The oil oligarchy, price war, and lingering Nigeria

On the 4th of February 2020, OPEC and its allies (OPEC +) had a meeting to cut down oil production in order to retain oil prices due to the coronavirus pandemic which instigated a reduced demand for oil, causing a 20% fall in oil price.

Russia, the largest oil-producing, non-OPEC member, in a bid to offend USA oil producers disagreed with the plan to cut oil production. In retaliation, Saudi Arabia, the biggest oil producer of the 14 OPEC members flooded the markets with cheap oil, leading global oil prices to the lowest daily fall in almost 30years.

Reacting to this oligarchy feud, countries like Nigeria which are oil-dependent have felt an enormously negative effect on their economy. Notwithstanding, Saudi Arabia remains bent on maintaining oil glut to keep prices low and consequently, the World Economic Outlook has slashed global economic growth forecasts. Corporate profits are shrinking, private consumption is dwindling and governments are revising their revenue targets downwards.

It is crystal-clear that the price war among oil leaders has had an effect on the Nigerian economy in no small way. The Nigerian Stock Exchange (NSE) witnessed bearish sentiments since the oil war started, with the All Share Index dropping significantly.

The foreign exchange market equally nose dived as oil revenue, the biggest contributor to foreign exchange earnings dwindled. The Central Bank reluctantly devalued the managed float exchange rate from 307 to 360 In the official market and over 380 in the parallel market. Exchange rate windows were in effect, scrapped. This would worsen the external vulnerability of the Nigerian economy; more so, with some prediction of an impending global recession.

In the heat of all these events, Nigeria growth forecast in 2020 is trimmed down to 2% from 2.5%; oil inventories are now sold cheaper than $20 to get rid of them; loans are being restructured and price of Premium Motor Spirit (PMS) is reduced from 145 to 125 to make ends meet as a nation.

It is unnecessary to admit that the Nigerian government never learns from history. If history is anything to go by, 2008 and 2016 held vital lessons for Nigeria. There were some inputs at conserving forex using the restricted items list, import-substitution, and some diversification, but all these were jettisoned immediately Nigeria got out of the quagmire. With oil price scaling downwards to $20 per barrel, Nigeria is forced to learn the hard way again. The survival principle remains – make more money from multiple channels.

Self-economic reliance is needed in Nigeria to absorb oil price shocks and this can only be achieved through diversification. Capital infrastructure must take no less than 40 – 50% of our national budget and also implemented. These two recommendations will engender internal economic stability and guard against external shocks.

Written by Adunola Bello

Adunola is a research intern with PricewaterhouseCoopers, Nigeria

Edited by Michael Ogunremi