THE FALL AND FALL OF OIL PRICES AND THE EFFECTS ON THE

NIGERIAN ECONOMY.
Historical Perspective.
A former Nigerian Head of State was once quoted as saying, Our
problem is not money, but what to do with money. This was in
the days of the oil boom when huge amounts of petro-dollars
were pouring in. Nigeria was one of the very few countries that
had discovered the black gold. Many countries had economic
cooperation agreements with Nigeria with a view to the benefits
of oil production. Patronage was almost at Nigerias discretion as
exporter, and not at the importers discretion.
This was in addition to a very robust agro-economy. Nigeria was a
major exporter of such agricultural products as cocoa, peanuts,
cassava, palm oil, cotton, rubber, etc. As a matter of fact,
agriculture was the bedrock of the economy before the discovery
of oil. The balance of trade was positive and the economy was
very robust.
On 1 January, 1973, when the naira and kobo became Nigerias
currency (to replace pounds and shillings), the exchange rate was
0.658 naira to 1 dollar.
In other words, 1 naira exchanged for
1/0.658 x 1 = 1.51 dollars
meaning that the naira was stronger than the dollar. In 1980, the
naira was even much stronger, exchanging for 1.81 dollars
officially, and 1.11 dollars on the parallel market (PM). In 1981,
however, the naira began to slide steadily against the dollar; and
in 1986, for the first time ever, it fell below the US dollar and
exchanged for 2.02 naira to the dollar officially, and 3.90 naira
(PM).

In the 1990s, the naira remained fairly stable at 21.89 naira to the
dollar officially, but with a wider gap on the parallel market at an
average of 80 naira to the dollar. Between the years 2000 and
2001, the currency resumed its descent, hitting an all-time low
and exchanging above 100 naira to the dollar.

POINT OF INFLECTION
In pre-independence Nigeria and up till the end of the civil war,
agriculture was the mainstay of the economy. Crude oil was
discovered in commercial quantity in 1956 and became a major
revenue earner for the country in the 1970s during the oil boom.
It was during this period of oil boom that the country chose the
path of least resistance and shifted its dependence from
agriculture to the oil sector.
That oil now plays a pivotal role in the nations economy cannot
be over-stated. Nigeria is the sixth largest oil-producing country in
the world, and almost all developmental projects hinge on
expected revenue earnings from crude oil exports. Explicitly,
about 90% of the annual budget is predicated on a forecast of
crude oil price per barrel, to the neglect and detriment of other
sectors, especially the agricultural sector.
The economy therefore became a mono-economy, lacking
diversity in revenue sources; and the huge foreign exchange
inflow created a false sense of affluence. Incidentally, crude oil is
like any other commodity and responds to the forces of demand
and supply. This is in addition to the price volatility sometimes
triggered off by geo-political dynamics of conflicts, sanctions,
wars and natural disasters. Over the years, international crude
has often experienced wide price swings from very low to very
high, from as low as $10 per barrel to as high as $150 per barrel.
THE TURNING POINT.

From 2010 to mid-2014, world oil prices remained fairly stable at

around $110 per barrel, but have since been on a steady decline
to the point where you can now keep a barrel at home for less
than $40. And this is due largely to supply factors rather than
demand factors.
The United States which used to be a major importer of crude oil
has suddenly discovered large quantities of oil in its backyard,
and has now attained energy-independence. US production levels
are said to have surged to their highest in almost 30 years. For
several years, the West imposed sanctions on Iran and placed an
embargo on its oil exports in order to influence its nuclear
policies. Now with sanctions lifted, Irans production taps have
been turned back on. Many more countries are discovering oil,
and production from countries outside the Organization of
Petroleum Exporting Countries (OPEC) is very high. This is further
exacerbated by the reluctance of the cartel itself to cut
production.
On the demand side, advances in technology have led to the
discovery of alternative sources of energy and the production of
energy-efficient vehicles. Furthermore, weak economies in Europe
and developing countries, coupled with a mild winter in recent
times, have meant a drastic drop in energy requirements. Simply
put, the world is pumping out more oil than the world needs.
It does not require rocket science or extensive knowledge of
economics to know that such a glut will naturally cause a crash in
prices. In actual fact, analysts predict a further slump except
urgent action is taken to stem the tide.
ECONOMIC IMPACT.
The impact of low oil prices on a mono-economy like Nigeria is farreaching. Oil exports to the US, which used to be the largest
consumer of Nigerias oil, have plummeted to a zero level owing
to the formers new-found self-sufficiency. In essence, Nigeria

