By Ejeviome Eloho Otobo
|Oil prices have witnessed a major boost as a result of the agreement reached, by OPEC ministers at their 30 November 2016 meeting, to reduce OPEC production by 1.2million barrels per day with the aim of bringing OPEC daily production to 32.5 million barrels per day. This agreement which is set to take effect on 1st of January, initially for six months, with an option for extension till December 2017, has been reinforced by the decision of five non-OPEC countries (Azerbaijan, Kazakhstan, Mexico, Oman and Russia) to cut their production by about 600,000 barrels per day. Consequently, the price of Brent crude — the international oil price benchmark – has jumped to over $55 per barrel, well above the average $46.89 per barrel that had prevailed throughout November.|
Low oil price was one of many difficulties that has constrained oil production in Nigeria. The other constraints included security, especially militancy in the Niger Delta; falling capital expenditure on oil production by the joint venture partners in Nigeria; the regulatory uncertainty posed by the long-delayed Petroleum Industry Bill which might increase royalty rate; and deferred projects by some of Nigeria’s joint venture partners due to falling oil prices, for example in Bonga South west (Shell), Nsiko (Chevron) and Bosi (Exxon Mobil).
However, the NNPC has intensified efforts to prospect for oil in the entire Nigerian Frontier Sedimentary Basins, including the Anambra, Bida, Gongola/Yola, Sokoto and Lower Benue Basins. At the same time, there are new oil discoveries in the Owowo-3 off-shore field; Lagos State (Aje field) and promising prospects in the Chad basin terrain in Nigeria. Yet there are many factors working in favour of potential long-term decline in oil prices. Most notably the Paris Agreement on climate change, with its emphasis on reducing the use of fossil fuels; the production of electric vehicles which aims to comply with new corporate average fuel economy(Café) standards and the growing adoption of diverse sources of renewable energy for electricity generation in many industrialised countries. These call to mind the famous remarks by Sheik Ahmed Zaki Yamani, during his tenure as the Oil Minister of the Kingdom of Saudi Arabia, in the 1970s, that “The Stone Age did not end for lack of stone and Oil Age will end long before the world runs out of oil”. This implies that advances in science and technology could make the use of oil less relevant with time.
Given this very mixed picture about oil outlook, can Nigeria still count on oil as an engine of economic growth? To appreciate the importance of oil in the Nigerian economy, it is useful to note that the share of oil in the Nigerian economy has fallen from 40 percent of GDP in 2004 to 15 percent in 2014 and to 8.19 percent in the third quarter of 2016. Nonetheless, oil’s share as source of government revenue and foreign exchange remains significant, at approximately 70 percent and 90 percent respectively, according to many estimates. The latter is the more important – oil remains Nigeria’s “passport” to the world market. In spite of all the rhetorics of commitment to diversification, there is no immediate substitute for oil as the major source of export income or foreign exchange. Attracting foreign portfolio or direct investment may rank high in the government’s policy mix, but policy makers should realise that even that source is unlikely to match the foreign exchange earning power of oil any time soon.
Nigerian policy makers must reflect on the implications of the evolving global long-term trends concerning oil. It is fortuitous that such reflection occurs while President Buhari is in power. No Nigerian leader has been more closely associated with, and perhaps more knowledgeable about, the oil sector than President Buhari. He served as Minister of Petroleum under Obasanjo’s military regime; Chairman of the Petroleum Trust Fund under General Abacha; and now doubles as the Minister of Petroleum since he was sworn into office on 29 May 2015. This article is offered as a contribution to that effort at national reflection and builds on, and extends the frontiers, of policy initiatives as outlined, in the ‘7 Big Wins’ launched in October 2016 which seeks to grow the oil and gas industry during the period 2015-2019.
The overarching consideration in that reflection is to ensure that public policies encompass three specific policy measures. First, the financial resources earned from the new discoveries should be devoted to achieve three strategic objectives: help diversify the economy; strengthen the fiscal foundation of the government; and make the people enjoy the benefits of oil. The earnings from the new discoveries — or earnings beyond a certain price threshold should — be divided into three equal parts and used as follows: allocate a third to the national budget; allocate another third to the sovereignty wealth fund to save for future generation; and allocate the remaining third for a Technology Innovation Fund to build the country’s science and technological capacity.
Second, up till now, oil has been the major source of revenue for, and of energy, in Nigeria. Long term decline in the price and use of oil poses an existential economic challenge to Nigeria. Its strategic response must be vigorous and twofold: It must develop a credible energy policy with relevant institutional framework around such policy.
This will require the consolidation of the existing government’s operational and regulatory institutions under one ministry, preferably the ministry of petroleum. And it must include economic diversification that reduces the country’s dependence on oil as a major source of export income and government revenue.
Third, it is ironic that despite the huge earnings from oil over the years, most Nigerian citizens have neither access to pipe-borne water nor regular electricity supply. The ability of all tiers of government to increase citizens’ access to pipe-borne water and public health care and of the federal government to increase electricity supply will be important tests of their commitment to inclusive growth.
Oil has been a major fact of life in the 40 years of Nigeria’s oil-dominated political economy (1974-2014). Even if Nigeria finds more oil and the price of oil hopefully strengthens, the government must begin to act as if, the country has transited into the post oil economy phase. A pragmatic and far–sighted approach demands that we use the oil resources to prepare for the day when oil might not be in high demand or have the current earning power. While Nigeria may still rely on oil as revenue earner in the short-to-medium term, the current federal government must chart a new post-oil course for the country and assure Nigerians a better future.
- Ambassador Otobo an International Diplomat and Harvard Economist, was a Director of UN Peacebuilding Support Office at UN Headquarters, New York and is currently Non-Resident Senior Expert in Peacebuilding and Global Economic Policy and a member of the Board of The New Diplomat.