Not all marriages last. Some end bitterly and others part amicably citing irreconcilable differences while maintaining a cordial relationship – mostly for children. The union between the Nigerian economy and oil seems to take the form of the latter. Oil prices hit a new three-year high on Friday, topping $ 85 a barrel, given forecasts of a supply shortfall in the coming months.
Still, the sentiment of Africa’s largest oil producer, Nigeria, appears to be less than excited for a country that depends on crude oil sales for a third of government budget revenues and around 90% of its foreign revenues.
Questions have been asked as to whether Nigeria really benefits from its oil revenues and to what extent the correlation between the Nigerian economy and oil prices is positive. To understand this, let’s look at the marriage between Nigeria and oil.
Nigeria and oil have enjoyed a fruitful relationship since they met in the late 1950s. Since then, oil revenues have funded most of Nigeria’s budgets. It is not clear whether the Nigerian economic situation would be worse now, if the nation did not discover oil. However, the relationship has been somewhat difficult as the Nigerian government has abandoned other sources of revenue in favor of over-reliance on oil money. This situation has made the country’s economy vulnerable to oil crashes and volatile oil prices.
As in any marriage, depending on a partner’s finances is not sustainable. Nigeria has been subjected to quotas and reduced oil production due to OPEC and the unrest in the Niger Delta respectively and oil money is not flowing as policymakers want it to be. Now the citizens (who are the children in this analogy) are asking the Nigerian government to find other sources of income as their growing numbers cannot continue to depend on oil money.
The truth is that the Nigerian government has not made wise use of its oil revenues. To date, the West African nation does not have a refinery that can operate at its optimum capacity. In recent years, oil has not accounted for more than 10% of the country’s GDP, as fossil fuels have yet to realize their potential downstream in the country.
The truth is, Nigeria’s oil production is insufficient to trigger an economic miracle as we have seen in Saudi Arabia – the Middle Eastern country that produces an average of 11 million barrels per day for 35 million people. In contrast, Nigeria produces an average of 1.8 million barrels per day and serves 150 to 200 million people. It is woefully insufficient.
Whatever income is generated by oil, the country must get by and maintain itself. Paycheck to paycheck style. It was never intended to elevate the country to the highest heights desired by the citizens. Then the rift between the Nigerian economy and the oil marriage began to appear when the Nigerian government with all its shortcomings brought in a mistress.
Who is this mistress?
Initially, Subsidy was brought in to be a nanny. A cushion for the poorest citizens to protect them from âmarket determinedâ prices. The purpose of the subsidies is to protect Nigerians from what Americans are going through – high gasoline prices against high oil prices that eat away at disposable income.
However, the federal government started an illicit deal with grants – which has now taken on the role of the mistress who exposed the failings of the Nigerian government over the years.
The subsidy scandal
Among the OPEC countries, Nigeria is the largest importer of petroleum products and the only OPEC member except Equatorial Guinea which does not export any petroleum products. The overwhelming statistics are the reasons the nation could do with a functioning refinery.
In terms of export / import ratio, the West African nation’s margin is statistically the most negative among OPEC countries.
Source: OPEC 2021 Annual Statistical Bulletin
Last week, Central Bank Governor Godwin Emefiele said Nigeria’s import of petroleum products uses 30% of its forex, which would be reversed by the successful start of operations at the Dangote refinery.
As Bloomberg Business reports, if Dangote succeeds in building his $ 15 billion refinery that costs more than his net worth ($ 13.5 billion), he could end the irony that the world’s largest oil producer Africa imports $ 7 billion in fuel per year.
Government subsidies on petroleum products are a major sinkhole contributing to pressure on currencies. In September 2021, the Ministry of Finance put the monthly subsidy bill at 150 billion naira, showing an unsustainable annual sum of 1.8 trillion naira. For reference, Nigeria’s annual budget is approximately $ 13.6 trillion.
Source: NNPC Notes to FAAC Executive Summary 2021
As oil prices rise, the cost of subsidies rises, causing the Nigerian economy to divorce the petroleum industry, as the money to stimulate the economy has been deployed to import petroleum products.
Oil revenues are spent on debt service (74% of revenues) and subsidies (crude for refined petroleum trading, direct sale-direct purchase, deficit in value, undercollections and all the terminologies used by the NNPC ). This is equivalent to earning $ 100,000, but your income is used to fund your $ 74,000 credit card debt, with child support increasing as your income increases. What then remains for the growing family?
How then does the economy benefit from oil? The economy clings to it, no matter how high the prices of Bonny Light, Brass River and Qua Iboe in the international oil market.
Recent trends show that the Nigerian government has failed to maximize its full oil potential. OPEC says Nigeria’s crude oil production averaged 1.451 million barrels per day in September 2021, which is below its OPEC quota of 1.61 million barrels per day. The trend in recent months has been below their allocation – 1.23 million barrels per day in August and 1.32 million barrels in July. It is leaving money on the table.
Investment bank Goldman Sachs postulates that prices could rise from here ($ 85) in the coming years. Even if oil prices hit the most coveted $ 100, Nigeria would not be any better off than it is now unless the government fixes the leaks.
To make matters worse, the amount of fuel imported into the country is inflated due to corruption and legitimate calls have been made to end subsidies as fuel “allocated” to Nigerians is smuggled to neighboring countries for arbitrage profits.
The government should find ways to ensure that Nigeria pays what is fair for the subsidies. Full implementation of the Petroleum Industry Act would end the current subsidy regime. The federal government must implement full deregulation in the sector, as the benefits go beyond importing products and would entail investment in the downstream sector.
In one year, the Petroleum Resources Department said the country’s consumption rate was 38.2 million liters per day. A few months later, the NNPC claimed the figure had risen to 102 million liters. Another day the numbers drop to 60 million liters per day. This aberration must be corrected. Subsidies protect the poor but this should not open a way for market players to illegally take advantage of the system for profit.
The second step the government can take to repair the marriage of the economy with oil is to focus on building refineries that end the importation of petroleum products. This would allow a phase-by-phase transition away from subsidies. There would be money set aside for economic stimulus projects that would increase the productivity of the country.
The âIncome Diversificationâ clichÃ© is still paramount. This month, Nairametrics reported that non-oil revenues have increased relative to oil revenues and that perhaps this could be the start of a new dawn for the Nigerian economy. Conversely, income diversification can breathe new life into the economy, although oil money is still very much needed by citizens.