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Will Oil-nations allow Renewable Energy replace Oil?

It is evident that the world can no longer rely on Oil for the sake of the world’s health.

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OPEC Cut: Nigeria defies Quota, increases crude oil production, FG discloses impact of OPEC+ oil output cut, how to manage post subsidy era

Over the past decade, Renewable energy has been projected by some of its ardent supporters, such as environmentalists and climate change champions, to phase out Oil. Fossil fuels are seen to be the bane to climate change. Last year when Nigerian Senator, Ben Murray-Bruce proposed an Electric car bill at the Nigerian Senate, many Nigerians called his proposal a “misplaced priority.” That event underlines the problem the world faces with switching to renewable energy.

Is Oil dangerous? Perhaps. According to the Intergovernmental Panel on Climate Change (IPCC), fossil fuel emissions are the principal cause of global warming. A 2018 research shows that, “89% of global CO2 emissions come from fossil fuels and industrial activities. The research also shows Coal as the dirtiest of the fossil fuels and responsible for over 0.3C of the 1C increase in global average temperatures – making it the single largest source of global temperature rise.

“Oil releases a massive amount of carbon when burned – approximately a third of the world’s total carbon emissions. There have also been several oil spills in recent years that have a devastating impact on our ocean’s ecosystem.

“Natural gas is often seen as a cleaner energy source than Coal and Oil. However, it is still a fossil fuel and accounts for a fifth of the world’s total carbon emissions.”

READ ALSO: Reps to probe FG’s N3.4 billion failed solar power project

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With these revelations above, it is evident that the world can no longer rely on Oil for the sake of the world’s health. However, certain factors make this phasing out implausible. First, 95% of the fuel demands of the transportation sector are provided by Oil. Think of every means of transportation we have. Think of cars, trailers, trains, buses, marine vessels, and airplanes, that rely on petroleum fuels. The transition to renewable energy would take some systematic and systemic approach with the will of countries and mega-corporations.

And there lies the most prominent problem. Interests. The United States, which is the largest producer of Oil, has not shown enough desire to reduce the use of Oil. The President, Donald Trump, has once called “climate change” a hoax, which manifested in his viral exchanges with Greta Thunberg, the teenage girl who has championed the global movement for climate change. The American Government has always supported its energy industry and the oil economy. Lots of jobs will be lost if the energy industry suffers. The sole reason why Donald Trump reached out to Saudi Arabia and Russia to save the oil markets a few months ago was to protect the energy industry in America. Exxon, Chevron, and the other shale oil companies have invested billions into drilling and exploration, so how then will they support a cause that ruins their business profitability.

READ MORE: Brent crude surges 5.4%, global demand for energy climbs higher

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Talk of Saudi Arabia and Russia, both countries’ budgets depend heavily on Oil. Russia has one of the world’s largest natural gas reserves, would it not be counterproductive to support renewable energy? This scenario applies to OPEC’s other members, the world’s most influential cartel in the energy space. In a bullet commentary released last year, OPEC said, “There is a mistaken public perception that renewables are the only solution to the climate challenge and that the oil and gas industry is the only or main source of pollution. This is not the case and does not match the views of either scientists or experts.”

If there is any evidence of how the United States and OPEC+ cannot cope with a reduced demand for Oil would be the Coronavirus-era we are in. The series of diplomatic interventions, budget revisions, budget deficits, revenue losses, company bankruptcies, and an increase in unemployment because of the fall in oil prices make you wonder if renewable energy can make its transition.

READ ALSO: Nigeria plans to support oil price with lower production cost per barrel

However, it seems Europe and the United Kingdom are keen on climate change and renewable energy. In the United Kingdom, in a 2019 research, Renewable energy sources provided more electricity to UK homes and businesses than fossil fuels for the first time. The renewables record was set in the third quarter of 2019 after its share of the electricity mix rose to 40%. Other European nations have shown the political will to support renewable energy.

The world needs Oil and has, over the years, been oil-dependent.  Renewable energy would not phase out Oil like Thomas Edison’s light bulb phased out the candle industry unless the world superpowers allow it.

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Dapo-Thomas Opeoluwa is a Global Markets analyst and an Energy trader. He is currently an MSc. Student in International Business, Banking and Finance at the University of Dundee and holds a B.Sc in Economics from Redeemers University. As an Oil Analyst at Nairametrics, he focuses mostly on the energy sector, fundamentals for oil prices and analysis behind every market move. Opeoluwa is also experienced in the areas of politics, business consultancy, and the financial marketplace. You may contact him via his email- [email protected]

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Will the Oil markets miss Donald Trump?

