Rising crude oil prices at the international prices could cause Nigeria’s incremental payment of fuel subsidy and other economic ills which may have been avoided if the country’s economy is in good shape, Daily Independent can report.
Analysts said the recent devaluation of the nation’s currency by the Federal Government has already soared the country’s subsidy payment which the government was uncomfortable about on account of the fact that only few aristocrats benefit from the subsidy regime at the expense of the multitudes in the country.
Besides, analysts are of the opinion that the rising crude oil regime may pose a serious health risk to Nigeria’s economy given the fact that there is increased global switch for energy transition.
Nigeria’s sales from crude oil has been on the downward swing lately
Daily Independent reports that the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, had recently warned that rather than being a positive development, the rising prices of crude oil in the international market could cause major challenges for resource-dependent nations like Nigeria.
Kyari, at the virtual Citizens Energy Congress, described the rising price of crude oil as a “chicken and egg” situation, adding that oil prices had started exiting the comfort zone set by the NNPC, and becoming a burden.
Kyari was quoted to have put the comfort zone globally at $58-$60, saying that for the NNPC, anything above $70-$80 will create major distortions in the projections of the corporation and add more problems to the company.
Kyari expressed the concern that as the commodity prices rise, buyers of Nigeria’s crude may be compelled to accelerate their investment in renewable sources of energy, thereby leaving the industry in a quagmire.
He said: “In a resource-dependent nation like Nigeria when it gets too high, it creates a big problem because your consumers shut down their demand. Demand will go down and obviously even as the prices go up, you will have less volume to sell.
“So, it’s a chicken and egg story and that’s why in the industry when people make estimates for the future, they always make it about $50 to $60. Nobody puts it beyond $60.
“But for us as a country, as prices go up, the burden of providing cheap fuel also increases and that’s a challenge for us, but on a net basis, you know, the high prices, as long as it doesn’t exceed $70 to $80, it’s okay for us.”
A report by Financial Derivatives Company, obtained by Daily Independent, said Nigeria’s daily subsidy on petrol is set to hit N7.1 billion on account of the country’s devaluation of the naira from N379/$ to N411/$.
Mr. Bismarck Rewane, the Managing Director of the company, disclosed in the report that the landing cost of petrol has increased by 61.6 per cent to N231.98 per litre from an average of N143.6 per litre in December last year.
According to him, following the rise in local consumption of petrol from 57.8 million (last year) to 93 million litres (about 60.9 per cent) subsidy payments could rise to N7.1 billion daily from N5.5 billion in June.
This, he said, was hugely due to the rally in global oil prices, at $76 per barrel and currency adjustment of between N410 and N411 at the Investors and Exporters Forex Window (IEFX) from previous N379/$, leading to an increase in landing costs for imported refined products.
He added: “Based on this new template, the expected price of Premium Motor Spirit (PMS) will increase to N254.90/litre from N239/litre estimated in April. Meanwhile, the NNPC has said that the price of petrol will remain at N162-N165/litre in July”.
He said that the daily consumption of petrol previously stood at an average of 57.8 million in the first quarter of 2020 with N5.5 billion daily subsidy payments in June.
He warned that new subsidy regime target will also be worsened by the impact of smuggling as an increase in subsidy payments diverts funds from critical capital projects.
“This will lead to a further increase in petrol prices. Furthermore, higher energy costs coupled with rising food prices will continue to erode consumer disposable income,” Rewane stated.
He stated that the oil and gas industry in Nigeria last week received some respite as the National Assembly broke a 14-year jinx to pass the Petroleum Industry Bill (PIB), a bold move that is expected to help recoup revenue losses, stop subsidy payments and encourage investments in the down- stream petroleum sector.
Rewane observed that Brent crude is trading at its highest level in over a year at $75 per barrel as global demand continues to pick up in the United States (U.S.) and Asia.
He said Nigeria’s oil output fell by 2.82 per cent to 1.38mbpd in May from 1.46mbpd recorded in April despite the ease in the Organisation of Petroleum Exporting Countries (OPEC) output cuts.
He said: ”The fall in the local crude production can be attributed to disruptions from pipeline vandalism and force majeure imposed by the international oil companies. But the good news is that OPEC and its allies are looking to further in- crease supply as from August.
“This implies a further increase in Nigeria’s production quota from 1.58mbpd in the near term. A rise in production coupled with higher oil prices would boost government revenue and increase the states’ ability to meet its obligations. It could also lead to an increase in the Federal Accounts Allocation Committee (FAAC) allocations that fell by 1.8 per cent to N605.96 billion in June.”
Former Director-General of Lagos Chamber of Commerce and Industry, Muda Yusuf, told Daily Independent that the rising crude oil price is a double edged sword.
He said: “It is good news for government revenue, foreign exchange earnings and liquidity in the forex market. It is also good news for investors in the upstream oil and gas sector”.
According to him, it is bad news for domestic energy costs especially cost of diesel, aviation fuel and kerosene, all of which have been fully deregulated.
He said due to the heavy reliance of industries on these energy sources, the impact on production and operating costs will be very profound.
He said logistics costs will be similarly impacted as most trucks are powered by diesel engines, adding that it is also bad news for the fuel subsidy burden on the finances of government.
He added: “One of our greatest strengths as an economy is our gas reserves. It is one of the largest in the world. I believe we should pay more attention to the development of our gas resources. We should infact be a gas producing nation, rather than oil producing. The success story of NLNG illustrates the huge potentials in the gas sector”
Engineer Martin Onovo, one-time presidential aspirant, said rising crude oil prices is good news for Nigeria’s economy because over ninety percent (90%) of the nation’s foreign exchange is generated from crude oil export revenue.
He added: “But with a corrupt, incompetent and wasteful regime like the Buhari regime, the benefits may not be realized. With the current crude oil price of over $70/bbl, national revenue will increase correspondingly. But no amount of revenue is sufficient for an incompetent, corrupt and prodigal presidency”
SOURCE: independent.ng