While the price of oil has been declining, Nigerian government assumes rising oil price in its budget for 2015-2017. Is it misguided or valid?
According to the government’s 2015-2017 budget frameworks, Nigeria’s oil production per day is expected to amount to 2.27 million barrels in 2015, down from 2.38 million during the ongoing year. By 2017, the oil output is expected to rise to 2.40 million barrels.
Furthermore, the oil price for the 2015 budget is assumed to be $78 per barrel, up from $77.5 per barrel in 2014.
Is the government playing pre-election games or are the assumptions valid? As it turns out, the reasonable answer is: Well, it depends.
Price assumptions
Thanks to a higher assumed oil price, the budget for 2015 is somewhat looser than for 2014. That, however, is not unsurprising taking into account the presidential poll in February 2015, when President Goodluck Jonathan must cope with tough competition.
Nevertheless, Nigeria’s Brent crude oil has lost more than 25 percent since June. These losses, in turn, accelerated in October as the OPEC (Organisation of the Petroleum Exporting Countries) has not cut output plans.
As finance minister Okonjo-Iweala recently put it, it’s time to “look more in the direction of non-oil sector. But Nigeria is not broke”.
In August, government revenue fell 4.6 percent to $3.7 billion, due to production outages from crude oil theft and pipeline shutdowns. Such measures were highlighted recently as the sister of petroleum minister Diezani Alison-Madueke was kidnapped in Port Harcourt.
Like it or not, crude remains critical to Nigeria’s near-term future because it drives most of the government revenues.
But what is driving crude?
Crude’s downward pressures
In Nigeria and other OPEC countries, crude oil prices have been under increasing pressure since June, when Libyan output began to recover, after several years of ‘Arab Spring’ destabilisation.
Meanwhile, global growth prospects have been slowing, due to China’s slowdown and Europe’s stagnation.
Since energy markets are denominated in US dollars, America’s shale gas revolution and the rising value of the dollar contribute to the crude’s downward pressures.
While oil demand growth is likely to remain relatively weak, $80 per barrel is seen as a credible floor for Brent, at least in the near term. That’s considered adequately low to restrict supply growth and boost demand, while still being high enough to satisfy OPEC members.
What about the risks? In the past few months, the downside risks have become elevated.
Geopolitical tensions
Geopolitical tensions have increased, particularly in Libya and Iraq, which has occasionally resulted in supply disruptions and rising prices.
Some observers argue that price pressures are easing, thanks to recent oil price rebound from the 27-month low, coupled with news that Saudi Arabia cut its supply to the market in September. Such trends have been supported by US jobs data and reports on the pickup of Chinese manufacturing activity.
More sceptical voices argue that America’s vast amounts of oil production is becoming available in export markets, which means that the US is buying less oil from the rest of the world.
What used to be a scarcity is morphing into a glut, which, in turn, forces prices to tank. That, however, is unsustainable over time. It means big losses to the Gulf producers and the shale oil producers in the US.
Beyond the tragic toll in human suffering, the Ebola epidemic in West Africa has already had a substantial impact in terms of foregone output, higher fiscal deficits, rising prices, lower real household incomes and greater poverty.
As the World Bank warned in mid-September, it is far from certain that the epidemic will be fully contained by December 2014. A “high Ebola” scenario would translate to slower containment in the core countries, but broader regional, even global contagion.
Due to network effects and exponential contagions, such outbreak would cause the current 10,000 cases to soar fifty-fold to 500,000 cases worldwide, as the worst-case scenarios by the US Centers for Disease Control and Prevention put it in mid-September.
Prepare for volatility
Recently, Russian President Vladimir Putin accused Washington of undermining global stability by backing “neo-Fascists” in Ukraine and “Islamic jihadists” in the Middle East. While the accusations were self-interested, they were not entirely invalid.
Russia’s exports remain critically reliant on its oil and natural gas, despite efforts at diversification. Consequently, any decline in oil price will cause substantial collateral damage in Moscow’s government revenues. In Nigeria, oil dependency is even greater in relative terms.
Before this summer’s price drop, crude prices had been around $100 a barrel since 2011. The recent dramatic dip in prices can be attributed to weak demand from China and Europe, as well as abundant supply from the US.
Although prices may fluctuate around $80 to $90, seasonal market tightening is expected to lift Brent to $85 by year-end. But there is another possible future. It is based on a low probability but high impact scenario.
If the European stagnation will deteriorate and if the Chinese slowdown would deepen, while US supply will remain abundant, Nigeria would have few alternatives but to adjust to the ‘new normal’. In the absence of adequate diversification, the country remains at the mercy of international energy markets.
Dan Steinbock