Sequel to breakdown in talks, Friday between the Organisation of Petroleum Exporting Countries (OPEC) and Russia and Kazakhstan, otherwise known as OPEC+, the stage is set for oil glut in the international market, with a consequent dip in price. The result for Nigeria will be a significant belt-tightening with a possible recession.
It may be recalled that OPEC had proposed to Russia and Kazakhstan to cooperate in reducing the supply of oil on the world market following economic slowdown as a result of the extant raging coronavirus disease. Russia had expressed unwillingness to cut supplies, and Saudi Arabia had threatened de facto to increase production if Russia failed to join OPEC to cut supplies, which would spell glut.
Alexander Novak told his Saudi Arabian counterpart Prince Abdulaziz bin Salman that Russia was unwilling to cut oil production further. The Kremlin had decided that propping up prices as the coronavirus ravaged energy demand would be a gift to the U.S. shale industry. The frackers had added millions of barrels of oil to the global market while Russian companies kept wells idle. Now it was time to squeeze the Americans.
The implication for Nigeria is lower prices for oil and a sharp reduction in projected revenue and a sure miss of the budgeted oil benchmark. The news of the breakdown pushed oil price down by 10 percent on Friday from $50.00 to $45.00.
Nigeria’s oil benchmark for the 2020 budget is $57.00. That benchmark is already under threat as the price of oil, as of the last trading date was $12.00 less than the benchmark price. That puts Nigeria’s budget forecast into jeopardy.
Economist Bongo Adi told NATIONAL ECONOMY that already, 50 barges of Nigerian oil is still on the high sea, unsold from February production.
The federal government is scheduled to meet this week to deliberate on the new benchmark price of oil to reflect the current and expected reality.
Dr. Muda Yusuf, Director-General, Lagos Chamber Of Commerce And Industry told NATIONAL ECONOMY that “With this scenario, the outlook for oil-dependent economies looks rather gloomy”. He said some of the fallouts from the oil price drop are that budget implementation will be constrained; infrastructure financing will be affected; There is also the revenue effect of the Coronavirus which is related to the drop in oil price. Oil revenue currently accounts for about 50% of government revenue and about 85% of foreign exchange earnings. With the current scenario of tumbling oil prices, a drastic reduction in the revenue of government may become inevitable in the near term. This has implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund the capital projects will be severely constricted. With this scenario, the outlook for oil-dependent economies looks rather gloomy.
He added that the slump in oil price and the associated adverse expectations will put fresh pressures on the reserves. Currently, it is at an all-time low of $36.2 billion as at 3rd March 2020. This outlook has the following implications: weakening of investors’ confidence, generation of speculative pressures on the currency, likely depreciation of the naira exchange rate, heightened inflationary pressures on the back of currency weakening, likely increase in production and operating costs for businesses and weakening of purchasing power with adverse implications for the welfare of the citizens.
Arc Kabir Ibrahim, National President of All Farmers Association of Nigeria and (AFAN) also told National Economy:”Our national budget is predicated on the barrel price of oil and will, therefore, suffer a drawback since there is turbulence causing a crash in the global oil price.
We must upscale our Agricultural production such that our import bill remains sustainably manageable.
We should seek to make Agriculture the mainstay of the economy by impacting several cross-cutting issues such as energy, which will give the required push to processing and overall industrial growth.”
It is recalled that the global supply chain has been deeply disrupted as China, which is the second-largest economy in the world, is a major supplier of inputs for manufacturing companies around the world, Nigeria inclusive. Many manufacturers and service providers in the country are already experiencing an acute shortage of raw materials and intermediate inputs. This has implications for capacity utilization, employment generation and adequacy of products’ supply to the domestic market. There is also an implication for inflation.
It is reported by Bloomberg that for over three years, President Vladimir Putin had kept Russia inside the OPEC+ coalition, allying with Saudi Arabia and the other members of the Organization of Petroleum Exporting Countries to curb oil production and support prices. On top of helping Russia’s treasury – energy exports are the largest source of state revenue – the alliance brought foreign policy gains, creating a bond with Saudi Arabia’s new leader, Crown Prince Mohammed bin Salman.
But the OPEC+ deal also aided America’s shale industry and Russia was increasingly angry with the Trump administration’s willingness to employ energy as a political and economic tool. It was especially irked by the U.S.’s use of sanctions to prevent the completion of a pipeline linking Siberia’s gas fields with Germany, known as Nord Stream 2. The White House has also targeted the Venezuelan business of Russia’s state-oil producer Rosneft.
“The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2,” said Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank. “Of course, to upset Saudi Arabia could be a risky thing, but this is Russia’s strategy at the moment – flexible geometry of interests.”
