Nigeria’s economy under threat as oil falls below $50 a barrel

Oil prices, on Thursday, fell below the $50 per barrel mark for the first time in three and a half years, as fears of a global recession and weakening demand triggered huge sell offs in New York and London.

Newswires reported that United States light sweet crude for December deliveries fell to $49.75 on the New York Mercantile Exchange, while the Brent crude, equivalent to Nigeria’s Bonny Light, fell to $48.90 a barrel on the International Petroleum Exchange in London, the lowest since May 2005 and about 70 per cent lower than July’s record price of $147.

Energy industry experts said on Thursday, that this was not good news for Nigeria, as the sharp decline in oil prices raised the possibility of a serious deficit in the 2009 Federal Government budget, which is based on a revised $45 per barrel benchmark, down from $69 earlier projected.

The losses in the international market were compounded by an indefinite shut down of 90,000 barrel per day of exports from Chevron’s Escravos terminal due to an attack by militants on a major crude supply pipeline in Delta State.

There were also reports that the Warri refinery had been hit by technical problems, which had resulted in the stoppage of production of refined products, raising the possibility of domestic fuel shortage this Christmas

Chevron, which declared a force majeure on Thursday, said it had mobilised to repair the pipeline but it was premature to estimate when the work would be completed.

Industry analysts suggested that the oil price slide might force another downward review of the 2009 budget projections, while capital-intensive infrastructure projects, including gas and power projects might suffer.

There were also fears that sliding oil prices might constitute a disincentive for needed investments in further exploration activities by oil and gas majors.

Members of the Organisation of Petroleum Exporting Countries are scheduled to meet on November 29, after opting to cut output by 1.5 million barrels per day.

The Managing Director, International Energy Services, Dr. Diran Fawibe, said that Nigeria was at risk of a deficit budget if oil prices continued to slide.

Apart from loss of revenue, he said many aspects of the economy would be affected, particularly the 2009 budget, which benchmark was on Wednesday, finally reduced to $45/bbl below previous estimation of $69/bbl by the Federal Executive Council.

He said, “If the slide continues, it means revenue targets will not be achieved, and if government sticks to the $45/bbl benchmark, government will have to run a deficit budget, which is not good for the economy.

“This will affect the capital budget, as government would have to rely on recurrent budget, which is even worse for us because capital budget will have a spiral effect on the economy. If the capital budget suffers, it means development will also suffer, especially infrastructure.”

Fawibe also pointed out that the continued depression of the market could limit countries’ capacity to borrow. For Nigeria, which recently adopted the alternative funding measure, it would be more difficult for oil companies to borrow to execute oil projects.

He argued that even if the oil price remained at par with the budget benchmark, there would still be negative impact on the excess crude revenue, and states would not have funds for their own developmental projects.


Besides, he added, the cash call for the Joint Ventures would be affected because of poor funding due to dwindling revenue generation.

He, however, said the situation could improve, “Although it appears the market is more turbulent than most people predicted, I think it would soon fizzle out. Just like oil price above $147/barrel was not sustainable in the long term, so also prices below $50/bbl might also not be sustainable in the long run.

“What is left is to find an equilibrium, which is where OPEC comes in. Under the circumstances, it is certain OPEC will cut output to shore up prices. Maybe, not to get price up to $100/bbl, but something between $50 and $55/bbl.”

Also painting a gloomy picture, the Managing Director, Platform Petroleum, Mr. Austin Avuru, noted that the Federal Government might have to review the benchmark for the 2009 budget even lower.

He said oil price below $50 was a very big problem for producing and consuming nations, especially for Nigeria, which economy was dependent on oil revenues.

“We have a big crisis with so much of our production shut down. This is a very big problem because nobody projected oil at anything below $60/bbl this year, not the producers and even not the consumers.

“Under the circumstances, only OPEC can salvage the situation using their machinery of trimming output. So it was a good thing that the clamour for Nigeria to pull out of the group because of quota issues did not work out, because we would have been in a worse situation now.”