Nigeria And Oil: Looking Beyond Price Collapse

By Austin Okere

The mistake we keep mak­ing as a nation is failing to anticipate and plan for our oil windfalls. There have been many boom oppor­tunities since Nigeria joined the Organisation of Petroleum Exporting Countries (OPEC) in 1971; oil prices increased by 400% in six short months after the Yom Kippur War following the Arab Oil Embargo. Crude prices doubled from $14 in 1978 to $35 per barrel in 1981 following the Iran/Iraq war. 

The price of crude oil spiked in 1990 with the uncertainties associated with the Iraqi inva­sion of Kuwait and the ensur­ing Gulf War – the so called ‘Gulf War windfall’ under then Head of State, Ibrahim Baban­gida. Data from the U.S. Ener­gy Information Administration show that the latest windfall happened between February 2011 and August 2014, under the Goodluck Jonathan pres­idency, when oil prices were much in excess of$100 per bar­rel. Another golden opportuni­ty was squandered.

During this same period, Saudi Arabia has amassed a whopping $593b in foreign exchange reserves and has re­cently announced that it is cre­ating a $2 trillion mega-sover­eign wealth fund, funded by sales of current petroleum in­dustry assets, to prepare itself for an age when oil no longer dominates the global economy. Coming closer home, Algeria, the second biggest African oil producer, with 1.9mbpd has ac­cumulated foreign reserves of $156b and a sovereign wealth fund of $50b. Nigeria, by far the biggest producer in Africa with 2.5mbpd has only man­aged foreign reserves of$28b and a sovereign wealth fund of a paltry $2.9b – about 5% that of Algeria. The major difference being that while the Algerians saved for a rainy day during the boom years, Nigeria was busy squandering her wealth, with nothing to show by way of in­frastructure or any solid invest­ments.

Yet Nigeria was able to bal­ance her budget, pay off her debts and save over $62b in for­eign reserves during the Oba­sanjo presidency from 1999 to 2007, even though the price of crude was mostly under $40 per barrel, except for the two years between 2005 and 2007 when it hovered between $50 and $75 dollars per barrel. It is bothersome that with the same level of oil price, Nigeria today is struggling to balance her budget and has resorted to ag­gressive borrowing to finance the deficit, inadvertently driv­ing us back to where we were before escaping from the huge burden of sovereign debt and the attendant debilitating im­pact of debt servicing.

I believe that Nigeria can save as much as $36.5b in the coming year if oil prices recov­er towards the end of 2016 and through 2017 to the projected $80 per barrel. This assumes we have all agreed that the cur­rent crisis is much too painful and too precious to waste. We must seize this golden opportu­nity with both hands and make the structural changes that will lead us to true prosperity as a nation. Almost every third Ni­gerian businessman you come across claims to be into Oil and Gas. Yet oil contributed only 6.4% to GDP growth in 2015.

An often overlooked area for rapid economic growth is tele­coms, entertainment and me­dia. At a recent event in Lagos, Dr. Doyin Salami, lecturer at Lagos Business School, re­marked that ‘The telecommu­nication sector grew Nigeria’s GDP by 8.7% in 2015, generat­ing spill overs, with uptakes in financial transactions technol­ogy and payment systems, e-commerce facilitation and pro­liferation of transport services, while making the offering of the burgeoning entertainment industry ubiquitous’. Quite simply, if each of the 34 million medium and small enterpris­es in Nigeria could be support­ed with technology to improve their businesses through online presence and seamless book-eeping to the point of employ­ing one more staff, they would create an additional 34 mil­lion jobs, much more than the government can ever provide. I totally agree with Dr. Sala­mi that Nigeria’s economy has systematically and strategical­ly diversified along the lines of technology and other services sector without Nigerians notic­ing. The services sector today contributes as much as 52% of Nigeria’s GDP.

Agriculture is also another sector that could do with spe­cial attention. If we strive to produce what we eat, we will not only be saving a whopping $6b from our import bill, but also provide the opportunity for inclusive growth, with the spill over effects down the val­ue chain, from logistics and transportation to light manu­facturing. But we need to make the right investments in infra­structure such as roads and rail transport linking farms with their food processors and markets.

The elephant in the room question is; who says oil prices will reach $80 per barrel?

*Austin Okere is an econom­ic affairs analyst