Dizeani Allison Madueke
By Obinna Chima
Analysts at the Financial Derivatives Company Limited (FDC) have reiterated the need to diversify the Nigerian economy, saying that the current structure makes the country highly vulnerable to either oil price or production shocks.
Presently, crude oil is responsible for 75 per cent of fiscal and 95 per cent of export revenue in Nigeria.
FDC stated this in its bi-monthly economic and business update, dated February 15, 2013, a copy of which was made available to THISDAY at the weekend.
The financial advisory firm maintained that given the changing global energy dynamics, the current trend of high oil prices might not be sustainable in the long run.
FDC further noted that the major challenge to oil price sustainability was the growing production of shale oil and gas through fracking.
It also referred to a report by PricewaterhouseCoopers (PwC), which stated that fracking, if deployed to other parts of the world could depress global oil prices.
FDC warned: “The shale oil revolution taking place in the US poses grave implications for Nigeria’s trade pattern. The excess crude that will result from the halt in consumption by the US will have to find their way to other markets probably the China and India. The intense competition that will take place is going to have a downside effect on global oil prices which will be disruptive for the heavily oil dependent Nigerian economy.
“The ripple effect will trickle down from a decline in oil receipts to a decline in government revenue, depletion of external reserves, pressure on the naira and overall macro economy. Nigeria has a subsidy plan that lowers the price of fuel for its citizens. The pressure will be intense to maintain this and also keep the government afloat.”
Similarly, the report cited a comment by the Head of Commodities Research at City Group to have said predicted that before mid-2014, the United States and Canada would stop importing crude from Nigeria and other West African countries.
“It is no longer news that the US will be self-sufficient in its oil consumption in the not too distant future. However the latest report that predicts the most powerful country will completely halt oil importation of West African sweet crude by 2014,” it added.
However, a review of the US imports of crude oil and petroleum products from Nigeria according to the Energy Information Administration (EIA) showed that the US imports from Nigeria had been on the downward trend since January 2011.
US oil imports from Nigeria also declined by 46.8 per cent to 543,000bpd in October 2012 from 1.02mbpd in January 2011. In addition, a further study of US import of Nigeria’s crude reveals that the decline in the US’ import of Nigeria’s crude is insignificant to Nigeria oil revenue.
According to FDC: “The major challenge given the above would not be the reduction or halt in US’ import of Nigeria’s crude but rather how to deal with factors such as theft, production slowdown, and difficulties in shipping to Asian countries compared with shipping to the US among other challenges.
“The direct relationship between production and revenue calls for an effective production process to boost growth in oil output. Also, Nigeria has four refineries with a combined installed capacity of 445,000bpd which are in a dilapidating state.
“An early passage of the Petroleum Industry Bill (PIB) will improve the oil industry activities and growth. Oil exports remain the major source of fiscal and export revenues in Nigeria.”