BSc Economics, UCL
Figure 1: Meme dated 21 April 2020, Twitter (Suvra, 2020)
While the outburst of hysterical memes on the internet targeting the exceptional phenomenon of negative oil prices elicited laughs worldwide, the storm of likes and reshares overshadowed the darkening reality of several countries. Many nations today are clutching onto thousands of barrels of oil, the very commodity that is threatening to plunge their economies into an abyss of failure. The reason is simple and mundane: a severe lack of diversification. And the prime example is Africa’s largest exporter of oil, Nigeria.
Crude oil, petroleum gas and refined petroleum are Nigeria’s top 3 exports, worth US$ 35.6B, 6.37B and 774M respectively (OEC, 2020). In combination, they comprise 90% of the country’s entire export revenue, but only 10% of the GDP (OPEC, 2020). Some might call this a saving grace in comparison to other oil dependent economies like Saudi Arabia, which owes 42% of its GDP to oil (Forbes, 2018). Nevertheless, only the recent, drastic fall in oil prices can explain the 1.3% fall in Nigeria’s GDP from Q4 2019 to Q1 2020 (Gbadeyanka, 2020). To make matters worse, 90% of its foreign exchange is derived from international oil sales (Adesina, 2020). Even though the country’s trade balance has been consistently positive, albeit relatively low, the slight dip into negatives in 2016 (deficit of 2.23B US$) indicates the possibility of turbulent times ahead.
Figure 2: Value of Nigeria’s trade balance in millions of Naira (2013-2019) (Nigeria Data Portal, 2020)
This is not surprising considering oil is volatile and unreliable. Furthermore, Nigeria levies a 0% tariff on non-oil exports (Alliance Experts, n.d.), making the government unable to rely safely on multiple revenue streams. This, in combination with plunging oil prices due to the COVID-19 pandemic is expected to make financing imports problematic in the short term. Nigeria’s reliance on imports, including machinery (for example, computers), vehicles and electrical equipment, to grow its manufacturing sector will only hinder its progress towards diversifying away from oil.
Figure 3: Oil prices in US$ per barrel (January 1990- May 2020) (Macrotrends, n.d.)
The drastic drop in oil prices, hitting rock bottom in April 2020, has stirred international apprehension and debate. This has been primarily driven by a substantial fall in demand of close to 25% since 2019. Subsequently, we have also seen trading volumes lowered to unprecedented levels. A rare occurrence of events, especially for an apparently precious commodity like oil that has been reigning over negotiations and economies for decades.
The first obvious reason, applicable universally, is a lockdown on 50% of the world’s population (Sandford, 2020), directly implying that jet fuel is one of the worst hit commodities. With extensive restrictions on non-essential travel, a majority of airlines currently remain grounded, with persistent uncertainty about a return to normalcy. Gasoline, of course, is another derivative suffering the consequences of strict stay-at-home orders. For Nigeria in particular, the domino effect has come into play as India, which is its largest importer of crude oil, has seen gasoline and diesel sales fall by almost 60% (Olisah, 2020).
A combination of factors raised hopes as Bonny Light, a high grade Nigerian crude oil, reached a 2-month high of US$27. This can be attributed to a few economies in Europe daring to ease restrictions and slowly open up, as well as production cuts by OPEC and USA. Nevertheless, health and safety will continue to be first priorities for the foreseeable future as many fear a resurgence of (Olisah, 2020) the virus, especially after the recent relapse in Wuhan. As a result, it is important not to see this slight upturn as a sign of returning to business as usual- at best, we will be barely limping to normalcy in the coming months.
The more concerning aspect of the whole situation is the stockpiling of oil even as demand remains weak. Despite a significantly lower workforce to maintain social distancing measures, inventories are filling up at an exponential rate due to a lack of buyers. With the industry already struggling to cope with an almost 80% drop in revenue (AFP, 2020), two factors are causing the major losses that are further anticipated. First, the fall in market price below the production cost of US$23 per barrel (Slav, 2019). Mele Kyari, recently appointed MD of Nigerian National Petroleum Corp., fears Nigeria will soon be out of business at this rate (Lehane, et al., 2020). This is further expected to damage FDI prospects that were previously focused on energy and hydrocarbons. Second, a severe lack of onshore storage means the oil has to go onto ships, and approximately 6 tankers are still floating off Gibraltar (Clowes, et al., 2020) without any interested buyers. To pre-empt the damages, several projects are being suspended, leading to an incoming wave of job losses.
