The Nigerian oil requires only little refining; fondly classed as “light sweet crude”, it easily wins the favour of the market. That over the last three decades money accruing from its sales has single-handedly powered the country’s economy is not an overstatement – revenue from oil makes up ninety-five percent of Nigeria’s foreign exchange earnings, eighty percent of government’s income and more than fifty percent of the nation’s total GDP, explaining why Nigeria has been described as a one-sector economy nation.
Current production stands at between 2.3 to 2.5 million barrels per day and Nigeria, which is the eight biggest oil producing nation in the world and America’s fifth largest supplier of crude oil, thus continues to maintain its status as a franchise player in the global energy market. The strategic role that Nigeria, as a oil producing nation, plays in the fate of the global economy would be better appreciated upon the consideration that any slight drop in the production volume of the Nigerian brand of oil, which only just recently began to lag behind Brent, in terms of preference and pricing, creates a significant shift in global oil pricing, a scenario which has been identified as capable of igniting a global economic downturn. This much has been underscored by the January 1996 maiden attack of MEND on facilities of a foreign oil company (Shell) operating in the Niger Delta area leading to an instant cut down of 250,000 oil barrels on daily basis in the Nigerian exploitative capacity. The resultant effect of this was an immediate upward shift in the prices of crude, even if only temporary, brewing concern in the US which is usually the first to feel the effect of any such shortfall in the Nigerian oil production capacity.
The dependence of the Nigerian economy on oil as its sole revenue source means that the welfare of the nation’s economy is tied to the caprices of the global energy market. Indeed, analyses have shown that with a change of $1 in the global price of a barrel of oil, Nigerian foreign earnings tilts upwards or downwards by $650 million representing about 2% of the nation’s GDP.
In the history of global oil market, the record set in July 2008 remains unbroken, when prices climbed to an all-time peak of $147.27 per barrel due to a complex interplay of various factors beyond demand and supply. That this happened shortly after the onset of a global financial meltdown also placed Nigeria in a vantage position. With the floodgate of foreign exchange opened into Nigeria, the Nigerian stock market frolicked in its bumper moments rising to become one of the best performing in the world at the time so that many foreign investors who calculated Nigeria as a safe haven flocked down with their capital. In the commercial hubs of the country there was an apparent touchdown of trade bursts and it seemed like the good time had come to take a permanent place.
But as the meltdown continued to spread and its untoward effects began to bite harder, oil prices also plummeted from the glorious peak of $147.27 to the despairing nadir of $40 by December of same year and that price remained till February of 2009. Nigeria was hard hit and the economic crash that followed was just as swift as the climb. The earlier optimism that the country was insulated from the ongoing economic meltdown became deflated at once. In just a few months, naira had lost about 25 percent of its worth in US dollar. The stock market sank by 40 percent, and nearly $3 billion of foreign investment cash in the stock market was nowhere to be found. The then IMF’s economic growth forecast for Nigeria earlier put at 8.1 came down to 3-4 percent.
But although the world appeared to have weathered the worst of the last economic storm and oil prices have over time bounced back – oscillating between $80 and $90 for the most of 2010 and even shooting to $113.93 per barrel in 2011 owing to the so-called Arab Spring – yet never again has a height such as $147.27 per barrel been clinched again.
Nigeria’s capacity to generate foreign exchange earnings suffered dearly during the years that MEND masterminded a continuum of attacks on the facilities of the foreign oil companies operating within the Niger Delta area. This insurgency went down in history as one unfortunate event that dipped the nation in an economic quagmire spanning beyond a decade. Living up to its words, the Movement for the Emancipation of Niger Delta (MEND) was unstoppable in his vow to totally destroy the nation’s capacity to export oil. Along with the movement’s maiden attack in January 1996 came a daily decline of 250,000 barrels of oil in Nigerian exploitative capacity. Unchecked, MEND continued to destroy pipelines, kidnap foreign oil workers, terrorize the land and ultimately curtailed the nation’s production capacity so that by September, 2006, with daily loss standing at 600,000 barrels of oil, Nigeria’s exploitative capacity had dropped by 25% amounting to an estimated monthly loss of nearly a billion dollars! It was during those economic dark days that Nigeria conceded its all-time place as the biggest oil producer and exporter in Africa to Angola with daily turn out having sunk down to 1.8 million barrels per day.