As Donald Trump prepares to vacate office, what will be the fate of the oil market and the several arrangements the US has put in place with OPEC+?

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President Trump leaves Walter Reed Hospital

OPEC will miss Trump, its ‘companion’, and would be careful about strains under Biden.

Some OPEC members are worried that strains in the OPEC+ union could reappear with the administration of the newly elected US President, Joe Biden, as the outgoing President Donald Trump went from criticizing the ‘cartel’ to aiding and abetting, in order to achieve a record oil yield cut.

Biden could examine political relations with three members from OPEC – Saudi Arabia, Iran and Venezuela, just as with key non-OPEC member, Russia.

Severe US sanctions on Iran and Venezuela has kept large number of barrels of oil free, every day in the market, and if Biden loosens up measures on the sanctions in the nearest future, it will lead to increased supply in the market.

In some of his statements, Biden said he would lean towards multilateral discretion to the one-sided sanctions Trump has forced, even though that may not necessarily mean removing any sanctions any time soon. In his mission, Biden said he would revisit Iran’s 2015 atomic arrangement if the leaders keep their part of the bargain.

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Trump quit the agreement in 2018, reemploying sanctions that cut Iran’s oil trades. Some in OPEC dread that the arrival of Iranian volumes will add to oversupply, without reductions somewhere else and stress over Moscow’s proceeds, with investment in OPEC+.

“Iran sanctions can be re-evaluated and then Iran will be back to the market, so again there would be oversupply and the current cut deal will be at risk,” an OPEC source said before the result of the political decision was known.

There are also fears Russia would leave OPEC+, as their ally leaves the White House. “There is the danger of Russia leaving the OPEC+ bargains too, which implies a breakdown of the arrangement, as it was Trump who welcomed Moscow,” the source said.

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Diplomatic threat

Biden has named Russia as Washington’s most genuine worldwide danger. In his campaign, he additionally vowed to rethink relations with Saudi Arabia.

In contrast, Trump liaised with Saudi Arabia and Russia to end a fiasco that brought oil prices down. The outcome was a record global arrangement to cut oil to around 20 million bpd or around 20%. OPEC+ alone consented to cut 9.7 million bpd.

Trump connected more with the oil markets, regularly taking to Twitter to comment on supply and the American energy industry. Biden is viewed as bound to avoid meddling in OPEC matters as much as possible. He would depend more on advisers and not micromanage as Trump usually did.

“Biden would not have the comfortable relations with Putin that Trump seems to have,” said Chakib Khelil, a previous OPEC President.

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Critical Implications

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Trump built up a good relationship with top OPEC producer, Saudi Arabia’s ruler Mohammed Salman, who depends on the United States for weapons and security against territorial opponents.

Although, there were certain times Trump tried to bully OPEC+ into bringing prices down, as it was affecting gasoline prices in America; his continuous support for Shale oil also affected OPEC’s dominance in influencing and managing global oil supply. It is highly improbable that Joe Biden would make that type of interference.

Furthermore, it is highly unlikely that Iranian oil would get sanctions lifted quickly. Hence, this means OPEC+ individuals would have a sufficiently long time to change their arrangement to prepare for more Iranian oil.

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Effects of the recession on families and how to cope

For families, it will require a lot of sacrifice, adjustments and prudence in the management of resources to navigate the economic storm.

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The National Bureau of Economic Research defined a recession as a significant decline in economic activities spread across sectors, lasting more than a month, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale/retail sales.

According to the just-released data by the National Bureau of Statistics, Nigeria’s Gross Domestic Product (GDP) declined by -3.62% (year-on-year) in Q3 2020, thereby marking a full-blown recession and second consecutive contraction from -6.10% recorded in the previous quarter (Q2 2020).

READ: CBN gives up on its policy of attracting dollars

The year 2020 has been a trying time, not only for Nigerians but for the world generally; this is as a result of the novel coronavirus, which has impacted the economy negatively.

The Nigerian economy over the years has been striving to be stable because of the mismanagement of funds, high debt rate and unemployment, etc. However, the recent recession compounded Nigeria’s socio-economic challenges caused by the COVID-19 Pandemic and Post #Endsars Violence.

