Crude oil price crash and the Nigerian dilemma

By Okofu Ubaka

That the Nigerian economy may further slide steeply into the abyss of another economic recession on account of the crash in crude oil price is not being seen today as a far-fetched scenario. What is the more painful dimension is that this is plainly tragedy foretold.

Underscoring the depth of the challenge facing the nation, the rating agency, S&P this Friday revised its sovereign rating of the Nigerian economy, issuing the oil producer, among several others, a B- grade, and in the process downgrading Africa’s largest economy to junk status.

Clearly, this twist of affairs indicates that handlers of the economy had failed to learn from the past mistake of running a mono economy. Nauseatingly, each time there is a crash in price of crude, which often results from supply glut, we are caught pants down. How long are we going to continue to progress in error?  Regrettably, we do not seem to have learnt anything from previous crashes which incidentally plunged the  economy into a recession that has  left us with the sobriquet  of the country with the most poor persons.

Desperate times call up the need for desperate measures. What are those economic measures or reforms we ought to have made but neglected to do in our usual ragtag approach to things of national importance? How many safety valves were installed shortly after to ameliorate the pains if there were going to be a future crash ? Almost like the National Anthem, the need to diversify the Nigerian economy had been monotonous.

It is needless to say that the Nigerian government has not been able to translate its oil wealth into improving the standard of living for its citizens. No doubt, the lachrymose fall in  the price of  oil to as low as $33 per barrel is debilitating and injurious  to our collective prosperity. No thanks to the Coronavirus pandemic though. As it stands, most economies are in ‘lockdown’. Specifically, the economy of China, a big consumer of crude oil is in a critical state, that those who run the economy had to effect a 20% slash in demand of crude. It must be noted that the pandemic has had a coterminous effect on world economy.  Commonplace knowledge tells us that where movement of persons whether infected or not are restricted. It therefore means that the trains and vehicles are not running, and if this is true, who buys our crude?

The already bad situation is made worse by the cold war between Russia and Saudi Arabia over benchmarks in production. The Saudi government wanted Russia, an erstwhile non  member  to cut oil  supplies by 1.5 million barrels per day. Reacting to Russia’s refusal, Saudi opened up its oil reserve and flooded the oil market with more crude than was needed.  Pundits are of the views that it’s foolhardy to go to war with Russia over price of crude. First, Russia is a non OPEC member. Secondly, Russia exports its crude to China and Japan through pipeline conveyance. This, automatically, remove the cost of freights.   At all times, the Russian government sells crude at far competitive price than any OPEC member country that add freight to the cost of crude.

Spain, the Netherlands, China, South Africa and  France are all buyers of Nigerian crude. All these countries had all had corpulent cases of the virus and consequently had the curves of their respective economies flattened. At $57 per barrel on a daily production volume  of 2.8 million barrels, over N2.64 trillion was projected in the 2020 budget. One does need to be told that the scourge of Coronavirus means more than pains for every Nigerian  as huge lost in revenue continues to count. Already, we have lost $335.7 million, and in six months we would have lost $8.63 billion. This would mean looking elsewhere for the shortfall to service the budget. Saudi Arabia and Russia have foreign reserves at over $450 and $440 billion respectively.   An  edge, most developed economies have over developing countries, especially, those of the African continent. Nigeria’s foreign reserve is a little above   $46.4 billion. How this paltry reserve would sustain a country of over 120 million in yet to abate perilous times remain to be seen.

Nigerians had been through tough times. Insurgency, inept leadership, corruption and infrastructural decade are some in a lengthy list.  And the Coronavirus epidemic is one of such doleful time,  albeit with tall   signs that we might have to be traumatized a few more times.

Let’s not argue about it, the 2020 Budget has failed. The strain on the country’s finance is obvious and pulsating. Already, the Central Bank of Nigeria has tactically devalued the Naira. This will in turn affect the targeted revenue for 2020, which was put at N2.64 trillion.  Expectedly, key projects across the country shall suffer setbacks. Payment of workers’ salaries may also pose problem to some  states.  Again, the importance of the Excess Crude Account and the Sovereign Wealth Fund may just well dawn on us.  Indeed, this is not a good time for the Nigerian economy.