The year 2007 however brought in a moment of remission for the troubled Nigerian oil sector with the militants finally coming out of the creeks to embrace the government’s gesture of amnesty and today, five years after, one of the obvious objects of celebration of the current government is that Nigeria has risen again, surging ahead of Angola to reclaim its lost position as the foremost oil producer and exporter in Africa. Equally cheering is also the new record set by the nation as a member of OPEC; Nigeria for the first time has become the second highest exporter of oil in the group trailing only behind Saudi Arabia.
Crude oil forecast for this year suggests a rise in the price well beyond $100 per barrel and it is not impossible that the all-time peak of nearly $150 per barrel be clinched again if not surpassed; what with the ban on Syria’s oil? For the rest of the world this might not sound exciting but for Nigeria, as an oil producing nation, the advantage certainly outweighs the disadvantage.
The Nigerian energy paradox is that energy exports keep the nation afloat while the lack of energy domestically constrains the economy from diversifying and growing. Every now and then scarcity of the refined products has successfully brought the nation’s economy onto its knees. With hike in the products’ pump prices also comes increase in industrial cost of production and cost of transportation, the ripple effect of which is felt across the all the facets of the economy, as far down as to the prices of food items in the local markets. An occasion that further unleashes frequent multiplied hardship on the Nigerian masses who live on less than $1 per day.
Although coming as an apparently underserved added burden on the Nigerian masses, the courage demonstrated by the present government in striking off the heavy subsidy on the downstream sector is indeed a right step in the right direction and one final solution to a myriad of interconnected problems that have hitherto frolicked for long years in the Nigerian oil sector. The ordinary expectation is that with four refineries installed to turn out 438,750 barrels of refined oil products per day, the 300,000 barrels estimated daily domestic need of the nation should have been conveniently met thus removing the need for importation of refined products. Ironically though, in the face of the combination of factors such as sabotage, poor management and lack of turnaround maintenance of the refineries, this prospect has simply been reduced to merely a mirage. But for as long as subsidy remains, the nation’s annual budget will have a narrower margin of fund allocated to infrastructural development just as oil pipeline vandalism, oil bunkering and cross-border oil smuggling will remain an attractive venture to those who perpetrate the acts. It is indeed lamentable that currently 400,000 barrels of oil, representing about a quarter of Nigeria’s daily production, is lost to oil thieves. In financial terms the picture is that the nation is via this channel losing about $14 billion on yearly basis in addition to another estimated $5 billion spent to repair vandalized oil pipelines on an annual basis.
With sincerity of purpose on the part of the government, it is expected that with removal of subsidy on imported refined products, much of which recent events have proven arbitrary anyway, sizeable portion of the nation’s annual budget will now be channeled towards infrastructural development which is indeed pivotal to the well being of both domestic and foreign investments.
Perhaps the government’s recent signing of a deal with a foreign investor towards the building of six refineries in the country two of which according to plans should be in full operation by the year 2013 is a positive harbinger to what the future portends as far as the government sincerity is concerned. With local refineries working at full capacity, generality of Nigerians will be able to access the products at reasonable pump price and this will definitely boost domestic economic activities thereby easing the ironical hardship that the Nigerian masses is being made to endure.
For the Nigerian oil sector with estimated reserve of up to 35 billion barrels the future is bright, but before this vast natural advantage could be leveraged upon, the Nigerian government would need to embark upon a policy of consolidation on investment in the oil sector. Experts have lamented the Nigerian daily production of 2.5 million barrels of oil per day which could have conveniently been up to 3 million barrels per day were the necessary investment put in place. And it is equally just as unfortunate that oil flaring still remains a challenge to Nigeria when the same gas could have been gainfully channeled towards power generation. However, problems of inappropriate pricing, absence of adequate gas infrastructure, low economic development and an unstable macroeconomic environment have stood in the way of maximum utilization of the nation’s gas reserve.
Now that the handwriting on the wall suggests that the Nigerian oil sector is headed in the direction of deregulation, optimism is also high that the benefits of such move will, in the long run, take care of the present developmental constrains and physical hardships that has for long stared the Nigerian masses in the face. Nigerian remains African’s number three most successful economy behind the Republic of South Africa and Egypt and the dream of becoming one of the foremost twenty economies in the world is achievable with visionary leadership and sincerity of purpose.