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The Obsolescence of Oil As We Live Out the Current Technology Wave

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Thursday, September 07, 2017 / 10:14AM /FDC 

With every new green announcement on the global technology stage we get propelled further into a reality where oil may no longer be dominant. Whether its France and India committing to phase out gas powered cars, Tesla’s quest to revolutionize the global perception of renewable energy cars or the increasing rate at which many of the earth’s inhabitants are being displaced from their habitat, the moral, health, economic and ecological arguments seem to be gaining traction after decades at the fringes.
 

The importance of oil may endure the same fate that coal did at the turn of the 21st century. While it’s arguable that oil still has a role to play in the markets for a long time coming, when countries such as India (Nigeria’s largest oil patron) set policies to cut oil receipts by half by 2030, then it explicitly highlights the energy direction of these countries in the future. In the short term, this downturn in oil demand will no doubt be painful, especially as Nigeria needs oil revenue for a full economic recovery.  

However, if the country explores options in agriculture and low cost manufacturing then the medium to long term opportunities for wealth creation might be restored. Unfortunately, the likelihood that policymakers will recognise the urgency of this new risk to future income levels is a bone of contention, particularly given the slow pace of implementation of policy actions towards diversification following the 1980s oil crisis and the 2016 oil crisis. 

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Changing dynamics in the global energy market mean renewable energy is on the rise

Crude oil accounts for 78.3% of Nigeria’s exports and India imports a significant amount. The new draft of the Indian National Energy Policy (NEP) is set to exceed its commitments to the 2015 United Nations Climate Change Conference (COP21) with the shift in its green car policy. The government plans to shift to electric cars from hybrid or traditional fossil fuelled cars, in the bid to cut its oil imports by half by 2030.  

India’s neighbouring country of Bangladesh is also joining the pack with the increased patronage of solar energy as a source of power. Solar panel installation has more than doubled in the region owing to its relatively low cost burden. In Europe the French, German and British governments have also aggressively pursued policies, which will reduce their oil import dependence by exploring alternative sources of domestic and industrial energy. Renewable energy consumption in the EU28 spiked to 13% in 2015 and is on course to meet the EU’s target of 20% by 2020.  

The rhetoric in the technology sphere is that cost of renewable energy projects is high and as such the riskreturn ratio does not foster further patronage. However, stakeholders in this field beg to differ.9 According to Adnan Amin, DirectorGeneral of the International Renewable Energy Agency (IRENA), asymmetric information has discouraged investment in the renewable energy industry in the past. 

The industry has matured and become more costcompetitive, realities that are not justified by the level of investment. Therefore as this information feeds its way through the global market, a spike in investment opportunities is anticipated.  

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Meanwhile, Nigeria remains heavily dependent on its oil revenue. Proceedings for the 2018 budget have begun and the Minister of Planning and Budget is toying with the idea of benchmarking government revenue on a very bullish oil production level of 2.3mbpd. While the ministry has remained quiet on the price, given the current uncertainty in the global market, increasing production hinges on the idea that there will be demand for the commodity. With the big policy changes described above, the need to diversify the country’s revenue portfolio has never been more pressing.   

Path towards diversification

The export led growth model, which Nigeria has adopted for years, could still work in its favour. However, Nigeria will need to seek policy paths for diversifying its various sources of export revenue. A case study example is the Indonesian economy. It looked to diversify its revenue despite being rich with oil. This led to increased comparative and cost advantages in agriculture (rice) and low cost manufacturing.
 

Like many emerging markets in the world, the Indonesian government suffered tremendously from political strife in the 1960s and as such the economic health of the nation took a back seat to this reality. However as the country is geographically blessed with natural resources, it benefited significantly from two oil booms in the 1970s (1973/1974 and 1978/1979). At the peak of the oil boom, broadbased development polices, such as directing oil revenue towards natural gas development, was adopted.  

By the 1980s, export led growth policies took centre stage as the rupiah was devalued (competitive advantage in the global market). New fiscal policies were also adopted with the introduction of increased oil and nonoil taxes and general deregulation across sectors in the economy. These policies were all part of an outwardoriented strategy, which saw trade reforms such as exemptions for exportoriented firms from import duties. It ultimately promoted a favourable climate for domestic and foreign investors.  

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Lessons for Nigeria to Learn

Solidifying its comparative advantage in agricultural and mineral commodities could open the path for Nigeria towards a well diversified export portfolio. In the Indonesia example, the government took conscious steps to help prop up its export base and incentivize exportoriented firms. In Nigeria, the Nigeria ExportImport Bank is taxed with the responsibility of originating and executing ideas which would help support the growth of nonoil exports.  

So far, although policies to enhance export trade have been explored, bureaucratic and financing bottlenecks continue to limit the scope of its achievements. Hence increased subsidies for the government, monitoring and awareness have to be imbibed in order to reach the target niche, exportoriented firms.  

In the policymaking field, there have to be more calls for investment inducing polices that will encourage both foreign and domestic investment in the export sector. In Indonesia, there was a wide spectrum of deregulation with the purpose of fostering investment. In Singapore, a nation with no oil reserves, private investment was the reason for its ranking as one of the biggest oil refining hubs in the world, increasing its export of refined oil products. One of the restraints to private investment is excessive and undue government influence.  

Regulation is a concept conceived from the idea that the consumer/public’s interest is at risk when asymmetric information exists in the market, which is the case in every market and economy. However, when policies become extraneous, the public actually loses as investment is curtailed.   

Outlook

The increased pressure from the global oil market and the fragility that ensues in the domestic market will enact accelerated focus and activity in adjusting the country’s revenue profile.  

The question presents itself in how quick policymakers will adjust policy to encapsulate the reality of the impending obsolescence of oil. At the moment, given the position of the economy on the business cycle, it could be argued that the likelihood of policy shifts might be at an opportunity cost to more pressing government obligations. The detrimental effects of folding arms and banking on oil to steer the economic course of this country are vast.
 

Nigeria is very much susceptible to global risks and more than ever, it lacks certain facilities to restore the economy in the event of another global crisis. Therefore to avoid a total economic catastrophe, economically and politically, it needs to begin the process of hedging the country’s well-being against risk and uncertainty. 

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