Business

Slump in oil price threatens government’s economic forecast

Published

6 years ago

November 25, 2018

Track News

• Budget Implementation, Infrastructure Development To Feel The Pinch
• Drop In Subsidy Payment Likely

The downward slide of crude price may hamper current economic prospects in the country, particularly if the development refuses to abate, oil and gas analysts have said.The prices of oil had fallen on Friday with Brent oil inventory for January delivery, sliding 6.1 percent to $58.80 per barrel, while West Texas Intermediate (WTI) dropped $4.21 to $50.42 a barrel for January delivery, a decline of 7.7 percent.

With the development, implementation of Nigeria’s 2018 budget, benchmarked at $51 per barrel could suffer should the slump persist, former president of the Nigerian Association of Energy Economics (NAEE), Prof. Adeola Adenikinju told The Guardian.The current drop, reportedly fueled by high crude supplies, alliance between some producers, particularly Saudi Arabia and US and uncertain economic growth, which triggered massive selling is the lowest since last year.

The concerns for experts including the Chief Executive Officer, International Energy Services (IES) Ltd, Dr. Diran Fawibe and Partner/Head, Odujinrin & Adefulu’s Energy Practice, Real Estate and Mining Team, Dr. Adeoye Adefulu are that Nigeria’s economy, which is currently stabilising on boost in oil price could be adversely affected as crisis in foreign exchange, primarily sourced from the oil sector was projected to worsen.

Meanwhile, the current spending on import of Petroleum products into the country, which had skyrocketed due to the increase in oil sales would drop, the experts claimed.Indeed, unless the slump is temporary, Nigeria could face challenges in the areas of deficit financing, cash call payment, microeconomics performance, project financing and political uncertainties, the analysts noted.

While WTI lost 34 per cent of its value since oil price peaked on Oct. 3, Brent went down as much as 32 percent.While the Organisation of the Petroleum Exporting Countries (OPEC)’s meeting between the influential oil cartel and its allies in Vienna on Dec. 6 would determine whether the growing supply should be curtailed, Saudi Energy Minister, Khalid al Falih had said the kingdom’s output this month would surpass October’s production of 10.6 million barrels per day.

While the International Energy Agency recently projected that non-OPEC output alone would climb by 2.3 million bpd this year, U.S. crude production has reached 11.7 million bpd, according to preliminary weekly figures reported by Bloomberg.“If the fall continues for long it will affect the capacity of government to finance many development programmes. This also has implications for deficit financing and it has impacts on microeconomic performance. The terms of monitory policies, the level of reserves is connected to oil, that could be affected too,” Adenikinju said.

The Professor was equally worried about looming foreign exchange shortfall to support economic activities, stressing that government must look for ways to diversify the economy from oil, especially as other emerging countries are becoming a better destination for foreign direct investment. Fawibe noted that growing infrastructure projects particularly in the oil and gas sector could be affected, considering that government is currently involved in most projects in the sector.

He stated that oil producing companies could be forced to cut down their investment, especially if those projects are not economically viable or in line with current realities.“Whenever oil price goes down the oil companies have to go to the drawing board to see which project to finance. They will slow down on investment,” Fawibe said.

Fawibe insists that it was high time the government strategized against the high cost of running democracy and tweak policies affecting the growth of the oil.“Our version of democracy is expensive in terms of allocation of resources at the expense of what will benefit the society in the long run. When you look at it critically, so much financial resource is being diverted to finance governance,” he said.

Adefulu said the current payment on petroleum products under recovery by the federation would reduce as the price of oil drops, adding that the development could however affect the nation’s revenue.According to him, the development may linger considering that the reasons behind the fall were basically human factors, championed by the US and Saudi Arabia.