Dwindling Crude Oil Price

Implications for the Nigerian Economy

After the rebasement of the Gross Domestic Product (GDP) in 2014, Nigeria turned out to be the
biggest economy in Africa and the 26th worldwide (G$594). While Nigeria revealed a middle income
($3,416 per capita), diversified and fast growing emerging economy (around 7% growth expected by
IMF in 2015), the relative political stability, the diversification of the economy and the demographics
dynamics have encouraged optimistic forecasts. The development of major internet players such as
Jumia or the irresistible expansion of Nollywood, banking services and telecommunication are
examples of Nigerian potential.
However, the African lion has several weaknesses. Nigeria remains a natural-resource export-oriented
economy, with oil contributing around 90% of the country total exports earnings. The oil and gas
activities provide about 70% of the total government incomes, although with 2.3 mboed (million barrels
per day) the country still struggles to leverage its vast natural resource wealth in order to displace the
poverty that affects about 55% of its population. Regulatory constraints and security risks have limited
new investment in oil and natural gas, leading to a constant production decrease but also challenges in
terms of education or infrastructure developments.
At $111 the barrel of Bonny crude oil, the federal budget was secured, with a breakdown point of $70.
The sudden decrease in the oil price faced on the international market may create challenges for
Nigeria at the time of the national and state elections. Through the analysis of the root causes of the
current fall down, the outcomes for the Nigerian economy will be assessed.

Figure 1 Nigerian key facts

Population

165 million (2013)

Liquid Reserves (Remaining)

15.12 billion barrels (1/1/2015)

Liquid Production

2,325 thousand b/d (2015)

Liquid Reserves/Production

17.8 years

Gas Reserves (Remaining)

46.21 tcf (1/1/2015)

Gas Production

4.57 bcf/d (2015)

Gas Reserves/Production

27.7 years

Source: Wood Mackenzie, 2015

Note: Reserves are for producing assets and those under development and
exclude technical reserves.

Stop drilling baby, the price is collapsing

The oil price has fallen by more than 60% since June 2014, when it was $115 a barrel reaching $48 in
early 2015. This sudden change comes after nearly five years of price stability, explained by the
inherent inelasticity of both supply and demand to price changes, as confirmed by the history of the
crude oil price movement:
Figure 2 Crude Oil Price and Key Geopolitical and Economic Events ($/b in real 2010 Dollars)

Source: US Energy Information Administration and Thomson Reuters, 2015

The analysis of the crude oil price shows that despite a long term trend of regular increase (weather,
economic and demographic growth tends to naturally increase the demand), the crude oil price remains
under the influence of external factors, such as market speculations and geopolitics factors.
The oil and gas market is driven by geopolitical events. These resources are located in strategic areas,
where countries or groups of countries have always tried to secure their influence. When the stability of
these regions is ensured, the price remains relatively stable. However, the upset of the regional stability
may lead to a dramatic change in the price volatility. For example, the invasion of Kuwait by Iraq or the
9-11 attacks are well known historical events that had impacts on the price surge.
In addition, since the early 1930s producing countries have unified their influence under political and
governmental organizations powerful enough to influence the price and preserve their interests. The
OPEC supported the boom of the oil price in the 70s in the context of the cold war. Nowadays, the
organization, under the influence of the main producer Saudi Arabia, has favored the decrease of the
oil price.
While some debate whether or not the drop in price is due to a Saudi ploy to pressure on North
American shale producers to slow production down, or is simply a supply and demand equation, the
direction of the price is increasingly unclear.
Reasons for the Dwindling Oil Price
The current fall of the oil price can be explained by several causes, although it remains a challenge to
identify the root ones.

i. The world economy is sluggish. After years of intense growth, the BRICS are slowing down
due to the saturation of their production capacities and the appetite of their traditional customers.
China is the most visible example with a GDP growth stuck at 7.7% (compared to 10.4% in
2010) leading to weakened imports of oil equivalent products.

ii. The current geopolitics turmoil in Iraq and Libya has not led to the expected collapse of
their industries. Although the market was anticipating a decrease in the production and a
shortage of supply, the 4 mboed of these two big players were preserved and remain available to
the consumers.

iii. If the production of the traditional suppliers has not slowed down, the shale gas
revolution in the US has certainly accelerated the abundance of oil equivalent products on
the international market. Summed to the GNL innovation, the US are to be the first producers of
gas in the world and future exporters. And in 2013, for the first time in the modern history, they
imported less than their exports.

iv. For the first time since the 70s and 80s oil crisis, OPEC has decided not to sacrifice their
own market share while facing the competition of unconventional resources, since the main
producer can tolerate lower oil price. It has G$900 in reserves. Its own oil costs (CAPEX and
OPEX) are most competitive (around $5-6 per barrel) to get oil out of the ground and have a
huge spare capacity of about 10 mboed in 2012 and 2013. We therefore had a scenario where
U.S. shale production grew but oil price did not decline because OPEC production was declining
balancing the net effect.

