Nigeria’s dependence on mono-economy, oil and gas, contributes over 90% of foreign earnings and over 80% of government revenue. This invariably means that any changes to the demand for these products will directly impact on the economy. A negative change that portends danger is real and looming as alternative energy sources are being explored. The competition against Nigeria’s oil and gas has become stiffer in the recent past with the exploration of the mineral resources in countries that used to depend on crude oil import from Nigeria.
The move by the United States (US) to commence full exploitation of its crude oil reserves was for the first time threatening crude supply from Nigeria. The International Energy Agency has said that the United States could become the world’s biggest oil producer by around 2020.
The US was Nigeria’s highest buyer of the essential product, but had to reduce its import from Nigeria due to its shale gas discovery. Nigeria is now struggling to get buyers for its petroleum product, following sharp drop in interest in the country’s crude oil by refinery operators in Europe. European refiners are facing pressures on their margins and seeking lower-priced inputs. This will inadvertently affect Nigeria.
Apart from the US, there has also been sharp decline in sales of Nigeria’s crude oil, attributable to lack of demand due to increasing shale oil output from other countries like China, India, and the United Kingdom. The country’s main export grades, Qua Iboe, Bonny Light and Brass River were all priced at lower margins at the first trading period in the New Year and a lot of the cargoes were unsold.
Already, the country has been scheduled to export about 1.95 million barrels per day (bpd) in April compared with the 2.00 million bpd it exported in March. As the US begins to produce more oil from shale formations, its demand for foreign supplies continues to plunge, hence, imports of Nigerian crude has fallen to the lowest in 27 years.
Already, the Organisation of Petroleum Exporting Countries (OPEC) had acknowledged that rising domestic oil production in the US would gradually diminish Nigeria and other member countries’ export to America.
OPEC, in its yearly world oil outlook released recently, believes this would result in a sharp cut in purchases from African and Middle-Eastern oil producers –most of them OPEC members.
The US purchases of Nigeria’s crude oil fell to a five-year low in the last few months, pushing Nigeria, a major OPEC member, to sixth position from fifth among suppliers to the world’s largest oil consumer. Nigeria exported an average of one million barrels daily to the US, making it Americas’ sixth largest supplier after, Canada, Saudi Arabia, Mexico, Venezuela and Russia.
Also, the government of India said it was working on an ambitious plan to cut the country’s oil imports by half in the next seven years, a move that could reduce the country’s crude oil import from Nigeria.
Competitive Pressure from African Neighbours
Asian buyers have a far greater choice of oil producers in Africa than a few years ago, especially African neighbour Angola, which often provides China with more oil than Nigeria.
Angola is now Africa’s third largest oil producer behind Nigeria and Libya and, in January 2007, became the 12th member of OPEC. According to the 2012 British Petrochemical (BP) Global Statistics Energy Survey, Angola has oil reserves of 13.5 billion barrels equivalent to 21.1 years of current production and 0.81% of the world’s thousand barrels of crude oil per day. The country is already exporting more than 90% of its crude oil to China and the US, which were Nigeria’s major crude oil importers.
What May Be Expected
It would be recalled that oil price crashed in 2008 to $40 per barrel. This exposed most glaringly the fragility of the Nigerian economy. The first casualty was the banking industry. It revealed how highly dependent the financial sector was on the oil and gas sector. The sector would have completely collapsed if the regulatory authorities neglected it during the crisis. It was the near collapse of the banking industry that brought down the stock exchange, and till date it is still finding its feet. Therefore, if 2008 oil price crash had such an effect, this fast approaching crash is expected to be much more devastating. Unfortunately, the expected effect goes even far deeper than this.
State governors are already accustomed to gathering once in a month to receive their monthly allocation from the federation account. Internally generated revenue remains absolutely insignificant compare to the handout from the federation account. Total internally generated revenue of all the combined 36 states with FCT is about 60% of the ₦731.13 billion shared from the federation account in April 2013. Many states internally generate less than 10% of their monthly expenditure; some are even as low as less than 1%, except Lagos, which generates about 70% and curiously enough, Sokoto generates close to 50% of its expenditure. If Nigeria’s economy is not diversified, what will happen to the federating states in the face of depletion of federal account?
What Nigeria Did Wrong
Nigeria is one of the nations endowed with abundant human and natural resources. Despite these endowments, the country is still wallowing in abject poverty and socio-economic backwardness due to her inability to harness her resources to foster agricultural development. The nonchalant attitude of the Nigerians towards agriculture has ushered in food insecurity, malnutrition and mono-economy, occasioned by sole commitment to the oil industry. Agriculture has been instrumental to the development of many nations –such as America, Great Britain, China and Russia. The sector has provided food security, employment, raw materials, industrialisation and diversified economy for the survival of many of these nations.
Prior to the 1970s, agricultural exports were Nigeria’s main sources of foreign exchange. During this period, Nigeria was a major exporter of cocoa, cotton, palm oil, palm kernel, groundnuts and rubber; and in the 1950s and 1960s, 3%-4% annual output growth rates for agricultural and food crops were achieved. Government revenues also depended heavily on taxes on those exports. Thus, during the period, the current account and fiscal balances depended on the agricultural sector. However, between 1970 and 1974, agricultural exports as a percentage of total exports declined from about 43% to slightly over 7%. The consequence of the phenomenon described above was that, owing to the reduced competitiveness of agriculture, Nigeria began to import some of the agricultural products it formerly exported and other food crops it had been self-sufficient in.
Nigeria needs to heed this timely warning that the food insecurity, malnutrition, unemployment, importation of foods, mono-economy and high economic dependence on foreign countries will persist unless it retraces its steps back to the way things were in the 60s. Then, great attention to agriculture led Nigeria to regional agricultural comparative advantage when you take other African countries into consideration. Nigeria had pyramids of groundnut in the North, palm oil in the East and Cocoa in the West and they accounted for over 90% of the then gross domestic product (GDP).
Available data confirmed that Nigeria is endowed with more than 33 commercially viable solid minerals begging to be harnessed. In spite of this, the sector contributes less than 1% to Nigeria’s GDP, as against its earlier 10% contribution prior to crude oil exploration. The government should put policies in place to unlock and attract huge investment in this sector.