Oil prices keep on sliding further. WTI fell below $70/barrel yesterday and the benchmark Brent Crude has tumbled about 36% as shown by the chart below.
As expected, this is good news for oil consumers such as Turkey, the US and the Eurozone. Also, those that bought put options on oil futures contracts would be very happy having speculated correctly. However, the producers especially the high cost producers with bloated budgets such as Venezuela, Iran and – you may may have guessed – Nigeria.
This article would concentrate a great deal on Nigeria, Africa’s largest oil producer.
First off, I am Nigerian. Due to the higher oil prices that existed prior to the 2008 oil shock (where crude dropped by almost 66% from a high of over $140/barrel to just over $40/barrel), the Nigerian government was saved by the rapid rebound in oil prices to over $100/barrel range. When the government was accruing forex reserves hands over fist, it simply ignored a huge segment of the economy – such as manufacturing and agriculture – and assumed that the 2008 shock was an exception. Who would want to do the hard work of repairing the refineries or privatising it when the dollars were flowing into the national coffers. There was a lot of money to distribute to various constituencies and those with the right connections could get into the refined oil importation business known as “oil marketing” locally. Nigerian politicians had a field day with corruption rife as the treasury was looted by all and sundry. This could be seen by the series of corruption charges brought against several state governors and lawmakers. Nigeria is and was suffering from the oil curse.
Despite the amount of forex reserves accumulated by the government with a peak of $68 billion in 2008, reserves have almost halved at about $35 billion currently.
The shale oil boom in America is now the wildcard the oil market. A recent report by the EIA suggests that just about 4% of US shale production will needs oil at $80 and above to be profitable. American shale production, especially those in the Bakken formation would still be profitable even up to $40/barrel according to the IEA. With Saudi Arabia – responsible for about 11% of global production and about 32% of the OPEC cartel’s output – adamant to cut its production and the uber efficient American shale oil drillers, oil prices may still have some way to go before finding a bottom. Nigeria, being a relative price taker in the oil market, is in for a lot of pain. Increasing supply from America, tepid demand worldwide and relative calm in the Middle East are no friends of the Nigerian government.
The challenge for the Nigerian government will be to increase the tax base, cut spending or both. However, the approach taken by the Finance Ministry by taxing luxury goods would do little to raise revenue. Wealthy Nigerians would find ways of reducing the tax liabilities which could include a reduction in the purchase of luxuries in the country and ramp it up elsewhere such as Ghana. Therefore people in those industries would lose their jobs thereby becoming a social burden. Alternatively, it could also lead to more corruption as the wealthy could pay off tax officials to enjoy their luxurious living tax-free. All in all, it is not a very efficient way of collecting taxes.
The Nigerian government should cut waste. Cutting down the number of ministries that exists from the present 27 to 13 would be a starting point. The ministries simply add more bureaucracy that simply makes the economy less efficient. For example, the Ministry of Labour and Productivity should be scrapped with the Ministry of Trade and Investment taking over their roles. The average Nigerian does not seem to experience the benefits of the government parastatals. For example, labour force participation as at 2012 was 56% according to the World Bank. This is despite a governmental action to increase employment. Regulatory agencies should be mandated to reduce red tape and increase enterprise across the country. The Corporate Affairs Commission (CAC; http://new.cac.gov.ng/home) should adopt the digital revolution, reduce the cost of registering a business and incorporating it to reduce the prevalence of the informal sector in the economy and reduce the time it would take to get a name approved. The CAC should act as a helpful and reliable conduit to getting started. The numerous and cumbersome fees need to be reduced and streamlined. The government automatically brings more firms and workers into the tax system and the formal sector while giving thousands of entrepreneurs validation when competing for contracts.
Other regulatory agencies need to be digitised and modernised. Agencies like the EFCC (Economic and Financial Crimes Commission), ICPC (Independent Corrupt Practices and other related offences Commission) and the FIU (Financial Intelligence Unit) need to be merged and workforce downsized in order to increase efficiency and effectiveness while relying on technology to improve productivity.
The four oil refineries (2 in Port-Harcourt; 1 in Warri; and 1 in Kaduna) should be auctioned off to anyone willing to start work on them while eliminating the subsidies for petroleum products; already, most Nigerians do not pay the subsidised price meaning that the subsidy is simply a free-for-all for the oil importers. Furthermore, it is uneconomic for the government to spend money on consumption (oil subsidy) at the expense of much-needed investment in communications and physical infrastructure. This would lay the ground for the next leg of Nigeria’s growth. This could be similar to the Eisenhower administration’s investment in US infrastructure in the 1950s which improved US productivity and connected the country thereby reducing the cost of bringing products to market and paved the way for future growth.
Merely, increasing the supply of companies and the growth of various industries would pave the way for a more sustainable mix of federal and state governments’ revenues which currently is contingent on the oil price, one which Nigeria is a price taker.
Photo: Stakeholder Democracy/Flickr, used under a Creative Commons Licence