The global oil market sneezes and we break out in a fever
“Every man for himself, and may the Devil take the hindmost!” That looks like the calling card Russia dropped at its meeting last week with the Organisation of the Petroleum Exporting Countries (OPEC). Led by Saudi Arabia, which faces a budget break even oil price of around US$86 per barrel, OPEC had proposed sharp production cuts amongst its members and collaborators like Russia, designed to support stronger prices. One unintended effect of covid-19 is a global drop in demand for crude oil that has put downward pressure on prices. Russia would have none of that, preferring, instead, to turn on its export taps full throttle. OPEC responded by binning its own caps on members’ production.
One immediate consequence of the free-for-all that most commentators now anticipate was that the market, recalling the supply glut which followed a similar disagreement between OPEC and Russia in 2014, started dumping oil contracts. Consequently, both the Brent and West Texas Intermediate crude oil blends closed Friday down at US$45.27 per barrel and US$41.28 per barrel respectively.
Other outcomes, no less immediate, are weightier still – especially back home, here. Looking out for silver linings, the most ready-to-hand is the fact that we can no longer describe the oil production assumptions of the 2020 appropriation act (2.18 million barrels per day) as heroic. With the OPEC ceiling on domestic production sizzled by Russia’s incendiary act, we may now produce as much oil as we care to. There is, alas, more cloud in this tale than there are silver linings. And this goes beyond the fact that effective installed domestic capacity in the upstream oil and gas sector was never going to produce that much crude in the first place, OPEC or otherwise.
It is not also about the fact that over the last couple of weeks, the news has included the fact that West African oil cargoes were stranded on the high seas looking for buyers. True, covid-19 has dampened China’s appetite for all commodities, including our precious main export. But long before that, as an oil export-dependent economy, we were increasingly vulnerable to three main global trends. The rapid reduction in the energy-intensity of global production. The threat to the internal combustion engine from electric vehicles. The improving cost per kilowatt hour of renewable energy.
What ought to frighten us most is that, from where we currently stand, the budget for this year is now awry. The annual deficit, already large and worrisome, will balloon. The public sector’s borrowing requirement, increasingly a burden to the elaboration of domestic options, will rise astronomically. And the private sector will feel the pinch. Worried that the domestic economy may no longer be able to support itself in the near-term, private portfolio flows may reverse. One of the big three global credit rating agencies recently estimated the share of portfolio investors in the nation’s gross external reserves at US$12 billion. Orderly or disorderly, any large exit of this investment class from the market will blow large holes in both the Central Bank of Nigeria’s (CBN) books and strategy.
Would these holes be large enough to scuttle the boat? It could be argued that a sovereign cannot go bankrupt. It may default on its external debt. It could inflate away its internal debt. And the effect of negotiating a balance of payments support agreement with the International Monetary Fund (IMF) is nothing as severe as a U.S. Chapter 7 or Chapter 11 bankruptcy filing. But even these are longer term considerations.
Over much nearer horizons, it would matter for the economy’s health how the diminution in government’s official revenues as a result of the oil shock feeds through to the coffers of regional and municipal governments. With public sector employment accounting for about two-thirds of salaried work in the country, and consumer spending an equally significant component of domestic output, a diminution in outgoings from the Federation Account Allocation Committee (FAAC) and the Joint Account Allocation Committee (JAAC) will have the same demand-dampening effect on the economy that was evident in the last recession.
Should we worry that last year’s output growth was on the back of a recovery in the oil sector (the non-oil sector, over 90 per cent of domestic output remained flat)? Or that a fall in household sentiments would hurt the real sector? Yes. But we must remember that we remain this vulnerable to what is now a primordial threat to our economy, only because of our failure to implement policies that improve its resilience.
