Managing Windfall from Rising Crude Oil Prices

 Last week’s rise in crude oil prices, which coincided with the rising oil output promises to ease the nation’s revenue pressures. However, economic analysts warned that unless adequate plans are put in place to save part of the oil windfall, manage the burden of debt, grow the foreign exchange position instead of engaging the usual spending spree, and effectively tackle oil theft, the excess revenue from oil won’t make the desired impact on the nation’s economy, writes Festus Akanbi

News of a significant boost in the volume of Nigeria’s oil production and the upward trend in the price of crude oil at the international market last week raised a measure of relief and hope for the economy which had been under serious pressure in the recent time. However, there were concerns that the fallout of the new price regime may pit the federal government against Nigerians who are currently protesting the burden of higher pump prices of fuel.  

The inflow of good tidings began on Monday when the Group Managing Director of the Nigerian National Petroleum Company Limited, Mr. Mele Kyari announced the dramatic improvement in the crude oil output which hit 1.67 million barrels per day, a significant improvement over production figures in the earlier part of the year. For instance, Nigeria’s daily oil production in July 2023 fell by 13.6 per cent to an average of 1.08 million barrels per day compared to 1.25mbpd recorded in June.

The National Assembly had approved a $75 benchmark for crude oil in the 2023 budget.

What came as the icing on the cake on Monday was the rise in the price of crude from $89 a week ago to $94.19 per barrel. The prices continued their upward movement on Tuesday to their highest since November, after Saudi Arabia and Russia extended their voluntary supply cuts to the end of the year, worrying investors about potential shortages during peak winter demand.

Implications of New Price Regime

Analysts pointed out that the surge in oil prices has implications for the global economy, as higher energy costs could fuel inflation and dampen consumer spending. It also poses a challenge for Nigeria, which relies on oil revenues for about half of its budget and 90% of its foreign exchange earnings.

Nigeria has been struggling with the impact of fuel subsidy removal, as it led to higher fuel prices surging by over 400%. Higher crude oil prices could likely lead to higher fuel prices, piling more pressure on the government to provide succour for millions of Nigerians who have seen their purchasing power dissipate.

In its analysis, Nairametrics, an online media platform, contended that the increase in Brent crude oil prices primarily affects Nigeria when oil marketers decide to import petroleum products at higher prices. This, in turn, it argued, may result in potential fuel price hikes. 

Therefore, as marketers import refined petroleum products, it is anticipated that the fluctuations in the global market will have an impact on pump prices, particularly during periods of high demand. Additionally, local prices of these products will be subject to variations influenced by local logistics and transportation costs. 

According to a report, about N318 billion (N10.6 billion) monthly losses are now recorded on petrol and may be calculated as under-recovery by the supposed NNPC Limited. Similar development had played out under the former administration of Muhammadu Buhari, where the government secretly returned subsidy and called it under-recovery in NNPC’s books.

The fear is that the rising price of crude oil will put the current administration in a dilemma having assured Nigerians that petrol subsidy has gone for good. The question is where will the government get the money to pay the widening gap between the actual cost of fuel and the affordable pump price of fuel.

In mid-August, Tinubu stated that despite the deregulation of the downstream market, the current petrol price would remain unchanged, as there are no immediate plans to raise fuel prices.

They maintained that on the positive side, higher oil prices could boost Nigeria’s oil revenues and improve its fiscal position.

This, analysts said could enable the government to increase its spending on infrastructure, health, and education, which are crucial for economic growth and development. They added that the development could also help the government to reduce its borrowing and debt servicing costs.

Speaking on the development, the Founder/CEO of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf told THISDAY on Thursday that the surging crude oil price is, paradoxically,  good and bad for the Nigerian economy.  

According to him, “It is good because of the positive implications for crude oil earnings which is in foreign exchange.  If there is anything we need most desperately in the economy today,  it is foreign exchange.  And our best prospect to boost forex earnings in the short term is in the oil and gas sector.  The renewed vigour in tackling crude oil theft is good for our oil production outlook.”

He explained that the flip side is the implication of high crude oil prices for our petroleum import bill and energy prices, saying that the prospects of heightened inflationary pressures, return of fuel subsidy regime, and worsening fiscal deficit are higher under this scenario.

“This may pose a serious risk to ongoing reforms in the petroleum downstream sector. 

It is thus imperative to accelerate the processes of ensuring domestic refining of petroleum products.” Yusuf said. 

In his intervention, the Managing Director/Chief Executive, of SD &D Capital Management Limited, Mr. Idakolo Gbolade, believed the time has come for the government to begin to save for the future.

He said: “Nigeria is presented with another opportunity to reverse the wastages of past years. The country can maximise the upward trend in crude oil by increasing its savings in Nigeria’s Sovereign Wealth Fund and the excess crude account.  The SWF will increase Nigeria’s external reserves and strengthen the economy, while the excess crude account will be used to intervene in critical sectors of the economy especially the conversion programme from fuel to gas using Compressed Natural Gas which will go a long way to reduce the cost of transportation and increase employment for the youth.”

“This opportunity must not be seen as a windfall and wasted as done in the past but should be used to strengthen our economy and reduce the prevailing poverty in our country,” he warned. 

In her response to THISDAY inquiry, an international economist and Head of Research, Africa and Middle East, Standard Chartered Bank, Razia Khan said that ultimately, Nigeria will benefit tremendously from the ongoing international politics on crude oil pricing since the flawed policy of subsidy has been stopped.

She said, “The good news is that with consumption of fuel already down 30% in response to the subsidy removal, Nigeria is now more a winner than a loser from higher oil prices.”

She admitted that it would be difficult to stave off a public outcry over the attendant increase in the pump price of fuel by people who had gotten used to cheaper pump prices. 

“Still, decades of consumption behaviour in which reliance on cheap fuel was incentivised through a flawed and wholly unaffordable subsidy will be difficult to overcome in one go. This means that there will be a necessary period of painful adjustment, but ultimately Nigeria will be better off without the subsidy,” she said.