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Published On: Sun, Aug 5th, 2018

Booming oil prices puts Nigeria at risk

By AYOOLA OLAOLUWA

Rising oil prices, once a big blessing may now be a curse for Nigeria, BusinessHallmark findings have revealed. The nation is now daily raking in millions of dollars as proceeds from crude sales due to rising oil prices. Since December 2017, the Brent benchmark oil price has soared by about 40%, to nearly $75 per barrel.

NNPC Corporate headquarters in Abuja

For the first time in the history of the nation, the Federation Accounts and Allocation Committee (FAAC) had last month (July), shared the highest revenue so far. On the 27th of July, the federal, states and local government areas shared the sum of N821billion among themselves for the month of June. A week earlier, they had shared N668.89bn for the month of May 2018.

The nation is currently awash with mega bucks to the joy of government officials and civil servants whose unpaid salary arrears are now been cleared.

And more is said to be on the way. Many financial institutions, including the Bank of America, Merrill Lynch, Goldman Sachs and others are projecting that Brent crude oil prices may trend gradually higher, hitting an average of $100/barrel by end 2018 before then trending lower to an average of $71/barrel by year-end 2019.

The reasons for this high price can be attributed to a number of factors. They include an agreement by the Organization of Petroleum Exporting Countries (OPEC) with Russia to increase output; a November 2018 deadline for American oil companies and allies by President Donald Trump to reduce imports from Iran; uncertainty over Libyan oil exports, as well as power outages in some of Canada’s oil facilities, among others.

However, economic experts have raised an alarm over what the jump in the prices of oil mean for the nation’s economy? According to the experts, the implications of higher oil prices are both microeconomic and macroeconomic.

The US Energy Information Agency (EIA), in one of its reports, said that crude oil prices make up 71 per cent of the price of petrol. The rest of what consumers pay at the pump depends on refinery, distribution costs and other associated costs which usually remain stable.

Speaking to BH in Lagos, an economics lecturer at the Osun State University, Prof. Kola Omowale, said that the continued rise in manufactured goods has changed the calculus for how rising energy cost affect the economy.

“Nigeria is a massive importer of petrol since we don’t have functioning refineries. Since petrol is necessary for most households, we must continue to buy from abroad. So, when crude prices increase, petrol prices increase. So, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services.

“It is either the government continues to subsidize the importation of petroleum, which I believe, is not sustainable, or Nigerians must one day pay for it from their pockets. No matter what, someone must pay the differentials.

“The same goes for businesses whose goods must be shipped from place to place or those that use fuel as a major input like the airline industry. Higher oil prices tend to make production more expensive for businesses, just as they make it more expensive for households to do the things they normally do. This shows that oil and petrol prices are indeed very closely related,” Omowale said.

The don also disclosed that rising oil prices also have adverse effect on macro economy. “Oil price increases generally increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products.

“Oil prices indirectly affect costs such as transportation, manufacturing, and cooling.  The increase in these costs will in turn affect the prices of a variety of goods and services, as producers would pass production costs on to consumers. The extent to which oil price increases lead to consumption price increases depends on how important oil is for the production of a given type of good or service.

OPEC

“Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil.  Increases in oil prices can depress the supply of other goods because they increase the costs of producing them. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input.

“High oil prices will most likely reduce demand for other goods because they reduce wealth, as well as induce uncertainty about the future. Another way to evaluate the effects of higher oil prices is to see higher prices as a tax on consumers.

“The simplest example could be seen in the area of imported petroleum products. The extra payment that the Federal Government makes to foreign oil refiners cannot be spent on other areas of the economy such as infrastructure. We have been told several times that the nation now spent N1.2 trillions on subsidy.

“This amount is stupendous. It could fix most of the nation’s problems. How much do we need to fix the Lagos-Ibadan Expressway and the 2nd Niger Bridge? I don’t think it will be up to N500bn. So, you can see the effect of the rise in crude price.

“I think this is not sustainable. The government will soon buckle under the pressure and increase the pump prices of petroleum products. I can assure you of that. We cannot continue with the present arrangement,” he said.

Another analyst, Dr. Nurudden Alao of Doran Investment, while speaking on the benefits and negative effects of rising crude oil price, said that the sharp spike in crude oil and the resultant hike in prices of petroleum products are going to wipe out any benefit the nation gets from revenues it is presently getting.