The OPEC Influence is decreasing but still represents 40% of the market
At a meeting in Vienna on November 27th 2014, OPEC, which controls nearly 40% of the world market
(about 30 million barrels), failed to reach agreement on production curbs, sending the price tumbling
citing fear of loss of market share as reason. However, global expert postulate the following reasons to
be behind OPEC's incentives of not cutting down its productions.

i.

OPEC strategy of allowing the price of oil to fall and put high-cost producers out of
business. By so doing, the OPEC is mindful of the experience of the 1970s, when a big leap in
the price prompted huge investments in new fields and alternative energy, leading to a decadelong glut in the market. Moreover, this strategy may push many alternative energy producers
and shale gas projects investors to bankruptcies, with many of them breakeven at only $70 per
barrels as. Thus, keeping price at $50 would have major repercussions in the US shale projects
and alternative energy producers. Investment in the US oil and gas sector declined by 37% in
2013 due to lower crude oil price which is one of the major drivers of the crude oil supply side.

ii. The non OPEC countries may also suffer from the current decision of the organization.
Russia, Brazil or the United States have been competing with OPEC members on the
international markets. The recent agreement between China and Russia threatened OPEC
access to the growing market and the organization is likely to secure the supply of their
resources to the future economic champions.
Lower crude oil price, varying perspectives, the case of Nigeria
Nigeria has started to feel the negative impact of the fall in global oil price and the country need to
brace up for tougher times ahead by reviewing its expenditures and building economic buffers through
budgets based on modest oil price.
Given the economical consequences of dwindling oil prices t would hurt the current account balance
(largely the difference between our earnings on exports and spending on imports), reduce growths to
the external reserve (from which the central bank spends in support of the naira), and by pushing up
import costs (we are an import-dependent economy) drive up inflation, penalizing the communities.

The following are both direct and indirect impact on the Nigerian economy.

i.

Loss of government revenue: The Nigerian federal budget is based on a conservative

estimate of the world price of oil. The federal government distributes oil revenue by a set
formula to the states and to local government authorities, which are mostly dependent on it
because they can raise little through local taxes on their own impoverished and underdeveloped local economies. Under 2011 figures, 62% of the daily average crude oil production
accrued to the Nigerian government ($100/barrel, 2.2 mboed, G$50.3 governmental revenues).
Due the dwindling price which got the price to $47/b, the FGN would be earning G$23.3 per
year, under the same level of production, exports (which slow down too), profit-sharing and joint
venture agreements. This translates to average loss of G$27 per year, the equivalent of 37% of
the national budget (Mozambique GDP).

ii.

Decrease in public investments: with decreasing revenues, the government has started
investigating austerity policies. If the national defense budget has already been cut in 2015,
post electoral arbitrations will necessary come with negative impacts on the country's
competitiveness (Nigerian road density is 1/7 of India's, power generation is 1/5).

iii.

Decline in the Excess Crude Oil Account: apart from the federal budget, the sovereign fund
of Nigeria will also face decreased capabilities to support the needs of the future generation.
The Nigerian government disclosed that it withdrew G$1 to settle debts owed petroleum
products marketers. This is due to the loss of revenue and accumulated debt owes to marketers
as a result of subsidies of the petroleum products.

iv. Naira Devaluation: With the fall in oil price the Naira, the sovereign fund of Nigeria will also
face decreased capabilities to support the needs of the future generation. The Nigerian
government disclosed that it withdrew G$1 to settle debts owed petroleum price was making it
hard to defend the currency, which may reduce the imports capacity of the country and weaken
the balance of trade since Nigeria's exports are mainly resources driven.

v.

