Crude oil price slumped below $0 per barrel on Monday, turning the oil market to negative and killing every hope that has been entertained by oil producing countries since the production cut agreement of OPEC members a week ago. The oil output cut wasn’t enough to save the industry from the catastrophe enveloping it now as a result of closed tarmacs, offices and industries. COVID-19 is winning from all angles and there is little hope to hang on right now.
The development has presented the world with a dicey economic hurdle that will take more than total elimination of coronavirus to scale. But for some countries like Nigeria, who 90% of its Gross Domestic Product (GDP) stems from oil, it’s more than a dicey hurdle.
“The oil world has seen many shocks over the years, but none has hit the industry with quite the ferocity we are witnessing today,” IEA said in an article published on its website early in the month. “The impacts will be felt throughout oil’s global supply chains and ripple into other parts of the energy sector.”
Though the Nigerian Bonny Light is still wobbling around $10, while the US WTI Futures has plunged -$54 for the first time in history, it’s not something to count on. Apart from Saudi Arabia, Iraq, Iran and Kuwait, whose production cost falls around and below $10, others have high production cost and have been selling at huge loss. Nigeria, with a production cost of $30 per a barrel has been paying people to buy its oil since the price plummeted below $35.
So it’s no longer a question of when there will be a rebound in the oil market, it’s a question of what the alternative to the Nigerian oil will be. With a mountain of infrastructural responsibility, especially in the health sector, begging for attention, Nigeria is on for a rough ride that will either make or mar her.
Though there is belief that the expiration of the May contract that took effect on Tuesday contributed to the price crash, as the forward curve has not crashed, the contract of June remains at $22 per barrel. But that is as good as nothing, and it only points to the dangers ahead.
Energy expert Alex Gilbert said there is hope that the commodity will stay with the forward curve, but there is also the possibility that the worst will happen.
“This is a terrible sign of what’s to come. It’s entirely possible that we see sub-$10/barrel spot prices all of May. Negative pricing for spot and futures are also possible for most US barrels,” he said.
The bleak future the situation presents brings back some memories that would have saved the situation for Nigeria.
In 2013, crude oil had a peak price of $100.95 its best since 2008. The surge in oil price then increased Nigeria’s revenue generation and put extra cash in the government’s purse. The only challenge lied on appropriation of funds and saving for the rainy days.
The Excess Crude Account (ECA) was created for only one purpose; to save for the times of distress, days like these when oil producers will be paying people to buy from them just so they can clear their stockpile, but it didn’t happen.
In the memo that she narrated her ordeal with governors as the Finance Minister, Ngozi Okonjo-Iweala told how the ECA funds were disbursed to governors for political appeasement, subjugating the objective and jeopardizing all efforts put in place by former president Olusegun Obasanjo, to sustain the excess crude account and save enough for the incoming storm.
“The institution of the Oil Price-based Fiscal Rule (OPFR) and the attendant creation of the Excess Crude Account are regarded as two of the greatest benefits of the macroeconomics reforms,” the memo said.
But the OPFR failed to yield results for one reason alone, the governors lacked the discipline to save and wanted all the money spent as it came. And since there was no law backing the ECA up, the governors stood on the constitution and squandered the wealth.
“The ECA was controversial. The state governors argued that it was unconstitutional because it prevented the sharing of all revenues among the three ties of government, as mandated by the constitution,” the memo added.
It was a fierce battle between the federal government and states. The combined fists of the governors, backed by the constitution, eventually won years later, when Goodluck Jonathan became president and bowed to the pressure.
The ECA was raided and plundered in no time, and the governors who were not thinking beyond their tenure had their full to the detriment of the future. Years later when the National Sovereign Investment Authority (NSIA), a sovereign wealth fund was created, it’s to support a saving culture backed by law. But it’s too late, the glorious old days of booming oil prices had become things of nostalgia, and the need for what was wasted was increasing as oil price kept dwindling.
It’s April 2020, and the Excess Crude Account is depleted to $71.81 million. With the oil market in turmoil, Nigeria is expected to look for another source of revenue generation to sustain the economy and its exploding population.
The former Minister of Education, Dr. Obiageli Ezekwesili said the situation has presented an opportunity for a total economic reset.
“If you are Nigerian, don’t say, “Praise the Lord! Hallelujah,” and then go and relax. Not a time for complacency. It is not all uhuru on this commodity that has defined our country. We need a total reset of our economic growth and development strategy away from oil,” she said.
While many agree with her that Nigeria’s need for economic diversification is long overdue, the concern lies on what the choices are and how they can be attained in this critical time.
What makes the situation uglier than it appears is that there is no other sector with such a huge revenue generation ability to sustain Nigeria’s economy. The agriculture sector that should have served the purpose is still an infant, not tall enough for the giant to rest on its shoulder.
Though Ezekwesili offered an answer to the question saying; “I want education and human capital to be the new oil for Nigeria,” Nigeria’s immediate needs can’t wait for that long.