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Oil Benchmark: Haggling over nothing

By Dele Sobowale

“Against stupidity, the gods themselves struggle in vain.” Fredrick Von Schiller, 1759-1805. (VANGUARD BOOK OF QUOTATIONS p 235).

Oil Installation
Oil Installation

On Tuesday, December 17, 2013, the Senate and the Federal House of Representatives finally agreed on the benchmark price of crude to be used as the basis for calculating the expected revenue for 2014.

One enthusiastic Senator was quoted to have said that: “While the Senate agreed to settle for the new benchmark, members of the House of Representatives were persuaded to accept the $77.5 offer.

It is a give and take thing. We at the Senate….upped the benchmark from the initial $76.5 proposed…the House of Representatives have been persuaded to reason with us and come down..”

Anybody reading that statement would imagine that the National Assembly had performed a very difficult feat for which it should be commended instead of wasting everybody’s precious time, like a bunch of idle people for which they should be condemned. In reality, what they have achieved was a political compromise with no firm basis in economics or the facts with which we are all familiar.

Furthermore, they have also harmonized their position which is still at variance with the proposal by the Executive branch – which stands at $73 per barrel.

However, both the National Assembly and the Executive branch in Abuja are united when it comes to one objective – they want to keep the crude oil benchmark low enough in order to continue to generate funds which will end up in the illegal Excess Crude Account, ECA and the Sovereign Wealth Fund, SWF, which the 36 states of Nigeria are disputing in court.

Frankly speaking, pegging the benchmark at $77.50 or $79.50 makes no sense; proposing $73.50 is at best ridiculous; and at worst insane for two very obvious reasons.

“Even God cannot change the past.” Agathon, c447-401 B.C First, global crude oil prices had remained at over $100 on the average in the last six or seven years. This is a fact which can be verified by the staff of the NASS or individual lawmakers, if only they are alive to their responsibilities.

The past, especially the immediate past, as well as the present and immediate future should weigh heavily in making this sort of decision. Nothing known to man suggests that crude prices will come down as low as even $85 next year. So, why are grown men and women haggling over $79, $76 or $73?

Dr Okonjo-Iweala, of course knows the truth, but she is wedded to raising false alarm about the movement of crude prices in the future in order to swell those two illegal accounts — ECA and SWF – to which she clings like a drunkard clings to a lamp post for support.

She knows better than anyone else that there is less than a five per cent chance that the price of crude will fall below $90 per barrel next year – particularly when orders for the first quarter of 2014 had already been placed. It would require a total collapse of the world’s largest 25 economies in 2014 for crude prices to plummet to $80 per barrel.

The Finance Minister knows this, but she also has a personal agenda which abhors the truth about the future trend of crude prices.

Obviously, what is being trumpeted as a triumph of reason is nothing more than self-deception by the NASS. At the very least, they have ensured that there will be nothing less than $20 per barrel of crude sold next year and that means that the nation will continue to maintain the illegal ECA, controlled by the Federal government, instead of paying all the proceeds into the Federation Account to be distributed to all the tiers of government according to the sharing formula agreed.

In other words, the Federal government which had amply demonstrated its inability to safeguard its own funds from the human termites in government and the civil service will continue to be the custodian of funds belonging to the 36 states, the Federal Capital Territory and all the Local Governments. At the moment, the price of Brent is close to $109 and nothing in the international horizon suggests that any shock to the supply system will drive it below $100  in the next three or four months.

Clearly, there is no objective basis for this ridiculous decision for which the Senate wants to claim credit. In fact, the House of Representatives, which opted for $79 per barrel, while also encouraging the illegality perpetrated by the Minister of Finance, was less generous with its support for a Federal Executive which lacks credibility on this matter. The 1999 constitution is generally recognized as being grossly defective.

One of its cardinal defects being that it stipulates that revenue collected from crude and other mineral resources must be paid into the Federation account instead of being collected by the states where the crude or mineral is lifted. That has left the states in a situation in which they have to go to Abuja to beg for their own money.

That has resulted in the unintended consequence of having the Federal government holding on to money which should not be in its possession in the first instance. Dr Ngozi likes it that way because she is one of the custodians today. You can bet her attitude will change if she becomes the governor of an oil producing state in the future.

“The economist like anyone else must concern himself with the ultimate aims of man.” Alfred Marshall, 1842-1924. (VANGUARD BOOK OF QUOTATIONS p 45).

I first came across that statement by the Father of Classical economics, as a Freshman in 1964, taking Economic 1a as an elective. Until then, I was under the impression that economics was a course people undertook to get rich. Marshall revealed to me a greater mandate and awakened in me a broader sense of responsibilities as an economist and a citizen of Nigeria and the world.

The Federal Minister of Finance is one of us – an economist. I will like to believe that she is also concerned with the aims of Nigerians. One of those aims is improving economic and social welfare. She has been telling international organisations that the Nigerian economy grew at 6.8 per cent this year.

With the population growing at less than half of that figure, the average Nigerian should experience increasing prosperity. We should be feeding better; be better housed; more people should have access to potable water and health facilities should show improvements – among other benefits of substantial GDP growth. Is that the case? So, let us undertake a year-end assessment by asking a simple question.

The question for our readers is simple: are you better off in December 2013 than in 2012? Send me a short message and I will publish the replies next week as a mini-referendum on the Nigerian economy in 2013.

One year is gone; another is furiously knocking on the door. I want to express appreciation to our readers for staying with us this year. We know you have other options; that is why we are grateful for your support.

My thanks go to the Business Editor, the newsroom staff without whom columnists work in vain; the Circulation and ICT staff who ensure you get the paper to read. The relationship had been marvelous and I can’t ask for more support.
Have a pleasant holiday season and a prosperous 2014 – irrespective of what our leaders do or don’t, God will provide for you.


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