Expert commends OPEC decision to cut production by 9.7m bpd

A development and governance expert, Dr. Chiwuike Uba, has expressed satisfaction with the decision of the Organisation of Petroleum Exporting Countries (OPEC) under the OPEC+ platform to cut down on oil production by about 9.7m barrels per day from 1st May 2020.

READ ALSO: Is Red Oil cure for Corona Virus? NO!

OPEC reduced oil production to 7.7 million barrels per day from July through the end of 2020, and 5.8 million barrels per day from Jan. 2021 through April 2022.

Commenting on this development, Dr Uba, who is also Board Chairman of Amaka Chiwuike-Uba Foundation (ACUF), said that, if there is any lesson Nigeria can learn from the economic effects of the COVID-19 pandemic ravaging the world and its attendant economic implications, it is to look beyond oil and advised the federal and state governments to commence immediate diversification of the economy.

He said that, whereas the changes in oil production may lead to a marginal increase in the global oil price, the market would experience a glut almost immediately, due to the continuing decline in oil demand.

He added that, though the 9.7million bpd cut will, in the short term, help the market not to fill up the international storage facility, which is already about 75 per  cent filled, the current size of the oil oversupply and additional oil supply will throw back the market into its state before the cut in oil production.

He said: “According to analysts from Goldman Sachs, the coronavirus crisis will slash demand by 19m bpd in April and May. The forecasted figure is way too big compared to the 9.7m bpd agreed as oil production cut; hence, too little and too late to prevent a decline in prices in the coming weeks as storage capacity becomes saturated.

“There is huge doubt if the cuts would be enough to compensate for a collapse in demand expected to be at least twice the size of the OPEC+ supply reductions. Truthfully, the agreed global cut of about 10 per cent in oil production will not offset the recent huge drop in demand occasioned by COVID-19 pandemic.

This is made worse by the lack of pronouncement by the President of the USA to cut US oil production after he said OPEC had not asked him to push domestic oil producers to cut production as he stated that the U.S. output was already declining in response to falling prices. More so, American oil producers may not cooperate with this cut as it would amount to controlling prices, which would amount to violating the competition law in the US. The USA is currently the world’s biggest crude producer.”

He stated that, according to history, previous oil production cut deals were typically violated by oil producers a few weeks after the commencement of implementation. Mexico already disagreed with the quota allocated to the country and instead opted to reduce the country’s production by 100,000 bpd.

He further opined that, given that the effective date for the implementation of the deal is 1st May 2020, countries with high production capacity such as Saudi Arabia, within the next few days will continue to line up tankers – conveniently. Until 1st May 2020, such countries would have the spigots wide open.

“Unfortunately, the production cut deal may not benefit Nigeria in any way. First, the expected improvement in the oil price will be minimal and short-lived as a result of the reasons I outlined earlier. Do not forget that Nigeria is already producing below its production capacity for a long time now; hence, affected by both production quantity and price. Even when Nigeria benefits from an across revenue from the global production cut, the would-be revenue may end up being shared by the national and sub-national governments without real plans for investment to jumpstart the dying economy.

P”The demand for oil will not spike in the short term as a result of lockdowns and shutdowns across the world. In addition to the closure of manufacturing and service companies, the weather across America and Europe are getting warmer; hence, reducing the demand for gas. Therefore, it has even become more urgent for Nigeria to begin to think about Nigeria without oil”, he said