High Oil Prices, Broke Nation

Emmanuel Addeh writes that while in normal times, Nigerians should be upbeat about the soaring oil prices in the international market, it is causing gloom back home at the moment.

As it is now, Nigeria cannot take advantage of the rising prices to earn the much-need foreign exchange to cool a practically overheating economy, reduce borrowing and improve on its infrastructure.

 President Muhammadu Buhari has always in his reminisces of the Peoples Democratic Party (PDP) days, blamed the party and its leaders for failing to grow all facets of the nation’s economy when oil prices rose above $100 under their watch.

While there has been no marked fundamental shift in the structure of the Nigerian economy from when the PDP was in power and what obtains currently, one thing the nation always looked forward to, was the increase in the prices of hydrocarbons to stabilise the economy, especially at times when the foreign exchange market begins to run riot.

At the last check, the 2022 budget has a deficit of about N6.25 trillion, approximately 3.39 per cent of the country’s Gross Domestic Product (GDP), despite oil surging above $130 per barrel.

Indeed, this deficit is to be financed mainly by borrowing from domestic sources being N2.57 trillion; foreign sources-N2.57 trillion; multilateral/bilateral loan drawdown N1.16 trillion; and privatisation proceeds projected to be N90.7 billion.

On December 22, 2021, the National Assembly approved a N17.126 trillion ($38 billion) budget for 2022, anchored on an oil price benchmark of $62 per barrel.

The approved oil price assumption was higher than the $57 per barrel price that  Buhari had proposed to the parliament on October 7 and also higher than the oil price benchmark of $40 per barrel adopted by the government for the 2021 budget.

Nigeria also retained the oil production target of 1.88 million bpd, including condensate production of between 300,000-400,000 bpd, for its revenue calculation in 2022.

If things were normal, as it is, Nigeria should be saving about $70 per barrel of oil that it sells, given that its benchmark price in this year’s budget stands at $62.

Given the current dynamics in the global market, the often-repeated blame by the president on past administrations for not transforming the country at a time of rising prices of fossil fuels no longer holds water.

Although, the issues bedeviling the petroleum sector, Nigeria’s cash cow, are not recent,  what is different with the current situation is that they appear far worse than what was obtained in the past.

While in the past, even ordinary Nigerians without much knowledge of how the economy works would heave a sigh of relief once the prices of oil started rising, many are now lost as to why there has been hardly any impact.

This is despite the price of the commodity rising from a low of $10 in 2020, due mainly to the Covid-19 pandemic to a high of $130 this week. So, Nigerians ask: Where is the windfall?”

As a reminder, in the heat of the Covid-19 pandemic in 2020, the oil market took what would unarguably be its greatest hit in history, with some blends slumping to the negative territory and sellers offering monetary offers to buyers to pick the commodity.

But riding on the back of the Covid-19 recovery and current Russia and Ukraine tensions, oil price this week has surged above $130 as the market remains very fluid and could even reach higher levels in the coming weeks. Brent price, Nigeria’s benchmark, had not touched $90 since 2014.

The Subsidy Conundrum

Nigeria has not been able to get the full benefits of rising oil prices because a large portion of the revenues it gets therefrom is used in paying for huge petrol subsidies. To be sure, this is not the fault of the ordinary Nigerian.

To put this in proper context, the Nigerian National Petroleum Company (NNPC) Limited. paid over N1.4 trillion for the purpose last year and this has gone even worse this year, as it was unable to remit a kobo to the federation account in January. 

But subsidy administration in the country remains highly opaque. So much so that Nigeria’s Minister of State for Petroleum Resources, Mr. Timipre Sylva, in a moment of frustration, last month expressed doubts over the country’s daily petrol consumption figures, describing them as crazy and opaque.

The minister agreed that there’s nothing that needed to be done that had not been done to solve the problem for decades, even before this administration, but without success.

Sylva agreed that the figures released by the concerned authorities were questionable, stressing that the best solution to the issue would have been to completely remove the subsidy. 

The minister alleged that a few persons were holding the rest of the country to ransom, explaining that the rich rather than the most vulnerable in the country gain more from the payment of subsidies than the poor.

 Rising Prices Bad for Nigeria, Says FG

At a separate forum, Sylva expressed concerns over the current increasing international prices of crude oil, saying the surge was not good for the country.

The minister maintained that Nigeria’s comfort zone for oil prices was between $70 and $80.

However, the minister’s assertion ran contrary to similar sentiments expressed by the Group Managing Director, NNPC, Mallam Mele Kyari, last year, who pegged the country’s area of comfort at between $50 to $60.

Although Sylva did not particularly explain why higher oil prices were bad for Nigeria, he stated that at the moment, Nigeria wasn’t gaining anything from the soaring prices.

When Kyari spoke on the same issue last year, he had mentioned that the need to ensure that Nigeria’s customers do not look for cheaper alternative sources of energy accounted for the country’s discomfort with the rising prices.

Despite oil almost hitting $130, the dollar at the black market remains at over N570/$1, and Nigeria’s foreign reserve earlier last month fell below $40 billion.

Massive Importation

A corollary to the payment of subsidies is the almost 100 per cent importation of all its products including petrol, diesel, kerosene to some extent, and even gas, although the country has over 206 TCF of proven gas reserves.

