By Olu Fasan
EARLIER this month, shortly before the global outbreak of the Coronavirus, also known as COVID-19, the price of oil tumbled from $68 to $30 per barrel. It’s a double whammy for oil-dependent countries, but particularly Nigeria, one of the world’s most volatile economies. With oil accounting for 96 per cent of Nigeria’s exports and over 75 per cent of its revenue, and with oil prices permanently in a downward spiral, Nigeria is utterly vulnerable, unable to cope with major pandemics, such as COVID-19!
Thankfully, Coronavirus hasn’t swamped Nigeria, and one prays it doesn’t. But, God forbid, if COVID-19 hits this country in its full force, the truth is that Nigeria can’t cope with the ensuing health crisis, economic emergency and social calamity.
Nigeria simply lacks the medical or scientific capability, the social and institutional capacity, including a welfare system, and, of course, the economic wherewithal to deal with a multi-faceted global pandemic.
This is not a piece about COVID-19 and Nigeria’s response to it; that’s for another day. But the perfect storm of the pandemic and the oil price crash presents an opportunity to highlight the perilous future that Nigeria faces if it remains dependent on oil income. It’s a bleak, even catastrophic, future!
In February this year, the IMF warned that “global demand for oil will peak by 2040” and that most oil-dependent countries would face dire financial straits. It said that “oil-exporting countries must be ready for a post-oil future sooner rather than later”, but noted that “governments in oil-producing countries are dangerously under-prepared for the global shift away from fossil fuels”. Recently, at a major energy conference in London, I asked a renowned energy economist about the IMF’s projection. His response was that the 2040 timeline was even optimistic; he reckoned the peak could happen by the mid-2030s!
The truth is that the age of oil is over. In the Bible, there’s a reference to “when money failed in the land of Egypt”. Well, oil too will soon fail in the world. Sadly, Nigeria is not heeding the IMF’s warning to be ready for a post-oil future. It is utterly unprepared. We will come to that shortly, but, first, why is the future of oil precarious?
Well, at best of times, oil is problematic because its price is internationally-determined, very uncertain and unpredictable. As a result, oil-dependent countries are at the mercy of the vagaries of the world oil market and buffeted by oil price and oil revenue volatilities. But the situation will get worse for three reasons. First is the “age of oil abundance”. There will be massive supply overhang, given the discovery of more oil reserves, which would keep oil prices down. Second, Western countries are investing heavily in green energy, and this would lead to the availability of alternative and cheaper sources of energy to oil. And thirdly, as we have seen with the effect of the Coronavirus on oil demand, oil is acutely susceptible to demand shocks. This will increasingly happen as population growth slows in the West and as demand shifts to electric cars and more environmentally friendly energy.
This was why the IMF warned of a dire financial future for oil-dependent countries. As supply of oil hugely increases but demand drastically falls, oil prices would collapse; for Nigeria, which relies on oil income for over 75 per cent of its revenue, that’s a doomsday scenario.
In 2014, oil prices tumbled, with Brent crude falling from $140 per barrel to $40. Two years later, in 2016, dwindling oil revenue, coupled with economic mismanagement, sent Nigeria into a recession, the first time in 24 years.
Following the recent oil price crash, from $68 per barrel to about $30, the Minister of Finance, Zainab Ahmed, warned that the N10.594 trillion ($34.6 billion) 2020 budget, which was based on an average $57 oil price, would be “drastically reduced”. And that was before the outbreak of Coronavirus!
But, let’s face it, Nigeria is a uniquely volatile oil-dependent economy, and that’s not just because oil revenue accounts for the lion share of its income. Nigeria faces three other problems.
First is its production costs. Recently, the Group Managing Director of the Nigerian National Petroleum Corporation, NNPC, Mele Kyari, said: “Today, there are countries which cost of production is classified at $30 per barrel and we are one of them”, adding: “If the oil price is $30 or $32 and you are producing at the cost of $30, you are out of business”. Saudi Arabia’s production cost is $7.50 a barrel, including capital expenditure. Surely, if oil price continues to tumble, as it will, and Nigeria’s production costs remain high, it’s inevitable that Nigeria will, to quote Kyari, indeed be “out of business”!
Secondly, there is the question of financial buffers. With a large foreign reserve of $502bn, Saudi Arabia can survive an oil price war and low price for a fairly long time. But what about Nigeria? Well, it simply can’t, not with a miniscule reserve of less than $37bn. Twenty-five years ago, Norway, another oil-producing country, created a sovereign wealth fund that started with just $200m; it’s now worth $1.2 trillion.
But Nigeria squandered its oil wealth, estimated at $300bn since the 1970s! Nigeria is averse to investing or saving for the rainy day, hence it has absolutely no resilience to, or insurance against, oil price shocks.
Then, finally, the biggest problem: the utter failure and unwillingness to diversify the economy. Oil has been a curse rather than a blessing to Nigeria. First, it spurs massive corruption and a rentier economy that undermines productive activities. Second, due to the so-called Dutch Disease, it engenders an import-dependency that destroys the non-oil sector and entrenches an anti-export bias.
But in a world increasingly defined by global shocks, pandemics and spillovers, Nigeria faces a wake-up call. It can tie its future to oil and be doomed or diversify its export base and prosper. It’s a critical choice!