— Oct 26, 2014 | Leave a comment.
The crisis that the sliding oil price may engender especially in poorly managed economies like Nigeria which largely depend on revenue from oil export is better imagined. Chika Izuora takes a look at the scenario
There was early warning sign by middle of July this year signifying that global oil demand is disappearing.
This quickly impacted on oil price which hit US$ 80/bbl and price at the pump also fell, and analysts were surprised.
Over the past three years, high oil price has generated increased interest in oil and gas in remote locations such as the Arctic and East Africa.
In addition, breakthroughs in oil and gas technology have also driven the development of unconventional oil and gas resources in regions of the world that were previously considered too high cost, too high risk or too far away from established markets for profitable energy production.
A recent article published by Chatham Daily News quoted Charles K. Ebinger of Brookings institute that as a result of climate change, melting Arctic ice, new oilfields and delivery routes are opening vast new regions for resource exploration in countries like Tanzania and Mozambique, which lack even the most basic infrastructure and need high energy prices to justify their development.
Despite possible environmental and infrastructure challenges, a number of countries and regions are motivated to pursue increased resource development and extraction for a variety of non-energy related reasons.
Oil Price In Free Fall
Unfortunately, while these emerging energy producers are coming online, the market for energy has been shrinking, at least for the near term.
Ebinger said that since June 2014 (when oil was $115/bbl), oil price has been on free fall, with demand dropping across Europe, Japan, India, China, Brazil and much of the emerging world market.
The drop in demand according to analysts is the result of a number of factors, including, slowing economic growth, rising global oil production (especially in North America), unexpected resumption of oil production in Libya, Nigeria, South Sudan and Iraq and increasing energy efficiency, a response to three years of oil prices in excess of $ 110/bbl, which, in turn has an impact and continues to impact long term global demand.
A decision by Saudi Arabia in August 2014 to cut oil production by 400,000 barrels per day (bpd) is seen as an attempt to defend its market share in the face of falling global oil prices.
Also, the decision by Japan to restart some of its nuclear reactors, reducing forward demand for fuel oil in the power sector was seen as another factor.
According to Brookings, Saudi Arabia tried and failed to stop the slide in oil price in August. Supported by the United Arab Emirates (UAE) and Kuwait, the Saudis have decided to send a message to the world market that it will do whatever it takes to retain its market share, even accepting a near term loss in revenue over the next two years.
The Saudi goal is to slow or halt unconventional oil production, which is undermining their market share. The short term decline in oil price also serves Saudi Arabia’s agenda by hurting their adversaries (Iran and Iraq) and squeezing Russia’s ability to fund the Assad regime in Syria.
However, Ebinger suggests that Saudi Arabia and its allies may be overlooking the complex economics of unconventional oil production in North America.
For example, while drilling new wells in some unconventional basins may not be profitable at $80/bbl, many existing wells have been largely amortised by current tax policies making them economic at prices in some basins such as the Permian at price as low as $40 –$50/bbl.
Ebinger predicts that price will fall to $60–$70/bbl, before stabilising at a level still far above the $38/bbl of 2008.
Again, Japan imported less crude during September but its thirst for liquefied natural gas rose compared to a year earlier, according to reports.
Japan’s customs-cleared oil imports fell 3.7 per cent in September from the same month a year earlier, while Liquefied Natural Gas (LNG) imports rose 10.5 per cent, Reuters reported, citing figure from the Ministry of Finance.
Japan, the world’s fourth-biggest crude buyer, imported 3.39 million barrels per day of crude last month, the preliminary data showed.
Outlook In Nigeria, Others
Nigerian government which is caught in the web of the sliding oil price said it is taking proactive measures to respond to the challenge.
But despite assurances by Nigeria’s apex bank, Central Bank of Nigeria (CBN) that crashing oil price will not harm the economy, international analysts see the country being hit afterwards.
Already Nigeria has joined Russia, Colombia and Venezuela as the biggest losers from the decline in oil, according to Neil Shearing, the chief emerging-markets economist at Capital Economics Ltd. in London.
