What Next After The Oil Boom?
The international price of crude oil has plummeted, and oil dependent economies are all scrambling to find other avenues to replace their falling revenues. Oil prices, like other economic phenomena, are cyclical; they have their booms and busts. However, for most extractive economies like Nigeria which have been devastated by the ‘Dutch disease’, there is always doom hanging somewhere.
When oil prices were booming, we were faced with higher prices of refined products. Although an oil producing country, we do not have refining capacity. These higher prices are borne by the citizens either directly in a deregulated environment or indirectly through subsidy payments by the government, money which would have gone to other capital projects. Since the payments for subsidies are on consumption rather than expanding the economy, they only promote rent seeking. This further makes the oil sector an enclave and a drain on government resources. It also discourages capacity utilisation in the manufacturing sector, induces higher imports, diminishes the foreign reserves, puts pressure on the exchange rate and worsens the purchasing power parity of the people.
revenues which affect both capital and recurrent expenditures. Economies such as ours are highly dependent on public sector financing or government funds. The spiral effects are usually seen in abandoned projects, inability to pay salaries and falling revenues and incomes for banks and other private sector businesses. Declining government revenues lead to a fall in our foreign reserves and puts pressure on the local currency; the Nigerian naira (NGN) in this case. The monetary authority is now faced with either devaluating the currency or using the falling reserves to defend the naira. Both have serious effects on the economy. The fiscal authorities are compelled to increase taxes, thereby leading to a fall in the disposable income of the citizens.
While this is not the first time oil prices will go down, this bust is coming on the heels of a sustained boom. The first oil shock which came with the Israeli-Arab war of 1973 was a positive shock for the oil producing nations and a negative shock for oil importing nations. Oil rose from $3 per barrel to $12 per barrel. By the time of the second oil shock which was caused by the 1979 oil crisis, the price of crude oil nearly doubled to $39.5 per barrel. After 1980, oil prices began a 20-year fall, eventually reaching a 60 percent fall-off during the 1990s. Oil exporters such as Mexico, Nigeria and Venezuela expanded production. Surprisingly, despite the second oil windfall of 1979; Nigeria was badly hit when oil prices began a decline in 1980. Economically, we fallaciously speculated that oil prices will sustain the last unbeaten run. We did not have a policy to guard against sudden and even envisaged fall in the prices at all. One constant thing with an oil boom is that it makes the currency stronger, once the people have a higher purchasing power, imports rise. As imports rise, consumption and production of local products fall, and imports rise further. This causes a balance of payment disequilibrium and distorts the macro economy. However, a fall in crude oil prices do not automatically mean a fall in imports. Rather, there is more pressure on the falling foreign reserves to support the appetites of our imports.
From 2009 the price of crude oil for the first time remained around the $100 mark for about five years to the extent that we didn’t view it as an anomaly. It fuelled corruption, excessive importation and increased consumption based on emotions. There was no corresponding increase in local manufacturing and other industrial activities. The last windfall went to lubricate a political machinery, retail and services, and fuelled demands of all sorts. The direction was one way, capital was exported alongside jobs, while comfort and luxury were imported and loot was siphoned.
The price of crude oil began declining in the middle of 2014 due to a significant increase in oil production in USA, and declining demand from the emerging countries. This oil bust is different from the other ones before it. China, the power house, has seen its growth rate slowed down. Shale oil or fracking raised the threat to OPEC’s crude oil production to discourage this and for other reasons. Saudi Arabia has been pumping crude oil into the market. The United States has lifted the embargo on the exportation of Iran’s oil. More countries have discovered, explored and are now exporting crude oil. OPEC members cannot agree on a quota or to cut down production. And for the first time, Islamic state in Iraq and Syria (ISIS), a non-state actor, has control of oil fields and installations enabling them to sell cheap crude oil to fund their terrorism.
Goldman Sachs last year predicted crude oil will fall to as low as $20 per barrel, it is presently below $30. For reasons listed above and many more, we may be experiencing the end of oil. It doesn’t preclude the price of oil from rising again, but this is the end of oil as we know it. Hitherto, one of the easiest reasons for the rise of oil prices was the crisis in the Middle East. However, the Middle East is engulfed in a myriad of sustained crises which no longer result in oil shock. Global Warming is gradually reducing the need for energy which goes into heating. Again, the activities to curb greenhouse emission and protect the environment from degradation has led to increased research and expenditure on alternative sources of clean energy. There have been many successes in renewable energy development, so that crude oil and other fossil energy can no longer hold the world to ransom. Producers of crude oil can no longer determine the prices of oil any longer and its by-products are no longer inelastic. There are more non OPEC oil producing nations and new oil producing nations who will not want to join the OPEC cartel at a time that OPEC’s influence has nosedived.
However, the end of oil will not be the end of Nigeria’s economy. What the end of oil should do for us is to reverse all the negative effects of the ‘Dutch disease’. Other products should queue for exports; we must move away from the importation of primary goods. Nigeria has all it takes in terms of human and material resources to re-start the economy. Prudence and affirmative actions to wake up manufacturing will go a long way. Unless oil rises suddenly, the naira will someday be devalued. A devalued naira with an exporting capacity will help boost the economy, especially if the exports are non-oil. Nigeria as an oil producing country must as a matter of economic expediency have refining capacity. It no longer pays to export crude oil, worse still when we are importing refined products.
The end of crude oil as we know it is staring at us and we must not end with it.