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Tuesday, September 27, 2022

RESEARCH: The effect of high oil price on the Nigeria economy

Oil has been skyrocketing in the past few weeks, as it has broken its initial record with a price that has been rambling about 120 dollar per barrel in the last few weeks 

Niarametrics also reported that Brent oil which is regarded as the global benchmark started the year trading $77.78 a barrel. At the start of the week, the Brent oil futures traded as high as $139.13. The last time the benchmark printed this price was back in 2008, which represents the highest price point the benchmark has ever traded in 14 years.

We also saw the United States benchmark, the West Texas Intermediate (WTI) futures, print a 14 year high of $130.50 a barrel, having started the year trading $75.21. So far, both the Brent and the WTI, when compared to their highest, are up 78.88% and 75.51% respectively.

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Bank of America Research, headed by the bank’s head of global economics research, Ethan Harris, detailed a scenario in which U.S. GDP growth could be cut by 1% over the next year if oil prices remain above $100 per barrel amid Russia’s invasion of Ukraine. The bank’s note said an even higher cost might even be in the cards if the U.S. or NATO move to curb Russian energy exports altogether, forecasting a shocking $200 barrel of oil.

According to ICE Futures Europe data compiled by Bloomberg, more than 1,200 contracts were traded on Monday for the option to buy Brent Crude future for May at $200 per barrel.

As a result of active options trading in recent days, the price to buy such options has skyrocketed. For example, the $200 oil options on the May Brent futures, expiring on March 28, three days before the contract expires, saw the price for buying them surge by 152% to $2.39 a barrel. The price of the $150 a barrel June call option doubled, and the $180 call options surged by 110%, per the exchange data cited by Bloomberg.

Let’s take it that the Bank of America’s prediction was a little too extreme. JPMorgan’s analysts are predicting that the Brent crude could end the year at $185 a barrel if the Russian supply continues to be disrupted. JP Morgan strategist Natasha Kaneva stated in a note yesterday that just under 70% of Russian oil can’t find a buyer. She said that if the self-sanction continued, the Brent oil price could end the year as high as $185 a barrel.

Nigeria, a nation highly dependent on its crude oil export, may look to benefit from the high oil prices seen in the market, however, we should remember that the nation still imports the majority of its refined oil products. The nation is currently feeling the effects of fuel scarcity as four refined oil importers brought in adulterated fuel, high in methanol content.

Although the price of Premium Motor Spirit (PMS) has been relatively stable, even amidst the rising oil prices, due to government subsidy payments, the price for diesel, for example, has been rallying. Just last week, the price of diesel hit N545, the highest ever, after a survey was conducted by Nairametrics.

Sources available to intel Region also confirmed that, for every liter of petrol, the government is paying 400naira per liter as a subsidy 

Nigeria also budgeted 2.55trillion as subsidy for 2022 Budget 

This is an increase of over 142% from the N225 which the commodity was for sold in January 2021.

The survey also revealed that most filling stations now sell diesel between N400 and N420 across Lagos up from an average of N350 per litre in late January (55.71% increase when compared to today’s price). Diesel prices closed the year (2021) at under N300 per litre.

Speaking on the economic effects of a $200 per barrel oil, Olumide Adesina, a financial analyst at Quantum Economics, had this to say, “If global oil prices continued to rise at the same time as the naira fell in the IEFX window, the resultant increase in domestic gasoline prices would almost certainly occur.

“Moreover, we do not have a working refinery, so we must purchase petroleum products for domestic use. That reduces revenue potential.

“Yet, one thing is clear: The Nigerian economy cannot afford subventions in the energy sector; it is just a matter of time and how much more Nigerians will pay per litre of gasoline in the future.”

Opeoluwa Dapo-Thomas, an International financial analyst, with a specialty in oil and gas had this to say, “It means less revenue and more allocation to subsidy payments – simply put. The Nigerian economy has not benefitted from higher oil prices in recent months. There are months where the NNPC paid no revenue into the Federation Account.

“The fact that Nigeria does not also produce so much oil also restricts the revenue potential from higher oil prices. You heard the Minister of Petroleum, the other day on Bloomberg TV, who said ‘we are not currently happy with higher oil prices – that is a frank reflection of our oil economy now. The chicken has come home to roost.

“Prices at this level would have strengthened our fiscal positions, FX reserves, Excess Crude accounts, and Sovereign Wealth Fund, but what we will see is north of 300-400 billion naira payments for “subsidy”. What’s the point of having a $62 per barrel benchmark for the 2022 budget, when you are not inherently happy with $200 per barrel? These are the issues.”

…article continues.

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