must now cut production or discover another destination for its

excess crude. There are therefore the problems of low volume and
low value of oil exports. As a consequence, the country is now
experiencing a significant shortfall in its foreign currency earnings
(or foreign reserves), which are a function of the volume and
value of exports. And evidently, the value of the naira is
inextricably linked to the size of the foreign reserves in direct
proportion. Therefore the substantial reduction in the size of the
foreign reserves has led to a plunge in the value of the naira,
pushing up the exchange rate to the current level of about 300
naira to the dollar unofficially.
INFLATIONARY EFFECT.
Nigeria is an import-dependent country, importing almost all its
needs, including food, which must be paid for in foreign currency.
Very few goods are produced locally. With the dollar now more
expensive, the importer pays more for the imported goods and
must correspondingly pass the cost to the consumer, to remain in
business. Prices then go up, resulting in inflation.
A market survey conducted by The Security Watch gives a useful
insight into the unprecedented level of inflation being currently
experienced.

Item
New Price (Naira)
Rice (50kg bag)
12,500-13000
Cooking Oil (25 litres)
9,500
Brand of Noodles (1 carton)
1200

Old Price (Naira)

9000
5,500
1000

Chicken (1 kg)
950

750

Brand of Chocolate Powder (400g) 450

550
Bread (medium loaf)
200-250

200

Biscuit (small pack)

15

10

Sachet of water
10

Brand of Soap (1 pack)

450

350

Cooking Gas Cylinder (12.5kg)

8000

6200

Generally, prices have gone up.

THE ROLE OF CORRUPTION/LACK OF ACCOUNTABILITY. (Pls
choose.)
Nigeria is the biggest economy in Africa, following the recent rebasing of the economy, and ought to have the capacity to
weather the storm in the event of any major shock in the
international commodities market. Unfortunately, years of
mismanagement and lack of accountability have left the country
almost bankrupt and insolvent. We recall that before this
administration, Transparency International rated Nigeria as the
second most corrupt country in the world. Corruption was brazen,
endemic and pervasive. The door to the treasury was virtually
flung open to political cronies, who had their sacks filled, pressed
down shaken together and running over. This has left the
countrys wealth concentrated in very few hands, leaving the rest

of the population in abject poverty. With the minimum wage at

18000 naira, the average Nigerian subsists on less than $5 per
day.
HIGH LEVEL OF IMPORTATION.
Other factors that have helped to deplete the nations reserves,
analysts say, include the unquenchable preference for imported
goods to the few locally manufactured ones, remittance of school
fees abroad and medical tourism. Economic experts are of the
view that curtailing our thirst for imported goods and encouraging
local manufacture will help to save scarce foreign exchange and
create jobs. They further argue that there are enough good
schools of international standard, and enough good healthcare
facilities to provide the medical needs of the country. Therefore, if
anyone considers themselves affluent enough to seek education
or medical attention overseas, it behoves them to seek funding
sources for their needs, rather than be subsidized with scarce
foreign currency at the official rate, at the expense of majority of
Nigerians.
Economic experts also agree that the most critical factor affecting
the nations foreign reserves is the importation of refined
petroleum products for domestic consumption. Paradoxically,
Nigeria is the only oil-exporting country that imports refined
petroleum, much like exporting firewood and importing charcoal,
or exporting chicken and importing eggs. This has been the
practice by successive governments since the days of military
rule. Nigeria has four major refineries none of which is producing
at installed capacity, owing to lack of proper maintenance; hence
the inability to meet domestic requirements. The nation is
therefore left at the mercy of a dollarized supply system that
depends on importation; and with the dollar so scarce and
expensive, fuel scarcity becomes a recurring decimal. Economists
are of the view that the permanent solution to the problem is the

complete overhaul of the existing refineries and construction of

new ones.
THE WAY FORWARD/LOOKING AHEAD. Pls choose.
It is generally believed that it is sheer folly to do things the same
way always and expect different results. Thankfully, the present
government came to power on the mantra of change. President
Buhari himself has been adjudged the least corrupt leader in
Africa by the international community, and has taken the bull by
the horn in the fight against corruption.
The dependence solely on oil for revenue is analogous to putting
all eggs in one basket, and has been largely responsible for the
instability in the economy. The current low oil prices underscore
the need to reverse the trend and diversify the economy. Nigeria
is blessed with abundant human and mineral resources, and vast
arable land for farming. To attain self-sufficiency in food
production, it is imperative to reposition agriculture to an
organized and mechanized level. Under Buhari, expectations are
high. How far he goes towards meeting them remains to be seen.