Moreover, a newfound revelation to move faster towards renewable energy is promising to be a strong agenda post COVID. All of these factors point towards the urgent need to diversify the Nigerian economy. Despite being an oil rich nation, the economy is barely reaping its benefits with a 10% contribution to GDP, thus validating the term “resource curse”. While until now, efforts have been aimed at making the industry more efficient, it is now time to pivot altogether. Efforts to strengthen the manufacturing sector, which currently contributes an equal percentage to GDP as oil, could be held back by the country’s unfavourable ‘Ease of Doing Business’ rank (131 globally) (Nordea, 2020). Even though the low cost of labour is a potential merit, workers will need to be retrained as the country moves into the secondary sector, which could lead to structural unemployment in the short run. There is also an urgent need to address corruption and remove bureaucratic obstacles, all of which will require immense involvement from the government. Most importantly, finding a steady and reliable source of foreign exchange must be a priority. Above all, turbulent oil markets, especially considering Nigeria’s turmoil, must serve as an alarming indicator for other oil dependent economies to shift their priorities in the name of national interest.
Adesina, O., 2020. Naira under pressure as Nigeria records poor export earnings. [Online] Available at: https://nairametrics.com/2020/04/04/naira-under-pressure-as-nigeria-records-poor-export-earnings/ [Accessed May 2020].
AFP, 2020. Nigeria says oil revenues down 80 percent. [Online] Available at: https://energy.economictimes.indiatimes.com/news/oil-and-gas/nigeria-says-oil-revenues-down-80-percent/75566594 [Accessed 25 May 2020].
Alliance Experts, n.d. Export to Nigeria (and what does Nigeria import?). [Online] Available at: https://www.allianceexperts.com/en/knowledge/countries/africa/exports-to-nigeria/ [Accessed May 2020].
Clowes, W., Lehane, B. & Bala-Gbogbo, E., 2020. Nigeria Stares Into the Abyss of a Life Without Oil Cash. [Online] Available at: https://www.bloomberg.com/news/articles/2020-05-06/nigeria-stares-into-the-abyss-of-a-life-without-oil-revenue [Accessed 25 May 2020].
Forbes, 2018. Saudi Arabia. [Online] Available at: https://www.forbes.com/places/saudi-arabia/ [Accessed May 2020].
Gbadeyanka, M., 2020. Nigeria Records 1.87% GDP Growth in Q1 2020. [Online] Available at: https://businesspost.ng/economy/nigeria-records-1-87-gdp-growth-in-q1-2020/ [Accessed 26 May 2020].
Lehane, B., Longley, A. & Cheong, S., 2020. Nigeria’s Banner Oil Hits $12, Millions of Barrels Remain Unsold. [Online] Available at: https://www.bloomberg.com/news/articles/2020-04-17/nigeria-s-banner-oil-hits-12-millions-of-barrels-remain-unsold [Accessed 25 May 2020].
Macrotrends, n.d. Crude Oil Prices - 70 Year Historical Chart. [Online] Available at: https://www.macrotrends.net/1369/crude-oil-price-history-chart [Accessed May 2020].
Nigeria Data Portal, 2020. Nigeria Foreign Trade Summary. [Online] Available at: https://nigeria.opendataforafrica.org/hgpslwc/nigeria-foreign-trade-summary [Accessed May 2020].
Nordea, 2020. Country profile Nigeria. [Online] Available at: https://www.nordeatrade.com/en/explore-new-market/nigeria/investment [Accessed 25 May 2020].
OEC, 2020. Nigeria. [Online] Available at: https://oec.world/en/profile/country/nga/ [Accessed May 2020].
Olisah, C., 2020. Nigeria’s Bonny light rises to about $27/barrel, oil prices set for 3-week consecutive gain. [Online] Available at: https://nairametrics.com/2020/05/15/nigerias-bonny-light-rises-to-about-27-barrel-oil-prices-set-for-3-week-consecutive-gain/ [Accessed May 2020].
Olisah, C., 2020. Nigeria’s oil crisis compounded as India’s fuel demand crashes by 60%. [Online] Available at: https://nairametrics.com/2020/05/05/nigerias-oil-crisis-compounded-as-indias-fuel-demand-crash-by-60/ [Accessed May 2020].
OPEC, 2020. Nigeria facts and figures. [Online] Available at: https://www.opec.org/opec_web/en/about_us/167.htm [Accessed May 2020].
Sandford, A., 2020. Coronavirus: Half of humanity now on lockdown as 90 countries call for confinement. [Online] Available at: https://www.euronews.com/2020/04/02/coronavirus-in-europe-spain-s-death-toll-hits-10-000-after-record-950-new-deaths-in-24-hou [Accessed May 2020].
Slav, I., 2019. Nigeria Boasts Oil Production Cost of $23 Per Barrel. [Online] Available at: https://oilprice.com/Energy/Crude-Oil/Nigeria-Boasts-Oil-Production-Cost-of-23-Per-Barrel.html [Accessed 27 May 2020 ].
Suvra, S., 2020. 18 Funniest Memes After Crude Oil Prices Fell Below $0 Per Barrel. [Online] Available at: https://funniestindian.com/2020/04/21/18-funniest-memes-after-crude-oil-prices-fell-below-0-per-barrel/ [Accessed May 2020].