How Nigeria’s inability to reap the benefits of a more than $100 oil price hike is hurting the economy

NIGERIA stands to lose outright gains from rising oil prices above $100 a barrel because it has failed to enact the reforms that could enable it to reap such gains.

The very expensive Nigerian Brent is currently selling for $123.06 a barrel, a price that could have had a positive impact on the Nigerian economy and reduced borrowing.

Much of Nigeria’s revenue and its federal budgets depend on revenues from petroleum resources. In addition, the sharing of allocations by the Federation Accounts Allocation Committee (FAAC) to the Federal, State and Local Governments comes from the proceeds of Nigeria’s oil revenues, which have increased due to the effects of war. Russian-Ukrainian, but have no positive impact. on the fortunes of the country because of oil imports.

The poor economic choices of the government and the delay in the implementation of the Petroleum Industry Act (PIA) have threatened the allocation of the Nigerian federation and foreign exchange inflows.

Due to the weak inflow of oil remittances, the Federal Government borrowed over 10 trillion naira from the Central Bank of Nigeria (CBN), a step which intensified inflationary pressures on the wider economy.

To compound concerns, Nigeria is currently failing to meet the Organization of the Petroleum Exporting Countries (OPEC) allocated oil quota of 1.7 million barrels per day as oil theft and vandalism of pipelines have plagued it. produced fewer barrels.

OPEC data showed that Nigeria’s oil production fell to an average of 1.35 million barrels per day. Although it reached around 1.4 million bpd in May, according to secondary sources, Nigeria still faces a shortfall of 350,000 barrels per day.

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How does this harm the economy?

Faced with the reduction in fiscal resources following poor management of revenues from oil resources, the government resorted to borrowing.

According to the latest figures from the National Bureau of Statistics (NBS), Nigeria’s debt figure has risen to N41.6 trillion. The government must borrow to meet most of its capital and operating expenses, including the payment of salaries.

The country’s current currency crisis stems largely from falling oil revenues, which is a dollar-linked business and largest contributor to Nigeria’s foreign exchange earnings.

Oil majors give up investing in Nigeria

Nigeria has witnessed a gradual divestment by major international oil companies, whose investments are worth billions of dollars.

Shell, ExxonMobil, Chevron and Total have ceded operations to other regions, despite Nigeria being Africa’s largest oil producer in the region.

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The Managing Director of the Nigerian National Petroleum Company Limited (NNPC), Chief Mele Kyari, had at the ongoing International Energy Summit (NIES 2022) said that oil majors were leaving Nigeria and moving their portfolios where they belong. could add value to their trip. towards a net zero carbon commitment.

Kyari noted that the big oil companies were leaving Nigeria not primarily because there were no opportunities in the country, but because of the push for fossil fuels over the past 10 years.

However, analysts say there are several other critical issues that have also contributed hugely to the divestment.

ICIR had reported that in November 2020, NNPC had paid $3.1 billion to five International Oil Companies (IOCs) for call-in obligations, but the oil company still owed the IOCs $1. .5 billion dollars.

Last year, NNPC owed Shell Petroleum Development Company (SPDC) an outstanding balance of $917 million, while Total E&P Nigeria Limited and Nigerian Agip Oil Company owed $252 million and $370 million respectively.

The lack of refineries forces the government to import PMS

The Nigerian government has been content with imports since state-owned refineries – the Port Harcourt, Kaduna and Warri refineries – became redundant.

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The country is known to have lost billions of dollars as a result of crude oil swap deals.

According to the Nigerian Extractive International Transparency Initiative (NEITI) 2021 reports, Nigeria lost 2.1 trillion naira due to postponement of crude oil production in one year.

NNPC uses direct sales and direct purchase agreements for its fuel imports. This method made it the sole importer of fuel, crowding out other importers who had complained about the inaccessibility of the dollar to start importing.

Borrow more N4trn to pay the PMS subsidy

For NNPC, anything above $70-80 a barrel of crude will create major distortions in its projections and add more hardship to the business,” as Kyari said at an oil summit in February. in Abuja.

He had argued that due to subsidy payments, the rising global oil price is creating problems for the Nigerian oil sector due to delayed reforms.

The NNPC helmsman fears that the country is spending N4trn to maintain subsidies and lamented that oil prices have started to move out of the comfort zone set by the NNPC and become a burden.

Industry analysts say a government that complained about low oil prices when it came to power in 2015 to now complain about rising oil prices is showing bad fiscal reforms in the sector.

“The current rise in the world price of oil is not reflected in government revenues. Now is the time to stock up for rainy days. In fact, the rainy day is here, but we are beaten by heavy rain,” said Adeola Adenikinju, professor of energy economics at the University of Ibadan. CIRI.

Nigerian Finance Minister Zainab Ahmed recently attempted to explain the paradox between rising oil prices and its negligible impact on the economy.

According to Ahmed, the rise in oil prices had little impact due to the corresponding increase in spending.

“The high oil price means we would be able to earn more revenue, but we also have the challenge of having to buy petroleum products to use in the country, as we don’t have functioning refineries. So it eats away at the revenue that we would otherwise have made,” the minister said.

Recently, CBN Governor Godwin Emefiele said that the federal government currently spends about 30% of its dollar revenue on importing petroleum products, which puts pressure on the local currency.

“By the time the Dangote Refinery starts operating, it would be a major source of foreign exchange savings for Nigeria. At present, the total foreign exchange we spend on imported items, import of petroleum products consumes almost 30%,” he said.

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