By Boniface Chizea
The price of oil had recently fallen suddenly and precipitously that it has left all concerned struggling to catch their breath. And this development caught most people unawares and has agitated not a few minds as the world had enjoyed some stability in the price of oil for almost four years now. Until June, 2014 the global price of oil had remained relatively stable at about $ 110 per barrel (about 68 British Pound) per a barrel for almost four years. What was almost alarming and sent all concerned scampering was the fast rate at which the price was falling. The price of oil fell by about 30 per cent between June and September, 2014. There is now genuine concern that some concerted efforts must be made to stem the falling price.
What precipitated this untoward development was a combination of excess supply and weak demand. Amongst OPEC member countries excess production was estimated at about one million barrel a day with ferocious competition for market share. Saudi Arabia the most important member of OPEC with the largest reserves refused to play the swing producer to help stem the falling price as it had done in the past. It was thought that Saudi Arabia had rationalized that it is in its strategic best interest to moderate the price of oil to make marginal fields including the American shale oil and gas not economically competitive. It is therefore speculated that Saudi Arabia is quite comfortable with prevailing price levels factoring in its massive reserves estimated at over 700 billion dollars. The estimate is that Shale oil has a breakeven cost of extraction of about $ 85 per barrel and therefore prices of oil in that range would make the American oil uneconomic. There was also the little concern on the part of Saudi Arabia of the need to whip other OPEC members into line and restore some discipline as most OPEC members had observed their respective quota in the breach.
There is also the problem of illegal bunkering particularly oil coming from the Islamic State ISIS which is sold at a massive discount; by some estimates the cost of oil from this source was being sold as low as $ 25 per barrel contributing in no small measure to the worsening market scenario. But there is some light at the end of the tunnel as since the Americans commenced the bombing of ISIS from August 8, 2014 the coalition had been able to stop the crude export form ISIS from a high of 70 thousand barrels a day to about 20 bpd and prevented the fall of a northern Syrian town to the Islamic Jihadists but there is still some struggle to try and halt completely the push by the jihadists.
In spite of the upheavals at Libya oil exports has not been drastically affected as well as productions form Iraq and Iran; which recently entered into some sorts of rapprochement with the West and has regained the capacity to export legally crude petroleum. All these developments have all contributed in no small measure to the worsening of the market situation. On the other hand there is the softening of demand from European countries as their economies continue to languish characterized by low inflation and weak growth with the distinct possibility of a third recession being witnessed in the region in a duration of six years.
What are the implications of this deteriorating market situation for the Nigerian economy; the largest economy in Africa and the continent’s largest exporter of crude? If we recall that Nigerian economy though now surprisingly diversified as the Service sector following the economic rebasing has proven the dominant section of economy as it contributes over 50 percent to GDP with Agriculture coming up next at 24 per cent and crude petroleum accounting for only 14 per cent; is dependent for 80% of Government Revenue on the export of crude petroleum, we would understand why when the oil market sneezes Nigeria automatically catches cold. Therefore the implications for government revenue is devastating and by extension to a generality of the population and in deed the rest of the economy.
Dr. Boniface Chizea wrote in from Lagos
