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Rising oil price: The gains, pains for Nigeria

The upsurge in crude oil prices at the beginning of the year has been interpreted as a sign of better days ahead for Nigeria but there is cause for alarm for the ordinary citizen, our reporter writes.

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The price of crude oil  hit more than three-year high last week rising to $71 per barrel for the first time since December 2014. 

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Brent, the international benchmark for oil prices and against which Nigeria’s crude is priced, rose to $71 per barrel after closing the year around $66.87 from about $53 per barrel at the start of 2017.

A number of factors accounted for the rally in crude prices.

Stronger demand fueled by ongoing output cuts by the Organization of Petroleum Exporting Countries (OPEC) and Russia, worldwide economic growth and a series of global events that have stoked geopolitical tension  are among the reasons why the price of crude oil gained momentum.

Market analyst forecast that there are a number of factors that could push oil prices even higher particularly the supply disruptions from Iran the third-largest producer in OPEC, which faces the threat of renewed U.S. sanctions, and Venezuela, where economic crisis is whittling away its ability to pump oil. 

Despite the latest rebound, oil prices remain lower than they were back in 2014, before the price crashed from about $100 per barrel down to $40, but the latest upsurge may signal some reprieve for oil producing countries. 

Gains for Nigeria 

Nigeria needs oil price to rise significantly in order to balance its budget as the commodity accounts for over 70 percent of  revenues. 

Experts agree that some of the positives of higher oil prices for Nigeria include increased capital inflow with the end being lower interest rates, more financial liquidity, higher asset values and ultimately greater consumer confidence.  

The Head, Investor Relations at United Bank for Africa (UBA) Mr. Abiola Razaq said that because oil represents the major source of revenue for the government higher oil price is good for Nigeria especially at this time that there is relatively stable environment in the Niger Delta region.  

“Higher oil price is good for our foreign currency revenues and overall fiscal revenues. It is also good for our current account balance and balance of payment which apparently dovetails into stability for the naira. Like you know, the naira has been stable around N360 to a dollar, our external reserves has risen to about 4 year high. The last time we saw the external reserves in excess of $40bn was sometime in 2014 which is something good for Nigeria,” he said. 

“In addition to that, you would agree with me that because Nigeria is a highly import dependent country the stability of the naira is also good from an inflationary perspective. You might have noticed that inflation has been coming down very fast which is attributable to the stability of the foreign currency market which has improved the level of liquidity in the FX market,” Razaq said. 

“It is also very good for us at this time given the fact that an increase in fiscal revenue is one thing that supports public sector spending and public sector has a positive multiplier effect for overall economic activities in Nigeria which is why a higher oil price is good for us.” 

Speaking further, Razaq said, “The borrowing of the government has also significantly come down on the back of a higher oil price which has given foreign investors more confidence to invest in naira instruments as well as government sovereign instruments. Recall that the government recently borrowed about $4.3bn from the capital market in 2017, which reinforces the confidence investors have in Nigeria which is partly attributable to the higher oil price and stronger production level we have seen so far.” 

The Head of Energy Research at Ecobank Mr. Dolapo Oni added that the accretion in the price of crude oil in the international market means more revenues for the federal government. 

“It gives us less fiscal deficit and government will need to borrow less. Also, the CBN can grow the foreign reserve which gives them enough confidence to decide to let the naira appreciate a little,” Oni said. 

Also commenting, the President of the Nigerian Association for Energy Economics (NAEE) Professor Wumi Iledare, said rising oil price was good news for Nigeria on one hand in terms of meeting budget expectations for 2018.  

“It provides opportunity to have savings since the price is significantly higher than the budget.  It may also provide opportunity to buffer up the external reserves and perhaps strengthen the dollars,” Illedare said warning that “these benefits rest squarely on discipline spending within the budget specification. Unfortunately it is an election year and prudent spending may be thrown out of the radar.” 

The Chief Executive Officer (CEO) of the International Institute for Petroleum, Energy Law and Policy (IIPELP) Dr. Timothy Okon also agreed that the rally in oil prices would benefit Nigeria’s economy, noting however that the country cannot derive the full benefit from the increase without fiscal discipline.

“For you to get the benefit out of higher revenue you must maintain fiscal discipline and that entails saving the money. You don’t change the budget benchmark simply because the price of oil has risen. You pursue sound economic policies, you spend on capital development like roads and infrastructure but if you spend it on overhead you are not being prudent,” Dr. Okon said. 

Pain for Nigerians 

While rising oil prices are welcomed by oil producers, consumers might not be that excited as higher crude price mean potential increase in petrol pump price.  

The general tendency is that when oil price falls, consumers are happy while producers are unhappy.  

According to the US Energy Information Agency (EIA) crude oil prices make up 71 per cent of the price of petrol. The rest of what consumers pay at the pump depends on refinery, distribution costs and other associated costs which usually remain stable. 

Analysts predict a surge in petrol prices is inevitable as crude price spikes higher.

Prof Iledare, the NAEE president, said the biggest disadvantage for Nigeria as oil prices surge higher is that petroleum product prices would have to rise because there is a positive correlation between crude oil prices and product prices.  

He said prices would have to go up because significant proportion of products consumed in the country is imported. 

 “Subsidies may be inevitable unless PPPRA ACT is fully implemented and marketers who bring product are allowed to sell at import parity price. Certainly, 145k is no longer optimal at $70 dollar crude price. Thus because of product importation the gains that would have emanated from high crude oil prices on external reserves and forex could easily be eroded unless product price rises commensurately,” he said. 

Razaq, the investor relations head at the UBA also concurred that that one of the negative impact of the surge in crude price is that because Nigeria still remains an importer of refined petroleum product, the naira landing cost of fuel will increase. 

“The compromise not deregulate also mean that the government would have to pay subsidy in some ways either by way of lower exchange rate to the importers or by direct subsidy to the importers,” he said. 

“So, anytime oil price goes up the naira landing cost of petroleum products also increases. Should the government finally deregulates, which is what everyone is looking toward, higher petroleum prices can also lead to higher inflation in the economy as well.” 

According to Mr. Razaq, another negative impact of the oil price rally is that the government may jettison reforms towards generating non-oil revenue because of the higher revenues accruing to it from oil.

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