Crumbling Global Crude Oil Price: Is Nigeria On the Verge of Another Economic Recession?
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Dubbed the giant of Africa, Nigeria is regarded as the most populous black nation on earth with a population of over 200 million people. In short, statisticians have pointed out that one of every ten black person on earth is a Nigerian.
Apart from its massive population, Nigeria, which is an oil-driven economy, is also known to be the largest economy in the whole of Africa, displacing South Africa as the latter recently fell into an economic recession that could take months to surmount.
Strangely, fresh indications are emerging that like South Africa Nigeria could also plunge into another recession in the coming months if the variables involved do not improve. As stated earlier, Nigeria is an oil-driven economy and one of the largest producers of oil in the African continent. The implication is that Nigeria largely depends the price of oil to finance her budget.
Interestingly, the benchmark for oil in Nigeria's 2020 budget was $57. Unfortunately, due to the latest trade war and battle for the control of the global oil market between Saudi Arabia and Russia, the market has become flooded with crude oil to the extent that a sharp drop of about 30% has occurred in the last 24 hours.
Precisely, in what could be described as one of the most terrifying single day drop in the history of the price of oil, we saw the price crashing from about $45 per barrel to a low of $33. More worrisome is the fact that economic pundits are predicting that the price of crude could fall to as low of $20 per barrel if the trade war between Russia and Saudi Arabia continues alongside the outbreak of the novel corona virus in most parts of Europe and America.
If the price of oil remains at its present price or plummets further, there is no way Nigeria will be able to finance her budget for 2020 without borrowing aggressively or drastically increasing the the average daily production to cover for the shortfalls in revenue. The first option appears to be very dangerous because the debt profile of Nigeria is already worrisome. As for the second option, increasing the supply of oil in the face of low demand has a potential to even crash the price further until it becomes almost worthless.
Consequently, there is almost nothing that can be done in the short run to save Nigeria from the looming economic woes that will result from the plummeting price of oil in the international market. Nigeria's economy entered a recession in February 2016 when the price of oil declined to $27. With just a few dollars left to reach the lows of 2016, only a miracle will save Nigeria from an imminent recession. The lesson from all of this is simple - that the diversification of Nigeria's economy is now or never!
Interesting read and I hadn't really considered the impact on the Nigeria economy because of the oil price crash. We are all going to have challenging times over the next few months as the global economy is turned upside down. Hopefully things will bounce back at some point.
I also live in an oil producing and exporting country, the defect we have here also has to do with the lack of diversification and the lack of fulfillment of a 50-year-old proposal to "Sow Oil" that referred to the idea to establish an investment budget based on oil profits, in order to develop education and industrialization, to achieve income diversification.
Unfortunately, the political caste was not committed to the idea and it was preferred to make short-term investments with a populist sense and spending was sometimes increased suspiciously.
Now, after the beginning of the 21st century with very high oil prices, we are facing a dangerous drop in prices, coupled with our investment failure and corruption problems, gives a bleak picture in this part of the world.
I was just wondering how Venezuela can handle current situation :/
I think that for some colleagues in other countries curiosity goes in two ways:
For the first thing on the list there are many interpretations, including those that have to do with an old and almost congenital political and administrative corruption, but also in the case of the second there are many different interpretations.
According to some colleagues, the Venezuelan ideosincrace has had to do with the issue of not causing a serious problem, after all it was considered for decades one of the "happiest countries in the world", largely because of the tendency to laugh at everything and make jokes of anything, taking lightly any situation ... that is not quite good, because it is an evasion, a joke is usually made or a laugh is given, but the problem is evaded instead of solving it.
Another thing that seems to have helped is emigration, professional people who oppose the governing system of the party that governs in the last 21 years were persecuted labor and mass dismissal, sought job opportunities outside the country and formed the first great Venezuelan wave of migration of the Century XXI, then, when the crisis was exacerbated by the fall in the price of oil and it became clear that if the political caste could not keep things running with an oil price higher than $ 100, then they could do less with prices below $ 50 That led to the successive waves of migration in recent years, which has even managed to reverse the country's immigration rate, as Venezuela was by tradition a recipient country of migrants, not a country where people left to emigrate.