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READ: AutoGas: President Buhari to launch scheme on December 1

Furthermore, to curb the spread of the pandemic, a lockdown was imposed nationwide, during the period of March to August 2020 and a lot of families found it challenging to survive the impact of disruptions to daily commercial activities.

Some had to dip into their savings to remain stable during that period. Jobs were lost as some companies could not afford to pay salaries, while some companies had chosen salary reduction as a way of sustaining their businesses.

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Prices of goods and services also increased astronomically during this period. On the other hand, economic activities, religious and social gatherings were limited to contain the pandemic across the nation and the negative effects on the economy.

READ: VAT collection edges higher but indicates weaker economy

The following are the major causes of recession in any given economy as drawn from the past Nigeria economic recessions:

  • A general rise in price of goods and service which leads to low purchasing power.
  • Increase of debt, especially foreign debts.
  • High-interest rates discouraging investors
  • Importation bans in Nigeria which increased poverty rate in Nigeria.
  • Mass unemployment and general loss of confidence in the government due to the challenging economic indices.

READ: Explainer: What does GDP actually mean, and how does it affect you?

In a recession, families with little or no barriers to resist the effect of recession are most likely to be hit severely. Though there are some families who may not be able to avoid the effects of the recession, they can make changes that can improve their situations and help them prepare for the future, while they wait for an economic upswing,

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Nigeria’s Q3,2020 Recession, below are the implications on families and households

  • Rising food inflation of over 17% will impact the cost of food prices as the festive season beckons.
  • Purchasing power parity of Nigerian households is challenged due to the economic situation.
  • Marital issues crop up, as financial pressures can damage mental health which can lead to depression and frustration in marriages.
  • The low-interest yield environment in the Nigerian capital market also affects appetite for savings in the fixed income market.

READ: Emefiele tells economists to stop “overdramatizing” analysis that can create Panic

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The unfortunate condition could be managed by families with these measures:

  • Families are advised to cut down costs ruthlessly, especially in this festive period. Have a reasonable festive celebration.
  • They should have a budget/financial plan put in place for the year 2021 as no one knows how things will unfold.
  • There is a need to have another stream of income or work overtime to sustain your family during this period and this can be achieved if you are skillful.
  • It is also advisable to purchase all you need for the festive season now, as prices of goods and services might triple because of the festive period.
  • It is crucial for some families to switch to cheaper schools around with the same qualities and standards to reduce expenses.
  • FMCGs are already tailoring the sachet-economy to the lower-class families whose earnings have dropped this year.
  • Households experiencing financial difficulties during this period are advised to position themselves to see how they can benefit from the various interventions from the Government for citizens.
  • Couples should have conversations around their finances and prioritize expenses while adapting to the new economic realities and coping with necessary adjustments

READ: Nigerian economy going into recession, might contract by -8.9% – Finance Minister

What Government can do to enhance the economy

  • Tax rates should be reduced on individuals, corporation, and small businesses. This high tax rate is affecting many small-scale businesses. Foreign investors will also be encouraged by the reduction in tax rate. This will increase inflow of dollars to Nigeria’s economy, and ultimately increase investment and standard of living. It will solve the problem of high exchange rate.
  • It is important for the government to curtail any unnecessary expenditure and focus more on expanding her export earnings and production through wise investment. Putting funds into the economy is a good idea, but there is need for diversification, allowing the free flow of naira and stabilizing the oil sector, modernizing agricultural sector. By this, Nigeria can spend her way out of recession wisely.
  • Enhanced Access to Credit: Here, the Nigerian government, especially the federal and the state government, should grant soft loans to small and medium scale enterprises, to enable them boost gross domestic product (GDP) of the country. In the same vein, agricultural credit should be given to farmers to enhance adequate food production and reduce the bike of farm produce in the country (Nigeria).
  • Nigerian Government should increase its expenditure on skills. It is only skills that lead to productivity and competitiveness as a nation. So, government should invest in skills acquisition in ICT, Telecommunications, Agro-allied, Sports, Vocational training among others. The training should be 80% free practical. There is need for multiple competence, particularly among youths as a measure to curb increase in global joblessness. The greatest challenge today in Nigeria is unemployment. The government should partner with private organizations, to organize entrepreneurship and skills acquisition programs for the youths. There should be a high level of transparency in the program to ensure the best candidates are picked. This way, Nigeria will soon see herself on top of the fastest-growing economy in Africa.
  • Increased Agricultural Production: There is need to reposition agriculture as a major driver of the economy, like in the 1960s when it was the major revenue earner in the country. Today, Nigeria spends billions of US dollars a year on the importation of agricultural products. The youths, as earlier stated, should be encouraged to go into Agri-business covering the entire value chain.

