Nairametrics| Nigeria’s plan for economic resurgence, which was contained in the Economic Recovery and Growth Plan (ERGP), has one primary cause for concern. As much as the plan lays emphasis on diversifying the economy and broadening foreign exchange and revenue sources, it heavily depends on oil prices to take off. Nigeria needs funds from oil in order to stimulate the economy, and initiate the planned reforms.
If oil prices are low, and efforts to get production back up do not yield fruit, the economy will remain in a rut, causing economic growth projections to remain what they are at this point – wishes.
According to leading investment bank, Goldman Sachs, between 2017 and 2019, there will be a hefty increase in global oil production due to large-scale investments made in 2011-2013. Goldman expects the possible addition of one million barrels of crude to global daily output over the period. This casts major doubts on OPEC’s ability to control price to the benefit of producers like Nigeria.
American oil companies have been adding to their shale oil rig count, and this according to U.S. data, has increased the country’s weekly oil production to about 9.1 million BPD for the week ended March 10 from an average 8.9 million BPD for 2016. This led to a fall in oil prices on Wednesday to their lowest since late November, with Brent testing the $50 per barrel figure.
This is worrisome for OPEC countries for 3 reasons.
- The Energy Information Administration (EIA) said U.S. inventories climbed almost 5 million barrels to 533.1 million last week, far outpacing forecasts of a 2.8 million-barrel build OPEC had in mind.
- In November 2016, OPEC had agreed to cut output when prices were this low, so with the recent increased output by the US and low prices, there is serious concern about OPEC’s ability to maintain the November agreement to cut output.
- If America is determined to flood the market with a lot of shale oil, then there is going to be competition for market share, which means countries will be seeking to increase output.
With the current state of affairs in Nigeria – reduced production – due to sabotage and lack of new investment in the oil sector, Nigeria may not be able to compete for market share when the time comes. Nigeria will, as a result, make a lot less money from oil than it is making now, which has implications for the funding the nation’s budget, FAAC allocation and repaying debt. There is also the added pressure that it means fewer dollars for the Federal Government, which has dire consequences for the foreign exchange reserves, and dollar liquidity in the market.
In its economic plan, Nigeria seeks to reduce its ownership of JV oil assets in order to allow for greater private sector investment and participation. But key concerns remain over the timing of the execution of this plan. Will the country also be able to get production back up to normal levels by eradicating Niger Delta militancy totally?
Oil price and output are key elements of the government’s fiscal stimulus plan, along with external borrowing. The government is in dire need of the fresh inflows from these sources to enable it implement its social spending plans, which will put money in the hands of citizens to spend more within the economy. Without this stimulus, the economy will have a harder time lifting off the ground.