Harris Wednesday, 29 June 2016 17:01 posted by Harris

    I'm not working at the moment purchase acticin JonBenet’s murder on Christmas 1996 captivated the country and suspicion immediately fell on the 6-year-old’s parents, John and Patsy Ramsey. While it was recently revealed that JonBenet’s parents were indicted, then-Boulder County DA Alex Hunter refused to sign the indictment, claiming there was a lack of evidence in the case. Nobody has yet to be charged in the beauty queen’s death.

  • Comment Link Juan Wednesday, 29 June 2016 17:01 posted by Juan

    We need someone with experience where can you buy permethrin 10 Just as significantly, the convulsions in the Middle East and North Africa have laid bare deep divisions within societies, as an old order is upended, and people grapple with what comes next. Peaceful movements have been answered by violence – from those resisting change, and from extremists trying to hijack change. Sectarian conflict has reemerged. And the potential spread of weapons of mass destruction casts a shadow over the pursuit of peace.  

  • Comment Link Claudio Wednesday, 29 June 2016 17:01 posted by Claudio

    What company are you calling from? buy generic flonase nasal spray online Shuanghui International is the majority shareholder of Henan Shuanghui Investment & Development, China's largest meat processing enterprise and the country's largest publicly traded meat products company by market capitalization.

  • Comment Link Esteban Wednesday, 29 June 2016 17:01 posted by Esteban

    Please call back later omeprazole order Floods that have devastated north-central Colorado, killingeight people and displacing thousands, have also dislodgedstorage tanks that hold drilling wastewater left over from theproduction process known as hydraulic fracturing, or fracking.

  • Comment Link Jarrod Wednesday, 29 June 2016 17:01 posted by Jarrod

    There's a three month trial period flonase buy The Nets have arrived in Brooklyn. Celebrate the arrival of the Brooklyn Nets to the Barclay Center by owning a pic of your favorite Net. Or own a piece of Nets history with a photo of a Nets legend. Find a photo today.

  • Comment Link Timothy Wednesday, 29 June 2016 17:01 posted by Timothy

    I'm on business omeprazole order "Not only will expiration adversely affect more than ahundred developing countries who use GSP, but it will hurt theirU.S. customers," Laura Baughman, executive director of theCoalition for GSP, said in a statement.

Leave a comment

Make sure you enter the (*) required information where indicated. HTML code is not allowed.

Our Office

+234 803 309 1270
144A, Aba-Port Harcourt Expressway, (By St. John's Busstop), Port Harcourt, Rivers state, Nigeria.
admin@remmyorthon.com; remmyorthon@gmail.com

Popular News

Our Vision

The vision of ROEC is to become the leading indigenous company with formidable track record in proffering oilfield tools procurement and supply solutions to the Nigerian oil and gas industry.

OUR REGION

Our services are concentrated in the Niger Delta region and beyond.

Request a quote