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From boom to gloom or doom –the story of oil (1)

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“History does not repeat itself; man does. Barbara Tuchmann.

Crude oil has always been slippery stuff – good when under control; destructive when out of control. Crude oil is about to destroy the Nigerian economy faster then Boko Haram or even Ebola.

CRUDE-OILThe government of President Jonathan, already besieged by such social “plagues” like the un-going civil war in the Northeast, the missing Chibok girls, apparent refusal to fight corruption, and the pervasive feeling that the nation is adrift, will have to add another mammoth problem – Nigeria is going broke once again and faster than anybody imagined.

This past Thursday, September 11, 2014, several news media carried the story that the price of the nation’s crude oil dropped below US$99. It has been trending downwards for weeks – while the President’s friends and government officials joined those campaigning for 2015.

Emperor Nero, A.D 37-68, fiddling while Rome was burning, would be regarded as more responsible than a Finance Minister leaving her desk to engage in the jamboree of re-election when the economy might be in total disarray by election time in 2015 – unless something urgent is done.

The story of Nigerian crude prospects, as it stands right now, is a triple tragedy. First, the nation is exporting less than was budgeted. That by itself would have meant gloom for a nation heavily dependent on crude sales. The Joint Task Force, JTF, recently put out a statement that crude theft had been reduced from 400,000 barrels per day to less than 90,000 per day.

Ordinarily, that should be regarded as good news. But, that piece of positive news hides the fact that aggregate demand for Nigerian crude is also down. Buyers want less Nigerian crude – whether stolen or not.

Second, in addition to lower demand, the price of crude is falling. Lower prices would have savaged the budget for this year and the Medium Term Plan, MTP, anyway. But, when it occurs at the same time as declining volume, the combined effect is economic calamity of unknown magnitude.

One thing is certain; this year’s budget is in shreds. Governments at all levels will feel the impact and those already owing their staff several months salaries will find it increasingly difficult to pay current bill – let alone the arrears of salaries. Contractors and creditors owed trillions of naira will find it more difficult to get paid.

The most risky thing anybody can do now is to undertake a contract on credit for any government. It might be better to throw the money in the septic tank. Virtually every Governor leaving office in 2015 will depart under a hale of verbal missiles. And Ayodele Fayose has my sympathies. He will return to a Government House hardly able to pay its electricity bills.


The third reason for concern about the current plunge in crude oil prices can be understood by realizing that this fall in crude prices might not be temporary. Indeed, it could be continuous and result in economic doom for nations heavily dependent on crude oil sales like Nigeria and Saudi Arabia.

Already, Saudi Arabia had reduced its forecast of oil exports for the rest of 2014 and for the entire 2015. That is smart thinking. But, Nigeria is our focus and our policy makers and people must know that we have been here before. Let us briefly travel down memory lane.

From the time OPEC restricted the supply of crude oil, after the Yom Kippur War in 1973 till the President Shagari administration, 1979-1983, the price of crude rose steadily for US$0.30, thirty cents a barrel, to about US$28/ barrel. Nigeria suddenly had more money than the commonsense to spend it.

We imported and bought everything; we even paid for cement imported which was never delivered and the boat which brought the consignment and sank with it. It was called the Cement Armada; but it was actually a grand pillage of the funds we would later need for our development.

Then, suddenly, the price of crude turned downwards. At first, some thought it was a temporary setback. But, it lasted until the time of General Sani Abacha, 1994-1998. It has been going up again ever since – until now.

That prolonged increase in the 1970s and early 1980s was made possible by an unprecedented rise in global GDP and prosperity – the demand for oil outstripped the ability to supply to the leading economies. Additionally, the number of oil producing countries was very small and OPEC contributed close to 75% of global crude. The first cracks came when Britain and Norway discovered crude in exportable quantities in the North Atlantic. OPEC lost some key customers but the Asian Tigers were just getting off the mark and they provided markets for crude once again. Along the way, Nigerian crude had plummeted from US$28 per barrel to US$9.90 under Babangida. The result was the Structural Adjustment Programme, SAP, which, undeservedly, gave IBB’s government a bad name. Another consequence of the collapse of crude oil prices was the inability of the country to repay its external debts – as and when due. The result was the escalation of the US$2.8 billion loan taken by Bassano’s government, which was regarded as manageable, to US$36 billion, which became an albatross around the nation’s neck until another oil boom which started during Abacha’s regime provided sufficient external reserves for Dr Okonjo-Iweala to throw US$24 billion at the Western creditors under Obasanjo.


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