Nigeria: Dynamics of an Oil Crisis
March 23, 2015
The new trend of low oil prices has rapidly escalated, carrying negative effects for producers and positive effects for the economies of importers, though these have been slow to become apparent. In this complex scenario, the oil-dependent country of Nigeria finds itself in a very peculiar position owing to a specific mix of longstanding issues in its wider economy, politics, security, and last but not least – its oil market. This has left Nigeria particularly exposed to the current crisis.
Let us have a brief look into the internal situation of the oil industry in Nigeria. The country is the largest oil producer in Africa, and the second largest in terms of proven reserves. Its economy is also heavily reliant on oil, which is the source of an overwhelming 95% of its export revenues. Digging a bit a deeper, this figure is linked to a series of structural problems, most notably the industry is mainly concentrated on extraction. Indeed, underdeveloped down-the-line processing activities make Nigeria the only OPEC member to export large quantities of crude and to re-import refined oil, this with a theoretical refining capacity of 445,000 barrels per day and an extraction capacity of 2.5 million bpd.
The performance of this vital sector of the Nigerian economy is unfortunately thwarted by other factors as well.
According to Nigeria’s Central Bank, $20 billion in oil revenues are “missing” from the period spanning from 2012 to 2013, raising the possibility of corruption in the political establishment.
Then there is the resurgence of the MEND guerrilla movement (Movement for the Emancipation of the Niger Delta) in the eponymous geographical area, where most oil reserves are found. This is coupled with the decline of the naira, Nigeria’s national currency, which has lost almost 17% of its value against the US dollar since last October. Depreciation notoriously favors exports, but that is of limited benefit when almost all exports consist of crude oil. Conversely, all imports are negatively affected, with costs of goods becoming inflated.
It is well-known that OPEC decided against cutting back oil production last November, which currently plateaus at around 30 million barrels a day across the entirety of the cartel. This has led to rampant speculation over the reasons behind the decision.
Nigeria seemed to be in good position to make an impact on the workings of the conference considering that OPEC is currently chaired by Diezani Alison-Madueke – the first woman to have this role in the history of the organization – who also serves as Federal Minister of Petroleum Resources of Nigeria in Goodluck Jonathan’s government. In hindsight, most analysts would agree that Nigeria’s choice not to put more pressure in favor of an oligopolistic policy during the meeting was a questionable one. Though too late now, a similar conclusion is apparently being drawn by many inside the cartel, including Nigerian representatives. In a recent statement, Mrs Diezani Alison-Madueke told the Financial Times that an emergency meeting of OPEC could be called due to the concerns of some members over the current price situation. Even so, it is unlikely that a meeting of this sort will take place and, even if it happened, that any decision to change production levels would be taken.
There are three fundamental reasons to believe that this is the case.
Firstly, as it should be clear by now, Saudi Arabia has been firmly against decreasing output levels, as reiterated very firmly by Oil Minister Ali al-Naimi last December, who asserted without any ambiguity that even if the price fell to $20 his country would not pressure to cut supply. It goes without saying that Saudi Arabia is historically one of the most – if not the most – influential participants of the organization.
Secondly, the OPEC members which could benefit the most from slowing down production, though they are facing internal and external difficulties of various degrees, are still divided within the organization and unable to tip the scale of consensus in their favor. Notable names are Lybia and Iraq, which are destabilized by terrorism and civil war, Venezuela which is struggling under the weight of debts and might possibly be targeted by US sanctions targeting the country and not just individuals in the near future, as recently suggested by American Secretery of State John Kerry. There is also Iran, which among its traditional well-known issues has come to a disagreement with Saudi Arabia, Qatar, and Egypt over its nuclear programme. Nigeria has some internal concerns of its own to worry about, mainly the Boko Haram threat and upcoming elections, elements that might divert attention from foreign issues.
It is unlikely that Nigeria could unite the efforts of the aforementioned members and leverage its presidency position in the cartel at this point in time, particularly after the fresh precedent of last November, when the OPEC conference agreed that production would stay the course without incurring in any major incidents.
Thirdly, the price of Brent slowly rose in February, peaking at about $62, roughly a 33% increase since it had fallen just below $45 at the beginning of 2015. Although the price plunged again and is currently hovering over the $54 mark, the break in the fall suggests that the lower bound has already been reached. Unfortunately, this is a mere palliative for Nigeria’s economy, since most estimates put its break-even point at around $122 a barrel with its current sales volume – more than double the current average price. However, for the time being the country is financially resilient, sitting on about $34.5 billion in foreign reserves and a 2015 public budget based on a $52 oil price benchmark. Certainly not enough to warrant a carefree status for an unlimited amount of time, but still sufficient to cover medium-term necessities and possibly weaken the will to fight against restrict supplying. In the same way, other countries with better break-even points might have reasonable expectations that the price figures will recover naturally to a more sustainable level.
However, this last notion might be controversial for several reasons. On one hand there is uncertainty about the trends of financial speculation. On the other, the demand for oil is still depressed with forecasts remaining gloomy. This last point is also being stressed by the International Monetary Fund (IMF) in its latest update to the World Economic Outlook 2015.
The approaching general elections on March 28 will likely give some indication about the future course of the country, but whoever wins, oil will play a key role in shaping Nigeria’s future.