The Oil Windfall This Time

Postscript by Waziri Adio

Brent Crude closed at $112.19 per barrel on Friday. That is 57% higher than $71.27 (the price exactly a month earlier) and 73% higher than $64.85 (the benchmark price for Federal Government’s proposed 2026 budget). Ordinarily, this predictable fallout of the US-Israeli war on Iran should be music to Nigeria and Nigerians. But not necessarily so. The significance of government’s windfall is not guaranteed. However, the hike in petrol price has swiftly imposed a significant burden on Nigerian households and businesses that are still reeling from a sustained episode of high energy cost and punitive inflation.

The distribution of the potential and the real benefits and burdens of the sudden jump in oil prices deserves serious policy attention. A recent statement from the Ministry of Finance indicates that the Economic Management Team (EMT) is already on top of the issue. That is comforting in a way, though nothing concrete came out other than the managers of the economy are monitoring and reviewing things. It is possible that certain policy options are being considered and are to be unveiled at the appropriate time. A lot will depend on how long the war lasts, how high oil prices jump, and how deep the aftershock goes. Given the different channels through which Nigeria may be impacted and the fragility of recent macro-economic gains, a watching brief will not suffice.

High oil prices, which ultimately hurt everyone, used to produce a different kind of anxiety within Nigerian government. It would have meant higher subsidy bill, since we operated a naked-hedge subsidy scheme (fixed pump price irrespective of the landing or production costs of petrol). This is precisely what happened in 2022 when Nigeria splurged $10 billion of its scarce resources on petrol subsidy alone. When Russia invaded Ukraine on 24^th February 2022, oil prices leapt from less than $100 a barrel to a peak of $139 in a little over a week. But the pump price of petrol stayed the same in Nigeria. By the end of the year, the difference washed up in a record petrol subsidy bill. 

Another recent worry used to be petrol availability, which had been framed as government’s responsibility. We were importing 100% of the petrol consumed in Nigeria and the national oil company had become the sole importer at some point. Additionally, there used to be concerns about finding the foreign exchange for importation of the continuously expanding volume of locally-consumed petrol, some of which conceivably seeped into neighbouring countries. The take-off of the Dangote Refinery has taken care of the supply anxiety.  And majorly, the removal of petrol subsidy has translated to Nigerians grudgingly coming to terms with the fact the price of petrol, like the price of any other good, can rise and fall based on the dictates of the market. Tinubu’s signature reform has also removed soaring subsidy bill from government’s worry list.

But it is a direct transfer of burden from the government to the consumers. Petrol prices in Nigeria have jumped 35-40% in the last one month. The country has experienced one of the highest percentage increases across the world (though not the highest jump in absolute numbers). The effect of the increase in petrol prices has, predictably, gone beyond raising energy costs to driving up the costs of transportation and food. The recent gains in national productivity and price stability could suffer some setback. Also, the harsh effects of recent reforms (which are yet to fully dissipate) could actually worsen. There is a legitimate worry about the gap between macro gain and adjustment costs which are disproportionately borne by low-income earners. This is the more reason why the government’s response should be more proactive and concrete, especially as petrol prices continue a steady climb.

The increase in the price of crude oil should be a revenue boon to the Federation and should expand the capacity of the different tiers of government to provide reasonable succour to mitigate the impact of high energy costs on businesses and households, especially the most vulnerable. If crude oil price stays elevated, every barrel of oil belonging to the Federation would fetch a higher revenue than projected, about $25-50 extra per barrel. But the extent of the boon will be determined by the actual production figures and the Federation’s share of the total production.

In the 2026 proposed budget, the Federal Government projected to produce 1.84 million barrels of crude oil per day. This is more realistic than the 2.1 million barrels per day projected for 2025. However, oil production has started falling again, with average daily production for February 2026 reported by NUPRC at 1.48 million barrels, down from 1.63 million barrels in January. I don’t have the latest data about Federation’s share of total oil production. But it should be around 40% and some of it is likely to have been pledged in different forward sales and loans by NNPCL and the Federation.

The combination of low oil production, rise in oil theft and mounting petrol subsidy ensured that Nigeria was about the only oil-producing country which was not under sanctions that did not reap a windfall from the Russia-Ukraine War in 2022. IMF projected that oil producers earned extra $320 billion in 2022. Nigeria missed out of that and did not even gain from increased forex inflow because it was practically bartering its crude oil for imported petrol. Meanwhile, the country was hit with high prices of food and other final and intermediate goods. Luckily, however, Nigeria of 2026 is different from the Nigeria of 2022. Precisely because of Tinubu’s fiscal and monetary reforms, the country stands to benefit from increase in government revenue and foreign reserves if oil prices stay much higher than the budget benchmark. The windfall may not be humongous, but some additional revenue is expected this time, with added bonus for the foreign reserves.

