The Accountant General of the Federation, Mr. Jonah Otunla, confirmed last week that the nation’s revenue from oil for September fell to N502.09 billion in September, down 16.5 per cent from N601.65 billion in August. He attributed it to falling global oil prices and domestic production outages. Ministry of finance sources said Brent crude oil, the benchmark against which Nigeria’s oil is indexed, has lost more than 25 per cent since June. Concerned Nigerians and financial experts have been expressing anxiety over the implications of global fall in oil price trend. However, in one breathe the Finance Minister and Coordinating Minister of the Economy, Dr Ngozi Okonjo-Iweala, said Nigeria is not broke, in another breathe she said Nigeria needs five billion US dollars to sustain the economy. CHIBISI OHAKAH attempts to put the development in perspective.
There has been a steady decline in global oil price, and this development has been eliciting concern among analysts and economy watchers all over the world, especially within the countries whose major source of revenue is oil, such as Nigeria.
It is actually not difficult to understand why global oil demand is diminishing. More countries are discovering oil and al¬ternative sources of energy. Also, the resultant reduction in revenue inflow will limit the capacity of government at all levels to fulfill their statutory obligations. This situation calls for prudent spending and a transformation of the economy to reduce em¬phasis on the oil sector, analysts say.
The concern is that the current volatility in oil price may have far reaching negative impact on Nigerian government’s fiscal operations, currency exchange rate, capital flow, the stock market, foreign reserves, inflation and interest rates.
Internationally, oil prices have been in a free-fall for nearly four months, and Tuesday’s $4 plunge in the US was the biggest drop in more than two years.
International oil price position
Since hitting a peak of over $107 in June, the price of West Texas Intermediate crude oil has since fallen over 24 per cent. It dropped as far as $80 a barrel on Wednesday, said to be the lowest since June 2012. Brent crude oil has also struggled, falling as low as $84.85 a barrel Wednesday. Analysts say it is the lowest since November 2010.
The oil price collapse in the US, paired with gloomy global economic reports, has weighed on stocks, and commodity-correlated currencies, such as the Russian ruble, have suffered.
International analysts say that the current sharp drop in prices is owed to a supply glut. There has been continued growth in U.S. shale production, and increase in non-OPEC countries oil exports have led to excess capacity. Shale oil is a substitute for conventional crude oil. Deposits of oil shale occur around the world, including major deposits in the United States.
As oil prices have fallen, the cost of production from US shale has emerged as a critical question for investors. In a downturn, higher-cost supply is most at risk, and the need for horizontal wells and hydraulic fracturing – “fracking” – in shale reserves means they are more expensive to develop than many oilfields in the Middle East.
What is making the supply glut even worse is slowing demand, experts say. The International Energy Administration lowered its crude oil demand projections for 2014 to about 200,000 barrels per day from the current 700,000 barrels per day. The IEA forecast is the lowest since 2009.
There is the factor of a softening Chinese demand, and there are severe questions about the Eurozone’s recovery, leading the International Energy Agency to cut its outlook,” Scotiabank Economics, a globally rated financial institute that provides in-depth commentaries on economic, financial markets and policy developments, both domestically and internationally, wrote yesterday.
Still trying to ascribed reasons for the current global oil glut, Scotiabank Economics further alluded that dynamics in the crude oil market are not supporting prices.
Total world oil demand is expect to grow at 1.05 million barrels per day this year. That’s well below the expected increase in production from non-OPEC countries alone, which is anticipated to grow by 1.68 million barrels per day in 2014, according to a Saudi news agency, KAMCO research.
Economic growth concerns in some countries
It is believed that falling oil demand may continue longer than many people expect as global economies struggle to post strong recoveries, and some nations, such as Japan, substitute oil for natural gas and alternative fuel sources. The US has since adopted the shake oil which is an alternative to petroleum
One of the reasons for an extension in the decline was the disappointing German output that reinforced worries that global oil demand will falter. Those fears are compounded by the International Monetary Fund’s global growth downgrade, which means that demand is set to remain soft.
