By Ikenna Ifedobi

Approximately forty years after the OPEC stranglehold on western Economies, in what was to nations like Nigeria an “oil Boom”, a real threat has emerged that may forever loosen the grip of the paling Cartel. In what may be a historical payback for the 70s oil boom, Shale oil: an equally ‘clean’ alternative has driven global oil prices into a price ravine.

The short and long term implications are not quite the same as the previous seasons of, and reasons for, booms and slumps. Why? Well for starters, new technologies like horizontal drilling and hydraulic fracturing or “fracking” has provided alternatives for heavy Oil purchasers like USA to be less dependent on imported Oil. While previous underlying causes for global oil price fluctuation may have been incidental, as in the case of regional conflicts, or even seasonal: like the 2008 economic recession in the US, the looming reality is that this price slump may be the beginning of a permanent decline in the importance of Africa’s crude oil. in the short run Shale Oil may reduce the relevance of Sub-Saharan oil, and in the long run new sources of energy would be more prevalent as can be seen today by the encouragement of hybrid engines in cars. Ultimately, African governments may witness a reduction in Revenue and an economic paradigm shift that may not be too comfortable.

For a one dimensional economy like Nigeria, the implications are quite far reaching. Nigeria is a good case study because 90 percent of her foreign exchange earnings come from the sale of crude oil. Its annual federal budget is created based on projections made on oil prices and quantity of oil sold.

File Photo: Crude Oil
File Photo: Crude Oil

According to an article in the Guardian of November 3rd 2014 titled- ‘falling crude oil prices and Nigeria’s response’, “ at a senate committee session on October 27 on the medium term economic framework (MTEF), which serves as a basis for the preparation of revenue and expenditure estimates for the annual budget, the finance minister and coordinating minister of the economy, Dr (Mrs) Ngozi Okonjo-Iweala, told the committee that the Nigerian economy was facing some challenges on account of the price drop”…according to the editorial, the national budget is predicated on a benchmark of 77.50 dollars a barrel and 2.39 million bpd.

Clearly not only has the value of Brent crude diminished significantly, but according to the MTEF document submitted to the senate on October 2014, “Actual oil production averaged about 2.25 million bpd (short of the required 2.39 mbpd) due to activities of oil vandals”. Therefore the value and quantity upon which the 2014 budget is based on had diminished. In the same MTEF report the minister also indicated that “the excess crude account has been depleted to the tune of 4.1 billion dollars from 9 billion dollars.”

This account was specifically created in times of surplus crude revenue to cushion seasonal market slumps. The minister suggested that the account may be lower than it was in 2008, when the last market slump occurred, having come down as low as 2 billion dollars at some point. The entire economy rests on the availability of a Crude oil market!

But perhaps the real issue is Nigeria being the first country to stop selling crude oil to the US: its previous largest consumer! Over forty percent of crude oil revenue came from the United States. And while the US has even increased its purchase from countries like Canada, and Saudi Arabia, despite the shale Oil boom, Nigeria has been removed from the suppliers list. It appears odd, and smacks almost of an embargo.

As at March 2007, Nigeria sold an average of 41.76 million barrels to the US, an estimated National income of approximately 2.5 billion dollars a month, even at today’s diminishes price, By July all crude oil sales to her main customer ceases, as Asian countries like India and China, and of course Brazil scramble to fill the void but have fallen short. According to Platt- an international oil and gas news agency, ‘crude export from Nigeria is down from 1.93 to 1.83 million bpd’. That is about 6 percent a month. So what happens when the Asian market finds a cheaper source of energy? How low can African crude oil fall? This is something that Most sub Saharan governments must strongly consider, going into the latter half of this decade.

With a continued plunge of oil prices and the glutting of the market with shale oil, one dimensional economies built on Crude Oil will face a reduction in foreign exchange and government revenue. From a macro economic perspective, the government will be forced to find other areas to make up for the apparent short fall in available resources and also consider lightening the load by reducing overlapping agencies and workforce.

Also, all subsidies will fly through the window, as government at this point will be so short of cash that it would be willing to jettison any government prop ups, just to sustain its operation. Fuel prices may rise by as much as 200 percent. And if the Asian market fails to buy a significant portion of Nigeria’s crude for any reason, then things really get dicey.