Well, the thing is that the emigrants left and looked for job opportunities, many left relatives in Venezuela and what they could save were sending family remittances to help their families survive. This phenomenon I think is nothing new for many poor countries in the world, but it is the first time in its history that it happens to Venezuela.
So I think that today we bring the situation afloat thanks to the foreign exchange in the market and the peculiar "sense of humor" that makes a joke of misfortune, but with the fatalism of accepting it as something inevitable and without doing anything to change it in most cases.
Nigeria, my home. I don't like talking about my home when i know there is very little i can do about it. Analyst have been warning for 5 years now that the government should shift concern from oil to other resources or trade but the government would prefer to seat with an almost finished resources (maybe not because Ogoni is still under cleanup, they haven't even started extracting, Lagos is still enjoying their newly found oil and Ogun state is still untouched). But that is not the issue. The price of oil has been dropping drastically over the last decade since the days of president Olusegun Obasanjo second term because more countries are starting to find oil (98 countries now produces oil leaving just 97 countries to depend on oil when the top 10 highest oil producing countries produces about 70% of the world oil and Nigeria isn't top 10). You see the supply is becoming higher than the demand.
The world needs more than oil and Nigeria can provide that. Agriculture is one thing from Yam, to cocoa bean (staying at the fourth most exported in the country) and others which Nigeria has left for the pursuit of oil. Gold in Osun (untouched),Abuja, Abia, Bauchi, Cross River, Edo, Niger, Sokoto, Kebbi, Oyo State, Kogi, Zamfara, and Kaduna, what happens to this, or is it the Bitumen and Sand tar in Ondo, lagos, oyo and some other states that nobody wants to use which the country is saving for the future (i wonder what our roads are made off), or Iron ore in Kogi, Enugu, Niger, Zamfara, and Kaduna States which some foreign companies are just misusing because the government doesn't see it relevance?, or with lead-zinc (with reserve of over 10 million tons and un-mined in over 10 states), or is it the excessive limestone of over 2.3 trillion metric tons with 568 million tons of proven reserves, found in Ogun state (OTTA), Cross River stateSokoto, Sokoto state; Nkalagu, Enugu state; Okpella, Edo state); Ashaka, Gombe state; Gboko, Benue state (Ewekoro) and Obajana in Kogi state. Maybe we want to talk about Barite, coal, tin, salt, or the newly found diamond in ife?
Nigeria was depending on this resources and agriculture and was doing fine with a very good international reserve until the Black gold (oil) came and we abandoned the rest. I will say the same thing economics have been saying that the country should diversify else face financial crises in the future.
@Gbenga thanks for the Economics and History lesson in this your well researched, thought-provoking post. Indeed, Nigeria needs to wake up and take up the challenge of the present day economic realities of the 21st century. I really do appreciate the vital points you made above. I guess the gold in Osun, Zamfara, etc were left that way because the cabals are benefitting from it secretly.
Thanks for stopping by.
Dear @gandhibaba
The other day I was wondering how current situation can impact economies of countries like Venezuela or Saudi Arabia. Somehow I forgot about Nigeria. You're on the same 'boat' as the other two.
Any idea what % of your country GDP is related to oil industry?
It may also be very difficult in current days to borrow money. Foreign banks may not be willing to be a lender at this time.
Upvoted already,
Yours, Piotr
Oil accounts for 2/3 of state revenue but only constitutes 9% of GDP. So, oil is a big deal for Nigeria's economy.
You're right. The risk is very high as oil prices may plunge even further. Banks at least want to lend responsibly. Cheers!
Don't hate me, I'm just thinking loud. That's also a must for Venezuelans:
https://en.wikipedia.org/wiki/Resource_curse
Resource curse
The resource curse, also known as the paradox of plenty, refers to the paradox that countries with an abundance of natural resources (such as fossil fuels and certain minerals), tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources. There are many theories and much academic debate about the reasons for, and exceptions to, these adverse outcomes. Most experts believe the resource curse is not universal or inevitable, but affects certain types of countries or regions under certain conditions.
Hahaha thanks for sharing the link above. The resource curse thesis is remarkably influential and very much true in the case of Nigeria. Thanks.
This is why I would always say that Nigeria should look in developing other sectors for revenue generation. It is very sad to note that the national budget depends majorly on oil revenues.
Chances are that the crude oil price would diminish even further. So, let's just see what befalls the nation and I hope the learn from this occurence.