Financial experts are seeing the current rising strength of the U.S. dollar as not helping matters. For instance, early in October, the dollar hit a four-year high as measured by the Bloomberg Dollar Spot Index, which tracks the greenback against 10 global trading partners.
Oil prices continued the downward movements during Sept-14 for the third consecutive month … as sluggish demand, ample supply and a strong U.S. dollar continued to be the key points pressuring the oil market. This is in addition to the pressures from the weak economic data from the world’s biggest energy consumers.
If the U.S. dollar were to fall, oil prices would have been supported more than what the market has seen recently, Dukascopy Bank said. The bank specializes offering direct access to the Swiss Foreign Exchange Marketplace.
Will OPEC come to the rescue?
OPEC’s next meeting is scheduled for Nov. 27, and many experts are hoping the cartel will push up that date. Analysts say that may be unlikely, same as any help from OPEC to boost prices as Saudi Arabia sits quietly on the sidelines.
A chief analyst with GasBuddy.com, Tom Kloza, reasons that for most of the 21st century, Saudi Arabia has been willing to be the swing producer for the globe, helping to support oil prices. “However, much of the rhetoric coming out of Riyadh indicates that the nation is not inclined to cut production or call for an early meeting,” he said.
“The Saudis are the Michael Jordan’s of OPEC and they don’t appear ready to take one for the team right now and cut unilaterally,” he said, adding that all these factors will add up to a “very sloppy oil market. “Speculation drives prices higher and is now probably driving prices lower,” said Kloza.
Imperatives for Nigeria
Many commentators in Nigeria believe that the current fall in oil price will affect economic gains in Nigeria. Over the last one week (and still count¬ing), oil prices dropped significantly when Iraq became the latest member of the Organisation of Petroleum Exporting Countries (OPEC) to cut its prices. This followed the decision of another major oil exporter, Saudi Arabia, to lower its prices because of growing fiscal deficits.
One of the consequences of this the fall of the barrel price of Brent crude oil, a global benchmark, last week from a near four-year low of $87.74 to $82.73, down from about $115 a barrel in June. Besides, a barrel of the American bench¬mark, West African intermediate crude, was trading $1.87 lower. That pushed its price below $80 a barrel, to $79.90.
The fall in crude oil prices (15% in January) has put some pressure on the 2014 federal budget which was based on $77.50 per barrel. Even though the drop in the price of crude oil is still some notches above the budget benchmark, government’s well-known imprudence and opaque public accounting still make any appreciable drop in the oil benchmark worrisome, particularly since the Nigerian economy is about 95 per cent dependent on oil for its foreign exchange earnings, and 85 per cent, for its total revenue.
Accountant General of the federation, Mr. Jonah Otunla, attributed the decline in mineral revenue to the slight decrease in crude oil prices and production loss due to the shutdown of the trunk lines and pipelines at the various terminals.
Revenues to be distributed to three tiers of government in September – federal, state and local – were N603.5 billion, down from 611.76 billion in August, Otunla said. Explaining further, he said that N2.76 billion ($16.67 million) meant to be transferred to the oil savings account, the Excess Crude Account (ECA), was instead distributed to plug government revenue shortfalls. The balance in the ECA currently stands at $4.11 billion.
Dependence on oil
Analysts say that fiscal deficits look very likely in the months ahead given that Nigeria’s economy estimated to be over 80 per cent dependent on imports. The chances are that this will have a serious effect on Nigeria’s short-term economic and fiscal growth. Already, government has hinted at a cash crunch, with an appreciable decline in the revenue accruing into both the Excess Crude Account (ECA) and the Federation Account. There may also be delays in salary payments across the states of the federation as a result of dwindling revenue from oil.