As it is, Nigeria does not refine a drop of products, so it imports all it needs to power the economy, costing billions in dollars, thereby fleecing Nigeria of the much-needed forex. Both the funding of subsidies and the importation of products are largely opaque.

 Minister of Finance, Zainab Ahmed,  has also expressed her frustration on the matter because the rising oil price has little impact.

 “The high price of oil means that we would be able to earn more revenue…But we also have the challenge of having to buy petroleum products for use in-country, because we do not have functional refineries. So that eats into the revenues we would have otherwise realised,” the minister said.

Under-production

Nigeria has not been able to meet its production allocation by the Organisation of Petroleum Exporting Countries (OPEC), so it has significantly under-produced for various reasons, ranging from technical to community issues, to ageing upstream and inability to restart its oil assets.

Despite rising Brent prices, the diminishing pace of Nigeria’s oil fortune is threatening the economic health of Africa’s biggest economy as the country’s oil rigs hit the lowest in six years.

While data obtained from Baker Hughes showed that Nigeria’s oil rigs, which depict the level of oil production activities by operators, have reduced significantly, OPEC’s data also indicate Nigeria’s oil production has slumped to an average of 1.35 million barrels per day in the last number of the month, from an oil production of 1.7 million bpd in 2015.

What this means is that with falling royalties and taxes, government revenues will also be negatively impacted.

Thinning Resources, Growing Population

Unlike small countries like Qatar and Saudi Arabia with small populations, Nigeria does not have a population policy, or where it exists, it is not implemented.

Despite its huge oil reserves, Nigeria has one of the lowest production per capita among oil-producing countries in the world, producing less than a barrel per 100 people.

In Saudi Arabia, for instance, it is about 28 barrels per 100 people, in Kuwait it is roughly 60 barrels per 100 people, while in the United Arab Emirates (UAE) production per capita is 32 barrels per 100 people.

For mostly religious reasons, despite the urgent need to do so, Nigeria has refused to do something about its surging population, precipitated by a very high birth rate. So, even if oil prices move higher than it is today, chances are that it will still be a drop in the ocean.

Grim Economic Indicators

Although oil prices rose by over 50 per cent in 2021, the Nigerian currency, the naira, fell 55.92 per cent in 2021, declining in value from N363/$ to N566/$, according to a new report by the Financial Derivatives Company (FDC) Limited.

The Lagos-based research and consultancy firm further stated that the country’s income per capita shrank by 3 per cent to $2,100 during the year 2021, with Nigeria hit by two recessions in two years.

With life expectancy at 55.75 years, the 4th lowest in the world, and the unemployment rate at 33.3 per cent, still the 4th highest in Africa, the report stated that Nigeria’s misery index hit 48.7 per cent last year.

Added to that, the FDC document indicated that 93.3 million Nigerians are currently neck-deep in poverty, even as diaspora remittance dropped by 26.09 per cent to $17 billion.

Till the end of the year, the report stated that gas prices rose 127.8 per cent, house rent by 50 per cent, particularly on Lagos mainland, while diesel prices increased 79.5 per cent.

The silver lining, however, is that Nigeria may soon be able to streamline its massive spending on the importation of petroleum products if everything goes as planned this year.

With the planned completion of the humongous Dangote Refinery, worth roughly $20 billion and covering around 250,000 hectares, the foreign exchange frittered on importing refined products could be retained in-country.

Once in full operation, the refinery is expected to produce petrol and other petrochemical products such as polyethylene and polypropylene.

Recently, Central Bank Governor, Godwin Emefiele, said the federal government currently spends about 40 per cent of its dollar earnings on the importation of petroleum products, putting pressure on the local currency.

“By the time the Dangote refinery begins operation, it would be a major FX saving source for Nigeria. Right now, the overall forex we spend on imported items, the importation of petroleum products consumes close to 30 per cent,” he said.

In addition, the NNPC last year brought in some contractors to rehabilitate the country’s refineries. Hopefully, this is seen to logical conclusion to curb the importation of the massive product.

World Bank’s Take

The World Bank has also been explaining why it appears that Nigeria is not fully benefitting from the current oil boom.

A recent statement dubbed: “Time for Business Unusual,” noted that while the Nigerian government’s fiscal position typically improves when oil prices rise, this will not be the case this time.

The report stated that in contrast with past periods of high oil prices, two factors are preventing the government from fully benefitting from the current boom. According to the Bank, they include a drop in oil production and secondly, increasing cost of petrol subsidy.

“Oil production has fallen below Nigeria’s estimated capacity and the OPEC+ quota due to inefficiencies and emergency shutdowns in the production and distribution processes for Bonny Light, Escravos, and Qua Iboe crudes,” it stated.

In addition, it stated that while the domestic price of petrol has remained fixed, global prices have risen, therefore increasing the cost of the subsidy.

 “The NNPC deducts the cost of the PMS subsidy from the oil and gas revenues that it transfers to the federation account.

“Rather than being accounted as an explicit expenditure, the PMS subsidy is treated as forgone revenue, and its cost is not reflected in the budget. 

“Deducting the cost of the PMS subsidy at the source of income undermines the predictability of revenue inflow into the Federation Account, creating serious challenges for budget and debt management at both the federal and state levels,” it stressed.

The report also stated that Nigeria’s subsidy imposes a massive and unsustainable fiscal burden on the country.