Economy Today

Implications Of Oil Hitting $70 on Nigerian Economy

Economy Today

By Biyi Adeniran

Goldman Sachs Group Inc. forecast Brent price to reach $70 a barrel in the second quarter. It estimated the price at $75 in the third quarter.

Brent oil price as at March 5, 2021 was $69.20. On 7 March, Brent jumped to $70.45 as a result of Saudi Arabia’s claim that a petroleum tank farm at one of the world’s largest oil shipping ports was attacked by a drone and a ballistic missile targeted at Saudi Aramco facilities.

This means that aside from the fact that oil price will go up, it might be volatile as well.

Recent upward movement of oil price though as a result of the mass deployment of the coronavirus vaccines and the fallout from the big freeze across Texas, give credence to the need to take the prediction seriously.

The Sachs’ forecast is based on the fact that the consumption will get back to pre-virus levels by late July while output from major producers will remain “highly inelastic” to the rising prices.

Covid-19 vaccine breakthrough is expected to trigger a rally.

The OPEC+ Meeting, where decision to deepen production curb in the month of April is also a factor in how realistic the oil price prediction.

The OPEC+ Meeting extended the cuts through April, aside from a slight increase allowed for Russia and Kazakhstan, due to seasonal consumption patterns.

Saudi Arabia decided to keep its 1 mb/d of voluntary cuts in place during this period.

It is believed that supply will further be tightened amid a price rally by the maintenance at three oil sands upgraders in Canada which will take off some 500,000 bpd in production offline.

U.S. shale may not return to aggressive spending until oil price probably get into the range of $70-$75 per barrel.

Rising oil price implies that Nigeria weakening revenue will be strengthened.

The projected revenue for year 2021 is based on an oil price assumption of US$40/barrel and production of 1.86mbpd. At the exchange rate of N379/$ revenue accruable to the government will increase with the oil price at US$70 per barrel as against oil price assumption of US$40/barrel.

Depending on how the “windfall” is managed this is expected to influence exchange rate direction, reduce debt burden and translate to more infrastructure.

In an economy powered by generator and unorganized transport system oil price increases are generally thought to increase inflation and reduce economic growth.

The increase in oil prices implies an increase in the price of petrol which may either mean a further upward adjustment in petrol prices or a return to the subsidy regime. Such increase in the price of petrol will affect the prices of a variety of goods and services in terms of production and transportation costs.

It is not yet certain when local production of petrol by Dangote Refinery will take off, and the extent to which the price will be bearable considering the fact that price of crude oil in the international market will still be a major factor.

Central Bank of Nigeria promised to sell the crude oil to Dangote Refinery in Naira value. The modality is yet to be spelt out with respect to pricing and the reference exchange rate.

It is expected that an increase in oil price will reduce aggregate supply since high oil prices in addition to high cost of unstable electricity mean that firms will purchase less energy. The implication is that the productivity of any given volume of capital and labour will decline and leads to potential reduction in output.

By extension this will lead to job cut, thereby compounding worsened unemployment problem in Nigeria.

One hope that Federal Government and the Central Bank of Nigeria will work and plan hard to manage upsurge in oil price, rather than just being concerned with the revenue to accrue to the coffer.

Failure to do this will spell doom for the economy and the battered welfare of citizenry.

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