Until now, the Nigerian government has only paid lip service to the diversification of the economy. Statistics show that the non-oil sector accounts for only 10 per cent of total earnings. There have been reports that Nigeria’s reign as Africa’s biggest economy is under threat from Angola.
This is a threat Nigeria cannot ignore. The impact of declining oil prices on monetary policy and foreign capital inflows is also of great concern, if the slide persists. As regards monetary policy, since the traditional disposition of the Central Bank of Nigeria (CBN) is to defend the nation’s currency through increased supply of foreign exchange, this will have a negative impact on our external reserve which has also experienced a decline in re¬cent months.
Will the CBN tighten monetary policy?
There are speculations that in response the Central Bank of Nigeria (CBN) may tighten monetary policy in response to the current dip in oil prices. But it is suspected that this may further push up interest rates, raise the cost of funds to investors in the economy and limit access to investible funds.
Reports say that the falling oil prices have unnerved global investment markets, with many investors already seeking the relative safety of government bonds, driving their prices higher and their yields lower – leading to a slump in business activity and weak consumer spending.
This development may however bring down the cost of fuel importation, which has always taken a big chunk of Nigeria’s revenue via subsidies.
The situation also calls for a realistic oil benchmark for the 2015 Federal Budget. In this regard, the newly proposed benchmark of $75 for the budget may not be realistic. The suggestion is that the 2015 budget be based on a realistic benchmark so that the fis¬cal estimates for next year are not imperiled from the outset.
2015 oil pricing Nigeria
Meanwhile quoting the Nigerian 2015-2017 budget framework document on Wednesday, Reuters aid Nigeria is assuming a $78 a barrel oil price benchmark for 2015 budget. The figure is up from $77.5 per barrel in 2014.
The document, which forms the basis for preparing the budget, assumed oil production of 2.27 million barrels per day in 2015, down from 2.38 million barrels in 2014. It projected oil output to reach 2.32 million barrels per day in 2016, rising to 2.40 million barrels by 2017.
A higher assumed oil price means a slightly looser budget for 2015 than for 2014, although that was to be expected given this is an election year, when demands for funds from politicians tends to surge. President Goodluck Jonathan faces what is likely to be a closely fought presidential poll in February 2015.
The document, dated to the month of September, assumed gross domestic product (GDP) growth of 6.35 per cent for 2015, down from 6.56 per cent estimated for 2014. These figures differed slightly from those given by Finance Minister NgoziOkonjo-Iweala in a news conference on Tuesday. She had projected 6.75 per cent growth in 2015, with this year expected to finish at 6.2 growth.
The budget framework paper said the budget deficit rose to 2.41 per cent of GDP in 2014 on higher debt servicing, up from an expected 1.85 per cent. Nigeria’s external and local debt stood at $65.26 billion as at end March 2014, up from $48.50 billion end March 2013, the budget framework document said.
In theory Nigeria saves money over a benchmark oil price in its Excess Crude Account (ECA), which then provides a cushion for when oil prices fall or extra cash is needed for spending on infrastructure.
Nigerian lawmakers are accused of inflating the benchmark price if they believe it is too low, which can bring them into conflict with Okonjo-Iweala. It is widely believed however that the inflation of the budget by the lawmakers is more for selfish reasons.
With global oil prices falling and a benchmark of $78 a barrel- a figure lawmakers wanted for 2014- they may agree not to try to raise the benchmark this time. However, the Excess Crude Account (ECA) is still prone to being raided for distribution to feed extensive patronage networks, analysts say.
The ECA declined as low as $2.5 billion at the start of 2014, from around $11.5 billion at the start of January 2013, according to the central bank, despite consistently high oil prices over that period. It has since recovered to around $4 billion.
Ironically, government prefers to play down the implication of the global dwindling oil prices, pretending that it does not amount to any threat. At the press conference in Abuja on Tuesday, OkonjoIweala allayed concerns over falling oil prices, arguing that the country still had funds to pay salaries and keep its debt obligations.