Like Nigeria, Venezuela is trying to resist the impact on its economy. “The price of oil will hit its floor and it will rise again,” President Nicolas Maduro assured Venezuelans, whose shaky economy depends critically on a high oil price. “Venezuela will continue with its social plans. Venezuela will move forward” he said.
But analysts insist that the only major oil exporters not in deep trouble are the Arab countries, whose governments have room for manoeuvre because of low production costs, relatively small populations, and big foreign currency reserves.
Since June, the cost of a barrel of Brent crude, the benchmark for world oil prices, has fallen by almost a quarter, from around $110 a barrel (where it was stuck for the past four years) to just above $80 a barrel.
Impact Of Fracking
Last month, for the first time in decades, Nigeria exported no oil at all to the United States. Even at a big discount, Americans just don’t need it. And the main reason for all that is fracking.
America’s production has almost doubled in the past five years thanks to the new drilling technologies, and the U.S. overtook Russia last year to become the world’s largest producer of oil and gas combined. (Saudi Arabia comes a distant third.) With production soaring and world demand for oil stalling due to slow economic growth, a collapse in prices was inevitable.
Analysts say the price could stay down in the $75 to $85 range for a couple of years. The reason is the “swing” producers (mostly Arab), who could theoretically push prices back up by cutting their own production, have decided not to do so.
Their concern is for the long-term power of the Organisation of Petroleum-Exporting Countries (OPEC) cartel, which used to be strong enough to set the price of oil. They forsee that it never will be the same again for OPEC unless they can drive the (mainly American) frackers who are causing the over-supply of oil out of business.
Saudi Arabia and its allies are hoping a prolonged period when the price of a barrel of oil is lower than the cost of getting that barrel out of the ground by fracking will ruin this new industry and bring back the good old days.
Unconventional oil producers feel that the Saudi strategy would not work because some 98 per cent of US crude oil and condensates has a break-even price of below $80 a barrel and indeed, 82 per cent of American production would still be turning a profit at $60 a barrel.
Even with its massive foreign currency reserves, Saudi Arabia probably cannot afford to keep the oil price low enough for long enough to break the American frackers.
And Iranians, Nigerians, Venezuelans and Russians, who depend on oil revenues for at least half their national budgets, will be screaming for higher prices before facing street riots.
The OPEC came into being when the U.S. ceased to be the dominant global producer in the early 1970s. With re-emergence of the U.S. as the biggest producer, OPEC’s clout is bound to shrink, they insist.
This will be a great boon for countries that depend heavily on imported oil, like India and China as it may eventually liberate the U.S. from its compulsion to intervene in Middle Eastern disputes.
It may be a disaster for repressive and/or corrupt regimes in countries like Russia, Nigeria, Venezuela and Iran, a Chatham house report said.
It also means worries about “peak oil” can be set aside for a while. We are finding new oil faster than we are using existing reserves.
Nigeria is the Africa’s biggest producer of crude, which accounts for about 80 per cent of government revenue. The country also imports about 70 per cent of its fuel needs because of inadequate refining capacity.
CBN governor Godwin Emefiele in an attempt to raise governments confidence had said that the bank is working in concert with government to develop monetary and fiscal policies to ensure Nigeria is not negatively affected by the falling oil prices.
But, Nigeria’s efforts to prop up its currency months before presidential elections are being undone by the slide in oil prices.
According to a report by Bloomberg, the naira tumbled to within 0.3 per cent of a record low as Brent crude fell to the lowest level in more than four years.
It said while some of the world’s biggest banks think the collapse in oil is just about over, further losses would force Africa’s largest producer to choose between raising interest rates, eroding foreign-exchange reserves or, eventually, devaluing the currency, according to Exotix Ltd., a London-based investment bank.
“We’re getting close to the point where the alarm bells are ringing loudly,” Angus Downie, the head of economics research at Ecobank Transnational Inc. in London, said.