READ: World Bank: Lower oil demand may persist till 2021

Conclusion

For families, this will be a challenging time, and it will require a lot of sacrifice, adjustments and prudence in the management of resources to navigate the economic storm.

Financial institutions should be encouraged to support the real sector playing the intermediation role.

In the Fiscal Policy space from the Finance Bill 2020 the government has taken some key steps in taxation and duties to reduce the burden on families and companies, but the process must be followed through effectively for implementation.

READ: Nigeria’s oil sector contracts by 13.89%, as covid-19 plunges economy into recession

The Government should demonstrate its seriousness in policy by cutting down costs from the Federal to State, and block all the leakages ensuring that funds are invested in infrastructure, healthcare, education and security.

Nigeria is a nation with resilient people. Families should remember that this is just challenging period to navigate what has been an unprecedented year in the nation’s socio-economic space.

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Recession; proactive measures not cyclical factors can resuscitate economy

The National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession.

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FG warns Nigerians about on-going N3million COVID-19 grant scam, IMF, World bank loans, Over 56% of 2019 budget expenditure was released for capital projects , FG changes decision to sell stake of oil assets in JVs, Finance Bill: Nigeria exempts small businesses from Company Income Tax , Finance Bill is for the good of Nigerians – Finance Minister, Zainab Ahmed, Nigeria, five other West African countries reject ‘Eco’ as ECOWAS single currency, FG rejects calls for tax reduction, tax relief for donors to intervention funds, Nigerian economy going into recession, might contract by -8.9% - Finance Minister, Nigeria to spend $33.20 billion in 2021 up 17.2%, will spend 25% of budget on debt servicing - Finance Ministry, COVID -19: FG accesses $750m loans from World Bank for states

Earlier this week, the Minister of Finance, Budget & National Planning, Zainab Ahmed attended the 26th Nigerian Economic Summit and in her presentation highlighted some of the steps and investments the government is making to bring the economy out of a recession. Some of the points she highlighted were; stimulating the economy by preventing business collapse through ensuring liquidity, retaining and create jobs through support to labour intensive sectors such as agriculture, undertake growth-enhancing and job-creating infrastructural investments in roads, rails, solar power and communications technologies, promoting manufacturing and local production across all levels as well as advocating the use of made in Nigeria goods & services. She also highlighted focus on pro-poor spending as a strategy to mitigate the impact of covid-19 on poor households.

We recall that during the weekend, the National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession. Following the 6.10% contraction recorded in Q2 2020, the economy further contracted though at a decelerating rate of 3.62% in Q3 2020. We reckon that prior to the covid-19 crisis, economic growth had began to slow with Q1 2020 GDP growth of 1.87% trailing prior 5-quarter average of 2.29% (excluding Q1 2020). The economy has largely survived on an oil-led recovery which we consider cyclical with other core sectors lagging and reeling from the fallout of the impacts of the 2016/17 recession.

In our view, the government needs to be proactive and strategic about policies it intends to adopt to resuscitate the economy. The focus on social welfare, fiat-led interventions in agriculture, emphasis on infrastructure development and advocacy for local manufacturing is reminiscent of prior strategies that can’t be really be considered successful. In our opinion, the economy is in dire need of influx of investments and adequate skill pool to spearhead resource allocation, which we believe can be provided by the private sector. Thus, the public sector should in our view invest in tackling structural issues around ease of business operations (borrowing costs, regulatory & licensing bureacracies/inconsistencies, public agency corruption & FX policies etc.) as well as strengthening regulatory & legal frameworks while the private sector drives the investments for accelerated growth in manufacturing, infrastructural development, agriculture and other core sectors.

In our view, supporting a free market-led economy (given the more organised nature of the private sector than the public sector) would see a return of foreign direct investments into the Nigerian economy while local entrepreneurs would be motivated to take more risks to develop businesses. The outlook for oil prices remain weak and production levels may remain below historical levels as OPEC attempts to keep price stable. Thus, the possibility of a cyclical recovery is limited, only proactive measures to correct long term structural issues would restore the economy on the path of accelerated inclusive growth.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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