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THE DYNAMICS OF CRUDE OIL PRICE AND THE NIGERIAN ECONOMY

By: Engr Odesa David E.

Published September 22nd, 2010

Since the 1980 great recession, the price of crude oil in the New York Mercantile Exchange, one of the markets where international crude oil is being traded, has been on the increase with fluctuations fuelled basically by speculations, forces of demand and supply, climate change and price of substitutes. The price of crude oil rose to its peak in the 1990s when the Gulf war broke out and the Middle East suppliers used it as a tool for frustrating America. Ever since, the price of crude has been on the increase with emerging economies like India and China helping to drive up the price as their demand for fossil fuel surpasses the supply in the market presently.

In the advent of the last global economic recession, industries in the developed nations such as America started closing shop and fast growing economies like China started faltering and this caused a drop in the demand for crude oil. On the other hand, oil producing nations like Nigeria in their bid to reap bountifully from the hike in price kept flooding the market with crude oil. This imbalance forced the price of crude oil to fall freely without succor from a record high of $147.27 per barrel in July 11, 2008 to as low as less than $40 per barrel in the first quarter of 2009. This scenario took its toil on producing nations who were caught unawares in the euphoria of the hike in price.

Nigeria was worst hit with the fall in price of crude oil. First of all, Nigeria is dependent on fossil fuel as the major source of income. As a matter of fact, earnings from oil and gas contribute about 80-85% of the gross national income. Oil being the main stay of the economy, it was benchmarked at $67 per barrel in the 2010 budget though the Federal Government has asked the National Assembly to review this benchmark. Making a comparism of the present market price of crude oil with the budget benchmark, it is only natural and reasonable to infer that a budget deficit is certain. This will take its toll on the Government and her programme for the people. It is obvious the Federal Government has embarked on an austerity measure to stem or at least contain the impact of this deficit budget spending by cancelling all offshore trainings for government personnel. Analysis have argued that such measures are capable of crippling the oil and gas industry presently plagued with inadequate skilled labour and shortage of manpower with little or no succession plans for the fast ageing workforce.

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Another aspect of the crash in price of crude oil on the Nigeria economy is the aspect of shortfalls in cash calls. The Federal Government through the state owned oil company – Nigerian National Petroleum Corporation is in joint ventures with seven international oil companies and have production sharing contracts with forty four others. Most of Nigeria’s proven resources are in the deep and ultra deep waters, with pockets of projects to explore oil in the deepwaters such as Chevron’s Agbani Field, Shell’s Bonga Field, Exxonmobil’s Erha, have shown that such offshore exploration and exploitation projects are cost intensive with a nation in crises, fired by the fall in price of crude oil.  It is evident that the Federal Government can no longer meet up with her counterpart funding obligations. This will invariably put a halt to further offshore deepwater exploration activities and in turn make it difficult to meet the nation’s aspiration of increasing production from the present 2.1 million barrels per day to a set target of 4.0million barrels per day by 2010.  

It is pertinent to note that developing alternatives to fossil fuel is also of great concern to the Federal Government in collaboration with the oil companies. Projects such as wind, solar, nuclear, hydropower, biofuel are all good sources of alternative energy that are in the pipeline for development. However, since these projects are cost intensive if they must be developed for commercial purpose, neither the Government nor the oil companies are in anyway, at least not at the moment, indicating or renewing their interest in this important aspect of energy plan. It is argued by experts that a generational gap in the development of renewing energy could worsen the alarming climate change.

Governments of oil producing nations have started withdrawing from their reserves to meet their social responsibility to their citizenry. During the oil boom of 2005 to 2008, most oil producing nations kept their excess earnings for the ‘raining day’. Most of these nations especially Nigeria has started drawing down on her reserve. With the rise in price of crude oil not in view, it is mind blowing to think of what could happen when the reserve is exhausted. OPEC (Organisation of the Petroleum Exporting Countries) of which Nigeria is a member, had made conscientious efforts at driving up the price of crude oil by embarking on cut in production by her 12-member cartel but this has had little or no effects on the price. Nigeria will find it increasingly difficult to continue with such social programmes as fuel subsidy and also embark on infrastructural development, education aid, health care and job creation at the same time. It is only reasonable to predict that this will result in unrest, union agitations, industrial actions and total grinding of government programmes. Hostilities and militancy may likely mesmerize the oil rich, highly volatile Niger Delta region. Oil companies may lay off some workers under the disguise of downsizing and rightsizing. All these are the consequences of the free fall in price of crude oil.

There is need to set a more conservative benchmark for our budget, develop non oil resources such as agriculture, sport, tourism, education and create a more business-friendly environment for businesses to thrive. Science and technology, infrastructural development and human capital should be developed as a matter of emergency to thrive like Japan and Israel in the face of a highly dynamic global economy.

Finally, let us as a people stand up to build a virile nation. If we rekindle the flame of hope, if we reawaken our consciousness to make the economy work, who can say anything is impossible?




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