“If oil prices continue to slide before the election, foreign-exchange reserves will come under pressure, and that’s when the authorities would be expected to adapt fiscal and monetary policy to the new oil-price regime.”
A weaker currency would boost the cost of importing everything from fuel to food, threatening support for President Goodluck Jonathan, who’s already under pressure for failing to stem deadly attacks by Islamist militants.
The Central Bank of Nigeria has supported the naira since mid-September by using its reserves to sell dollars outside of twice-weekly auctions, according to Standard Chartered Plc. At those auctions, it offers the local currency at a price of 155 per dollar, plus or minus three per cent.
The naira is weaker than that in the open interbank market. It fell to 165.83 per dollar on October 13, the lowest level since it reached a record 168.9 on February 20. The currency dropped 0.1 per cent to 165.52 per dollar as of 2:32 pm in Lagos, the lowest level on a closing basis since February 25.
While the intervention helped prevent the currency from being among the worst performers in emerging markets this year, reserves are starting to erode, falling to $39.3 billion last week from almost $39.7 billion in early September.
The naira has weakened 3.2 per cent versus the dollar in 2014, heading for its biggest loss since 2011. That compares with declines of 23 per cent for Argentina’s devalued Peso, 20 per cent for Russia’s Ruble and 4.5 per cent for South Africa’s Rand.
Brent crude for December delivery has fallen 26 per cent since reaching a peak in June, and settled at $85.40 during the week. It dropped to $82.93 on October 16, the lowest since May 2010. Bank of America Corp. and BNP Paribas SA predict prices will hold above $80 a barrel.
Nigeria’s monetary authorities will be monitoring oil prices closely in coming weeks, Ronak Gadhia, an analyst at Exotix in London, said.
“The central bank is going to have to make a judgment on whether the price drop is temporary or if this is a more permanent issue that makes it respond with some policy measures,” Gadhia said.
“The ideal scenario would be to devalue the currency. But in an election year that might not be palatable.”
Nigeria’s foreign-currency reserves, which were as high as $48.9 billion in May 2013, have fallen almost 10 per cent this year as authorities used the money to bolster the naira.
While oil revenues are under pressure, Nigeria is still running a trade surplus, aiding reserves, Chris Becker, the lead macroeconomic and equity strategist at African Alliance Securities, said.
The effects on the economy mean Nigeria is unlikely to raise interest rates or devalue the naira, he said.
“They have a lot of runway to defend the currency,” Becker said. “That’s what they’ll keep doing for now.”
Reacting to some of the concerns raised, the Independent Petroleum Marketers (IPMAN) said the Nigerian oil industry has not fully developed in such a way that white products like diesel, petrol and kerosene could be sourced within.
The IPMAN stated that likely failure of the National Assembly to live up to its promise to pass the Petroleum Industry Bill (PIB) before the end of the 7th session of the Assembly is a source of worry.
Gani Dibu Aderibigbe, national treasurer of IPMAN who reacted to some of the issues while speaking with LEADERSHIP Sunday believes that the passage of PIB will bring to an end the era of fuel subsidy, importation of fuel and kerosene which will further aggravate the situation that will arise by the oil price drop as government will not have much funds to sustain the subsidy regime.
“One wonders why the government is budgeting the colossal sum for the purpose” he asked.
Going further, Aderibigbe said that only the Nigerian National Petroleum Corporation (NNPC) imports kerosene and the same NNPC distribute all kerosine imported as well as locally refined kerosene.
He said that no marketer was consulted before arriving at the subsidy figure which may be based on statistics from NNPC.
He said that Dual Purpose Kerosene (DPK) consumption is around 15 million litres per day adding that despite alternatives, the demand is growing because of other uses. Aviation, industrial and so on.
Aderibigbe said that Nigeria would be badly hit if the scenario persists as our refineries are not working optimally, hence need to augment through importation.
The importer is government corporation, so if there is any problem, search light should be turned to NNPC/PPMC, he said.