…the cost of producing oil in Nigeria continues to grow and the country needs oil prices above $100 to balance its budget. What this means is that Nigeria faces permanent headwinds as it relies on oil for 80 percent of its budget revenues. Sadly, there is no tangible investment in enduring infrastructure and manufacturing to show for the near 50-year bonanza, since rent from oil started coming in.
It has been 18 months of an unlikely journey for oil. The bloodletting for petro-powers and petro-dollars instigated by Saudi Arabia continues. It has engineered a tectonic shift in the geopolitics of oil, back to the United States. The Organisation of Petroleum Exporting Countries (OPEC) can no longer dictate the price of oil. The power has shifted from the deserts of Arabia to the Shale oil rich patches of North Dakota and Texas; an area wildcatters now call “Cowboyistan”. United States is the new orthodoxy, the new oil czar. OPEC has lost its pricing leverage, America is the new fixed player of global oil.
Nigeria is in dire financial straits and at economic risk because those who have ruled Nigeria since the assassination of General Murtala Mohammed lived a culture of stealing, conversion and excess, on one trick pony. The pony is now very sick. Oil’s future contract between 2015-2020 is firmly between $52-$63 per barrel. Nigeria is in trouble. Given it’s mono product economy and if the global market calculus stays the same (nothing suggests it wouldn’t), Nigeria is at risk of rolling financial turmoil and possible civil unrest in months and years ahead as a direct consequence of oil glut and a changed environment in oil geopolitics. It is about time to warn Nigerians, to brace up for the difficult times ahead.
In my column of October 27, 2014, “Is OPEC Toast, Is Nigeria Broke?”, I wrote about the impending loss of power by OPEC and the implications for the Nigerian economy. Today, the organisation has lost its bite, it is only maintaining its Vienna office to put up appearances. OPEC is impotent! Saudi Arabia, the crazy glue that holds OPEC together misjudged the Shale revolution. Late Last year, in an attempt to suffocate the Shale industry, the Saudis took a bet by increasing their output to 10 million barrels per day. The plan was to drive out shale oil producers by flooding the market and offering discounts to keep existing customers. The gamble was taken with the expectation of halting or slowing production from existing oil wells, instead, it achieved the opposite. Shale producers stopped drilling new oil wells but maintained production rates in existing oil wells. At the same time, oil producing countries who are not OPEC members became more resilient to lower oil prices than previously thought. Oil prices crashed and kept crashing! The glut also had the unintended consequence of new investment in high cost drilling, shelved by the oil majors in Canada, Mexico and Russia.
Nigeria is at tenterhooks! The economy is undiversified and vulnerable to steep and sustained decline in oil prices. Nigerians must be ready to invest in their own future by facing draconian austerity. We squandered nature’s enormous gift to us that lasted for decades. We did not focus on human infrastructure (relevant education and skills training) and infrastructural development.
Unfortunately for OPEC, shale oil producers are mostly mid-cost. Year after year, their adaptability increases and they are able to be more efficient, shave costs and switch to high-yielding wells. Advanced drilling techniques has allowed them to launch wells in different places from the same site by using smart drills with embedded computer chips to seek out cracks in the rock and extract oil. Shale frackers are shaving significant number of days off their drilling time thus driving costs down by as much as 50 percent with promises of more low cost drilling as technology improves. A typical shale oil well now takes about 18 days to drill compared to conventional oil rigs that takes up to a year.
For OPEC, the genie is out of the bottle. With wells, ready technology and infrastructure, every rise in oil price will be met by a surge in United States’ output. If oil climbs to$55-$60 range, production will go up instantly. Given this scenario, it is difficult to imagine oil rebounding to $80 per barrel. Meanwhile, the cost of producing oil in Nigeria continues to grow and the country needs oil prices above $100 to balance its budget. What this means is that Nigeria faces permanent headwinds as it relies on oil for 80 percent of its budget revenues. Sadly, there is no tangible investment in enduring infrastructure and manufacturing to show for the near 50-year bonanza, since rent from oil started coming in.
President Obasanjo, warts and all, paid off external debt before he left. If we did not have the common purpose traitors who looted Nigeria blind, the country would have been better off. in the words of OPEC founder Juan Pablo Perez Alfonzo, “oil has often been the devil’s curse, encouraging a windfall mentality that impedes growth”. Nigeria has an external reserve that could barely support three months of imports and running fiscal deficit that must be covered almost dollar for dollar by drawing down reserves. Nigeria is at tenterhooks! The economy is undiversified and vulnerable to steep and sustained decline in oil prices. Nigerians must be ready to invest in their own future by facing draconian austerity. We squandered nature’s enormous gift to us that lasted for decades. We did not focus on human infrastructure (relevant education and skills training) and infrastructural development.
How To Diversify Fast!
It is heartwarming that the new administration is keen on keeping a lid on expenses, hopefully, we will see more of that in the 2016 budget. Non-oil revenue from improved tax collection, customs and excise duty on goods as focused on by the administration will help significantly In the short and long term. President Muhammadu Buhari’s economic team should focus on accelerated diversification of the economy through industrialisation, infrastructural development and enhancing human capital to drive innovation and economic efficiency for now and for the future. There must be an analytical framework focused on diversification of natural endowments, diversification of products and services and diversification of economic partners. The weaknesses and strengths of Nigeria’s economy has to be truthfully defined and addressed for increased prosperity without the usual regional, religious and ethnic colorations. If things are done right, increasing non-oil exports will enrich the middle class and reduce the government’s weight in the economy
For any meaningful growth to be achieved, policy makers must look at the structure of employment in the country. Nigerian workers do not have the skills that can drive the economy and that speaks to the quality of the education system. There will be no measurable improvement in human resource without considerable investment in education and a total overhaul of the education system.
The new administration has to take a more pragmatic approach at harnessing natural resources by adopting sustainable policies that matter for development and diversification. Export concentration on commodities is not the answer for developing economies. This is because resource dependence leads to macroeconomic volatility that Nigeria has no control over. Oil price swings is a veritable example. The macro-policy solution available to Nigeria is to add value to its own commodities by investing in local production and internal consumption. For any meaningful growth to be achieved, policy makers must look at the structure of employment in the country. Nigerian workers do not have the skills that can drive the economy and that speaks to the quality of the education system. There will be no measurable improvement in human resource without considerable investment in education and a total overhaul of the education system. The regulatory environment must also be looked at with a view to finding out, how well has the market institutions developed to strengthen the quality of institutions. In addition, the nation’s comparative advantages must be identified. Product space analysis can be used to determine if Nigeria is facing excessive trade barriers, whether there is a role for industrial policy, and what can be done to diversify in the short term.
Bámidélé Adémólá-Olátéjú maintains a weekly column on Politics and Socioeconomic issues every Tuesday. She is a member of Premium Times‘ Editorial Board. Twitter @olufunmilayo
