MON, MARCH 09 2020-theG&BJournal- Global oil prices were in fresh turmoil after Saudi Arabia, the largest crude oil exporter, dramatically announced production increase and price decrease overnight despite reeling demand from coronavirus. The move is seen by energy experts as hugely detrimental to the Nigerian economy.
Saudi Arabia cut its forward crude price to China by as much as $7 per barrel and is reportedly looking to increase daily crude production by as much as 2 million barrels per day.
Nigeria’s oil price budget benchmark for 2020 budget was $57 per barrel. A sharp drop in revenue could cause significant dislocations in the 2020 budget and in the economy, especially for a country already grappling with challenges of weak revenue performance and a complete erosion of fiscal buffers.
‘’Oil revenue currently accounts for about 50% of government revenue and about 85% of foreign exchange earnings. With the current scenario of tumbling oil price, a drastic reduction in the revenue of government becomes inevitable in the near time,’’ The Lagos Chamber of Commerce and Industry (LCCI) said in a note to theG&BJournal Sunday.
The Lagos Chamber of Commerce and Industry (LCCI) sums up the potential impact on Nigeria’s economy: ‘’ There is also the revenue effect of the Coronavirus which is related to the drop in oil price. This has implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted. With this scenario, the outlook for oil dependent economies looks rather gloomy.’’
The slump could also significantly impact on Nigeria’s foreign reserves which currently is at all-time low of $36.2 billion as at 3rd March 2020.
‘’This outlook has the potential to weakening of investors’, generate speculative pressures on the currency, force likely depreciation of the naira exchange rate, heighten inflationary pressures on the back of currency weakening, increase production and operating costs for businesses and weakens purchasing power with adverse implications for the welfare of the citizens,’’ the LCCI noted.
Analysts speculate that the Saudi Arabia decision could be an attempt to draw Russia, a non OPEC member, back to the negotiating table after the country rejected OPEC’s proposal to cut oil production by 1.5 per day.
Coronavirus is already relentlessly pressuring crude oil prices down. Saudi Arabia bombshell, sent prices tumbling to the biggest one-day drop since 1991, the first day of the Persian Gulf war.
US oil prices have crashed by as much as 27% to a four-year low of $30 a barrel from average of $50 in 2020. Stock markets around the globe are profoundly squeezed. Asia Pacific stocks and US futures have tumbled on the back of the ensuing war which may see other OPEC producers such as Iraq, United Arab Emirates and Kuwait announcing steep cuts to their own oil prices by as early as April.
It is not certain what Nigeria’s government response is yet but close sources tells theG&BJournal that the Federal Government will cut back their infrastructure financing programme for the fiscal year by as much 45% if the price war persist.
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