Lower Economic Growth: Significant drop in the oil price, according to the National Bureau of
Statistics (NBS), had led to a decline of about 5.4% in the third quarter value merchandise trade
in 2014. Moreover, the total value merchandise trade stood at G$32.21. Furthermore, this
figure indicates a decline of G$1.83 compared to the previous quarter.

vi. Lower investment appetite: in order to restore their profitability, the International Oil
Companies will progressively delay or cancel their Foreign Direct Investment. This climate of
anxiety may spread over the overall economy due to previously exposed factors. For instance,
Nigeria may witness delays in the Dangote completion of the 500,000b/d Refinery. And the
impacts are still to be assessed on existing oil fields' profitability.

vii. Reduce Employment: The major driver of the Nigerian economy is the oil and gas sector.
Lower price will slow down oil and gas investment and activities whereby reducing level of
employment in the country due to oil dependency of the Nigerian economy. It may possibly
results to job cuts especially for small indigenous oil and gas companies that cannot sustain
themselves in the period of low price and will spread to dependent sectors.

viii. Foreign Reserves Depletions: Nigeria's foreign exchange reserves fell to G$34.51 by January
13, down 20.2% from G$43.24 a year earlier, owing to drawdowns by the central bank to
defend the local currency, the Naira as a result of falling crude oil price in the world. This
amount cannot pay for six months of imports. With two years of foreign reserves, Russia is
already reputed to be in turmoil considering the dependency level of the country to importations.

ix. Imported Inflations: from the microeconomic perspective, Nigeria is a finished good import
dependent economy. With very little of anything produced to a significant degree domestically,
the country must rely on importation for a majority of its economic goods, even food. A more
expensive dollar from falling oil price will mean more expensive imports for the merchant. The
merchant must now pass on that added expense to the consumer to break even, leading to
inflation.

x.

Stock Market impact: Declining oil price hurts both consumer oriented stocks and oil-based
stock. The All-Share Index (ASI) in Nigeria which tracks the general market movement of all
listed equities on the Exchange, including those listed on the Alternative Securities Market
(ASeM), regardless of capitalization had significantly dropped in response to the declining oil
price. The ASI was 43.07k on 15th June 2014 and now stood at 28.7k as at 14th January, 2015.

Conclusions
As a conclusion, the current declining oil price has been affecting and will continue to affect the
Nigerian economy. The level of dependency of the country is symptomatic of the "resource curse"
faced by several major producing nations. Although the specialists agree this situation may not last, the
loss for the national wealth is already requiring policy, social and economic changes if Nigeria expects
to keep its position on the global scene and its influence in West Africa.
However, on the positive side, the dwindling of the crude oil price is not entirely a bad omen for
Nigeria due to the existence of several structuring strengths and lying opportunities. The country's
diversification may act as a stabilizer, supported by cheaper access to resources. The industry, the
agriculture and even the service sectors may benefit from the fall. The demography will support the
national market and provide outlets to the local suppliers and manufacturers. In addition, it should act
as a wakeup call to:

i.

Accelerate the diversification of the economy and reduce the dependency to oil revenue,
supporting the emergence of national export champions.

ii.

Strengthen the Nigeria Sovereign Wealth Fund and save for the future unforeseen situations,
as Norway or Abu Dhabi did in the past in diversifying their investment.

iii.

Stabilize the governance of the country to offer an attractive environment for the Foreign Direct
Investment.

iv. Explore the potential of new energies, capitalizing on Nigerian assets, such as water, sun, wind.
v. Promote a shared-value model between the NOC and the IOC by encouraging operational
excellence, OPEX and CAPEX reduction, responsible local content and equilibrate partnership
agreements.
These strengths and opportunities will be investigated in the next issues of the analysis of oil price
impacts on the Nigerian economy.

Salisu Rabiu Isihak

NNPC

Stephane Rousselet
WPC

SALISU R. ISIHAK is a Supervisor, Project Investment, Assessment and Analysis at Nigeria National
Petroleum Corporation. He has a B.Sc in Economics (First Class Honours) from Usmanu Danfodiyo
University, Nigeria and an M.Sc Energy Economics (with Distinction) from University of Dundee, United
Kingdom. He has extensive experience in Oil and Gas sector and been invited as Technical Speaker
at the 14th and 15th Nigerian Oil and Gas Conference which bring together a distinguished line-up of
local and international speakers to establish best practice and discuss practical solutions of the
Nigerian Petroleum industry. He is a member of the World Petroleum Council (WPC) UK Youth
Committee and Sub-Saharan coordinator of the WPC Youth Committee
STEPHANE ROUSSELET has five years of professional experience in international business
development and project management. For an oil and gas major, he develops innovative and value
chain projects for the upstream operations in the North Sea, the Gulf of Guinea and the Middle East. He
joined Nigeria as Logistics Superintendent. He was elected as French representative of the WPC Youth
Committee in 2014 with the aim of catalyzing and facilitating dialogue amongst stakeholders and find
sustainable solutions to key energy issues. Founder, former Vice President and Secretary General at
Youth Diplomacy, he contributed to unite young leaders from around the world, and to facilitate their
involvement in, and impact on, global issues through open dialogue and engaging diplomacy.