From a microeconomic perspective, Nigeria is an import dependent economy. With very little of anything produced to a significant degree domestically, the country must rely on importation for a majority of its economic goods, even food. Nigeria imports food to the tune of 700 billion Naira, down from a whopping 1.4 trillion Naira annually. A more expensive dollar from falling oil prices will mean more expensive imports for the merchant. The merchant must now pass on that added expense to the consumer to break even.

Things generally become more expensive across the board, and inflation sets in, but because the nature of this type of inflation is predicated on the structure of the economy itself, it cannot therefore be controlled by monetary policy and manipulation by interest rates. Over time the government and domestic economy eventually yield to the orchestration of the international market and the helpless attachment to a single export commodity.

It takes a while for economic phenomena to trickle down, but sometime in the middle of 2015, if oil prices continue to decline, and Oil exports don’t improve, then the average Nigerian citizen will notice a sudden and dramatic increase in food and transportation costs, among a host of other things. It is important to understand that the emergence of shale oil will change the international Crude oil market for ever and OPEC as a viable cartel may become a fallacy in the near future, just 40 years after its greatest moment.

Another strong point to consider is the intrinsic political relationship that may lie in courting these international Oil companies (IOC). In a paper titled “The Petroleum Industry Bill: An evaluation of the Effect of the proposed Fiscal Terms on Investment in the Upstream sector “By Sani Saidu, Abdel Rasheed Mohammed”, the following words from the managing director of Shell Nigeria (SPDC) sums up the sentiments of the IOCs about the PIB “The PIB proposes multiple increased royalties and fiscal terms that will slow down new investments in deep water considerably. It will also exclude a number of legitimate costs from being recovered. Uncertainties around these issues are already stalling development of major discovered resources and discouraging companies from undertaking the aggressive exploration programs they launched under the 1993 production sharing contracts (PSC)”.

Basically the IOCs don’t like the PIB propositions and think it a bit draconian in its nationalistic tinge. Coupled with the fact that the west is losing to china in the African market, where you would see a Peugeot a few years ago now you are likely to find a Toyota or a Nissan.

So just as a wild hunch, it may not be a coincidence that western economies play tough with Nigeria for her trade preference to Asia and gradually tighten the capital to single source economies. As the only nation that is not selling to the US, Nigeria is completely at the mercy of Asia and Brazil…and pray nothing disrupts their demand… then what?

Nations suffer economic crunches, and for a country like Nigeria, the impending insignificance of Crude oil, triggered by a technological drive to more efficient energy, will carry a decline in living standards many are not used to. Two things may cushion the slump, namely a massive investment in domestic refineries, and huge agricultural schemes on state and federal levels.

In some countries, the correctional facilities are even merged with the agricultural sector to maximize productivity. But the ability to refine crude oil to petroleum products is a matter of national security for any serious country, and as asserted by the National president of the Independent Petroleum Marketers Association Of Nigeria (IPMAN), Mr Chinedu Okorokwo, “IPMAN is working seriously to ensure that the proposed 3 billion dollars refineries in Kogi and Bayelsa come on stream by 2016 to reduce cost of refining outside the country”, he said at the associations zonal meeting…such moves are welcome as only the ability to supply refined petroleum products and agricultural sustenance can save countries like Nigeria from the impending slump of crude oil demand.

The horizon is clear to see: Shale oil has come to stay and will keep crude price low. In single source economies like Nigeria: dependent on just one commodity for her foreign exchange, the shortage of forex will create inflation and economic hardship for the average citizen. To cushion these harsh economic storms, Nigeria can invest in Agriculture, of which she has an upper hand.

From a political perspective; it’s easier to control a well fed crowd than a hungry one. And the ability to refine a significant portion of crude oil domestically will ensure some kind of stability in shaky times. Taking these significant steps can begin to safeguard fragile economies like Nigeria from the brutal effects of volatile economic prices on overtly dependent economies.

Ikenna Ifedobi, is an economist and Consultant for the American Petroleum institute (API), based in USA.

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