Nigeria is not new to oil windfall. We have had different windfalls, right from the aftermath of the 1973 Arab Oil Embargo to the many episodes of soft oil booms between 2000 and 2014. Without fail, we always fail to maximise the boons and, in most instances, we turn them into burdens. Historically, the oil windfall that is not frittered away in Nigeria is pilfered. The 1991 Gulf Oil War Windfall is a major case in point: up till today, there are still question marks on the management of the $12.4 billion sequestered in certain accounts. Periods of high oil prices coincide with when we lose our heads, expand the size of government, pursue white elephants, and binge on imports. We not only fool ourselves into thinking that high oil prices would last forever but also compound the structural deficiencies of our economy.

In 2004, the President Olusegun Obansajo administration invented the Excess Crude Account (ECA), a rainy-day fund, to insulate the country against the known volatility of oil prices. As at 2008, the ECA had a balance of over $20 billion. The ECA was questioned, legitimately, on constitutional grounds. But its depletion owes more to the indiscipline and lack of foresight of the political elite. Oil booms are always followed by oil busts, and those that do not have enough to fall back on end up gnashing their teeth. That has been the case with Nigeria, after each boom time.

Now that we are back to the prospect of an oil windfall, the challenge is what to do differently. There will be a temptation to share the extra money to all tiers of government, as we have done with the extra revenue from petrol subsidy removal and Naira devaluation. This will not necessarily trickle down to the citizens or address the new burden imposed on consumers by high energy prices. Besides, sharing and spending the money may have inflationary impact. This will undermine the valiant efforts of both the monetary and fiscal authorities on price stability and additionally punishes the poor. The legislators may also be tempted to increase the oil benchmark price, and together with the executive they may even connive to raise the total budget. These should be resisted by all means.

The windfall this time around, no matter how small or big, should be managed more transparently and accountably. A portion of it should be deployed to providing relief to vulnerable households and businesses in a meaningful but sensible way. But the bulk of it should be put aside for the rainy day that will surely come or to provide insulation from the possibility of a global recession. Despite constitutional hurdles, political actors have found statutory and smart ways to save part of the money that comes to the Federation Account. This further illustrates that where there is a will, a way will emerge. Even the constitution can be amended once there is a political consensus to do so.

Solid Use of Catalytic Funding  

A major challenge of Nigeria’s mining sector is that it is not deemed bankable. This is despite the promise the sector holds and the fact that anything above the shovel-and-digger mode of resource extraction would be capital intensive. The government realised this gap as far back as the early 2000s when it made the first serious effort to reposition the solid mineral sector. This was why a special fund, the Solid Minerals Development Fund (SMDF), was created in Section 34 of the Nigerian Minerals and Mining Act of 2007, one of the signature laws of the Obasanjo era.

But for some curious reasons, the fund did not fully take off until 2017 when its board was inaugurated and a management team was appointed by the President Muhammadu Buhari administration. Led by Hajia Fatima Shinkafi, the management of SMDF has been working silently but strenuously to make solid mineral sector more investable. The fund has favoured strategic partnerships, flexible financing, technical support and catalytic funding to advance its mission. Some of the efforts are beginning to yield tangible fruits, though many may not notice.

Two key developments are worth highlighting. The Central Bank of Nigeria recently announced that it has increased its gold reserves to $3.5 billion. This is mainly from gold bars sourced and processed locally through one of the initiatives of SMDF. Launched in 2019, the Presidential Artisanal Gold Mining Initiative (PAGMI) is a smart policy intervention that seeks to integrate artisanal miners into the national economy and prioritise processing, which is where the real value in mining is.

The second key development is also about beneficiation—the fancy name for processing. But it is value-addition with a twist. This is the partnership between SMDF and the Africa Finance Corporation (AFC) to establish a $1.3 billion alumina refinery in Nigeria. There are many bright things here: the involvement of AFC, a multilateral investor; the estimated contributions of the project ($8 billion in forex inflows and over $25 billion to Nigeria’s economy across the project’s lifecycle); and the genius idea that nothing stops you from adding value to natural resource sourced from outside your shores.

My sense is that our public officials and the larger public still do not fully understand that the solid minerals sector is different from the oil and gas sector. The structure and the economics of the two sectors are different, even though both are from the same extractive parent. To derive maximum value from solid minerals, the state has to concentrate on setting policy direction while also serving as a facilitator and catalyst. The clarity as well as the inventiveness of SMDF’s approach is thus a cause for cheer.