“According to the NNPC, the landing cost of petrol as at May 2018, is around N180. That is N40 more than the current price of N145. And we are talking of just the landing cost. If we add other costs to it, we should be nearing the N200 mark. We must pay for it. It is either the people pay for it directly, or their representatives in government pay for it on their behalf.

“Mind you, the fund could have been used to cater for their welfare by spending it on essential sectors like health, education or security. It is lose-lose situation. The major consequence is reduced government and consumer spending.

“A return to prices over $100 a barrel would further overwhelm the consumer and exert a strong negative drag on the overall economy”, he said.

BH checks established that the price of oil influences the costs of other production and manufacturing across Nigeria.

For example, there is the direct correlation between the cost of Jet A-1 or airplane fuel to the price of transporting goods and people. From April 2016 when crude oil prices began its upward surge, till date, the price of aviation fuel has risen by over 130 per cent causing airline operators to grumble over the high cost of the product which gobbles 45 per cent of their operating cost.

Analysis of Jet A1 price hike made available to our correspondent showed that a litre of the product was sold at N105 in April 2016, but by April 2018, the price had jumped to an all-time high of N220 per litre in Lagos and N240 to N260 in Abuja and the North East respectively.

The price as at the time of compiling this report is between N280 and N320 per litre.

An aviation worker with one of the leading airlines in the country who did not want his identity disclosed, blamed the constant increase in air fares to surging cost of aviation fuel.

A senior staff of the Department of Petroleum Resources (DPR), Engineer Soji Abanikanda (not real names), said that the effect of rising cost of crude oil goes beyond the aviation sector.

“As many industrial chemicals are refined from oil, lower oil prices benefit the manufacturing sector. Before now, drops in the price of oil were largely viewed as positive because it lowered the price of importing oil and reduced costs for the manufacturing and transport sectors. This reduction of costs could be passed on to the consumer. Greater discretionary income for consumer spending can further stimulate the economy.

“On the contrary, high oil prices add to the costs of doing business. And these costs are area also ultimately passed on to customers and businesses. Whether it is higher transport fares, more expensive airline tickets, the cost of manufactured goods shipped from Europe, China and America, or food items shipped from abroad, high oil prices will definitely result in higher prices for seemingly unrelated products and services.

“No doubt, oil prices do have an impact on the economy, but it goes two ways because of the diversity of industries. High oil prices can drive job creation and investment as it becomes economically viable for oil companies to invest more in exploration.

“However, high oil prices also hit business and consumers with higher transportation and manufacturing costs. Lower oil prices hurt the unconventional oil activity, but benefits manufacturing and other sectors where fuel costs are a primary concern”, he said.

However, the Chairman, Independent Petroleum Marketers Association of Nigeria (IPMAN), Ore Depot, Mr. Shina Amoo, maintained that though the rising price of crude oil has its own negative effects, Nigeria will surely gain more from it.

“I see the rising price of crude oil at the international market as a blessing for our economy because this is our major source of foreign exchange. I can say Nigeria is a mono economy, although we are trying to diversify our sources of revenue now. With the rising price, government will generate more money which I think should be used to cushion the effect of the hardship on the people.

“They should also use the money generated for infrastructural development which will boost the economy and make life better for the majority of the people. With the new price, I believe some of the non-performing loans given out by our banks will start performing.

“But to benefit more from this rising price of crude oil, we must look for more countries to buy crude oil from us and make sure that we address the threat to oil facilities by Niger Delta militants.  If we can’t produce more and export more, we won’t be able to benefit from this windfall. I call it a windfall because the price now is much higher than what we used as benchmark for our budget.

“We also need to invest more in building refineries so that the volume of refined products which we import will come down drastically or better still we should ensure that we no longer import petrol and other petroleum products.

“The rising price is also a double-edged sword. If we continue to import large volume of refined products, the gain will be lost because Nigerians will have to pay more for petrol, diesel and other products because we are not refining here in the country. But we will make more gains if we export more crude, refine crude oil for our local consumption and even export refined products to other countries. This is the time we can maximise the opportunities presented by this situation,” he said.

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