April 2, 2012 / Proshare
With oil prices soaring ever higher, not even Saudi Arabia who stepped in last week, and vowed to increase its production by 25% if necessary, could prevent an imminent high and rising oil prices. This should have been good news for Nigeria; but for the import dependent structure guiding the oil industry and the application of international base price for determining local prices.
In the main however, such price assurances as received from Saudi Arabia portends an ability to drain a few dollars off oil futures, the reality remains that there is nothing Saudi Arabia or anyone else can do about rising oil prices if an escalation of crisis is pursued. In fact, crude oil is still on track to reach $150 a barrel by mid-summer.
We have been here before – and history seems to have a way of repeating itself when politics clashes with economics on a global scale.
Oil prices started rising much earlier in 2012 than they did in 2011. The price for crude oil broke above $100 a barrel on February 13, 2012, two weeks earlier than last year. The key driver of higher gas prices at present is actually the world's oil markets coupled with a heightened uncertainty about what's going on in Iran and the Middle East.
President Barack Obama said in Oklahoma recently that "The main reason the gas prices are high right now is because people are worried about what's happening with Iran," "It doesn't have to do with domestic oil production. It has to do with the oil markets looking and saying, you know what, if something happens there could be trouble and so we're going to price oil higher just in case."
Since early 70s, Oil has accounted for about 80% of Nigeria’s revenue and 95% of export earnings. Despite the high contribution of oil to Nigerian revenue, it remained the third largest contributor to GDP after Agriculture and Wholesale/ Retail Trade.
The partial removal (preferable to call this a price increase) of the fuel subsidy in Nigeria from Jan 1, 2012 will likely result in extra resources for distribution among the Nigerian state governments at the expense of the consumers who may have to pay more based on a shift in base rates.
Logically, the current and continuous rise in oil price should result in increase in revenue, but in January 2012, federal government announced a significant drop in oil revenue by N226.38bn. What is happening here?
The Minister of State for Finance, Dr Yerima Ngama said the revenue dipped from N892.70bn in December 2011 to N666.32bn in January. Reason? The huge decline in revenue was largely due to production hiccups experienced in the major oil production centres (even after the declared amnesty).
In answering that concern, It further stated that there was a drop in crude oil lifting as a result of production shutdown at the Bonga Terminal, as well as drop in production at the Qua Iboe Terminal, in addition to downward review of estimates by oil producing companies. The one-week strike embarked upon by organised labour to protest the removal of subsidy on petrol also contributed to the huge decline.
Ironically, in the 2012 budget passed by the Nigerian parliament on Thursday, 15th March, 2012. Nigeria’s Upper and Lower chambers of parliament jointly agreed a total expenditure of N4.88 trillion as against N4.65 trillion proposed by the Finance Minister Dr. Ngozi Okonjo-Iweala.
The budget spending is anchored on an assumed $72 per barrel oil price, up from $70 per barrel proposed. For oil revenue to hit the expected target, hiccups such as shutdown at terminals would have to be taken care of.
The continuous rise in oil price will surely increase Nigeria’s excess crude account which is now being transformed/transferred into the Sovereign Wealth Fund (SWF) and foreign reserves.
If all things go well, the rising reserves, buoyed by rising oil prices, will eventually provide a strong support to the fiscal consolidation agenda of the Federal Government.
The Energy Information Administration (EIA), an independent statistical agency of the U.S. Department of Energy, forecasts the price of a barrel of crude oil to average around $100 per barrel through 2012, in response to increased demand as the world moves out of recession. This is $6 a barrel higher than in 2011. The EIA warns prices could spike significantly during the summer driving season. However, there's only a 6% chance it could go above $125 a barrel.
Given the uncertainty surrounding the Iranian nuclear programme, it might even go higher than the predictions of EIA as Iran's nuclear ambition presents a significant threat to political stability in the Middle East (even at the level of conjecture). It is especially worrying to Israel, which has a long history of conflict with the country. With Tehran resisting international efforts to thwart its nuclear programme, an Israeli strike on Iran's nuclear facilities remains a possibility and thus the basis of a heightened fear driving oil prices, production and supply estimates.
Under such a scenario, the world appears to currently be in crisis mode. Pushed to the brink by Western sanctions, Iran has threatened to close the Strait of Hormuz - the narrow channel in the Persian Gulf through which 35% of the world's seaborne oil shipments and at least 18% of daily global crude shipments passes.
If Iran closes the Strait of Hormuz, crude oil prices will pop by between $30 and $40 a barrel within hours. Should the strait remain closed for 72 hours, oil trading will push up the barrel price to $180 in New York, and closer to $200 in Europe. The situation is further complicated by potential military conflict - such as an Israeli air strike on Iran's nuclear facilities.
Nigeria should be aware of the risk involved in higher oil revenue and should address both the macro benefits and the consumption challenge such a scenario presents – this has to be better managed than we have done before as higher revenues are not likely to translate into stronger budgetary performances.