Oil price fall: How the mighty are crawl­ing

Daily Trust - - BUSINESS - By Daniel Adugbo

Many crude oil ex­port­ing na­tions have been pres­sured to in­tro­duce aus­tere eco­nomic mea­sures as they con­tinue to wit­ness sig­nif­i­cant rev­enue short­falls due to the dwin­dling price of oil.

Oil prices had been fairly sta­ble un­til mid-2014 when prices started fall­ing from around $114 a bar­rel to below $50 in 2015, dip­ping fur­ther below $35 a bar­rel. IMF pre­dicts it could crash to $20/bar­rel in 2016.

The im­pli­ca­tions of this on Nige­ria, africa’s big­gest econ­omy and crude ex­porter, has been im­mense as cap­tured by the Man­ag­ing Di­rec­tor of the In­ter­na­tional Mon­e­tary Fund (IMF), Chris­tine La­garde in an in­ter­view af­ter her visit to Nige­ria. She said, “Clearly what has hap­pened is that the rev­enue of the Nige­rian govern­ment has been sig­nif­i­cantly af­fected by the de­cline of oil prices.The fall of oil prices have re­duced, not only just the rev­enue, but it has re­duced the en­try of for­eign cur­rency in the coun­try.”

This re­al­ity has forced the fed­eral govern­ment to lower its oil rev­enue pro­jec­tion to N820 bil­lion from oil ex­ports in 2016 based on a bench­mark price of $38/bar­rel from a pro­jected oil earn­ings of N3.9 tril­lion pred­i­cated on a price as­sump­tion of $53/b in 2015.

Lower oil price meant 2015 pro­jec­tions was not re­alised and an­a­lysts are pes­simistic about oil rev­enues for 2016 as oil prices plum­met below $35/ bar­rel while the coun­try’s pro­duc­tion is fore­cast to suf­fer from theft and the lack of fresh in­vest­ment.

The govern­ment has put Nige­ri­ans on no­tice that its eco­nomic mea­sures could lead to more aus­tere con­di­tions in 2016. The Min­is­ter of Na­tional Plan­ning and Bud­get, Mr. Udoma Udo Udoma, said af­ter a coun­cil meet­ing that, “It is go­ing to be tighter for ev­ery­body.We are be­gin­ning a jour­ney of change and change has to start with the clar­ity of pur­pose of where we are go­ing.”

Nige­ria is not the only coun­try feel­ing the heat. Many oil pro­duc­ing coun­tries are un­der great pres­sure be­cause crude oil is their ma­jor rev­enue source.

Col­laps­ing oil prices meant lower govern­ment rev­enue for mem­ber coun­tries of the Or­ga­ni­za­tion of Pe­tro­leum Ex­port­ing Coun­tries (OPEC) in­clud­ing big­gest pro­duc­ers like Saudi Ara­bia, United Arab Emi­rate and kuwait as oil ac­counts for ma­jor­ity of th­ese coun­try’s ex­ports.

The world’s top crude ex­porter Saudi Ara­bia, re­cently re­leased its 2016 bud­get, with a mas­sive eco­nomic pol­icy shake-up as a re­sponse to the ef­fects of low oil prices.

The coun­try an­nounced plans to shrink its bud­get deficit with spend­ing cuts, re­form fuel sub­si­dies and a drive to raise rev­enues from taxes and pri­va­ti­za­tion.

It would re­view govern­ment projects to make them more ef­fi­cient and en­sure they were nec­es­sary and af­ford­able. The coun­try’s rev­enues pro­jec­tions for 2016 was low­ered down from that of 2015.

Re­ports about its bud­get state­ment said the govern­ment had also raised do­mes­tic fuel, wa­ter and elec­tric­ity prices, though prices re­mained very low by global stan­dards.

The coun­try has also out­lined other re­forms in­clud­ing “pri­va­tiz­ing a range of sec­tors and eco­nomic ac­tiv­i­ties” and plans to in­tro­duce a val­ueadded tax, ac­cord­ing to re­ports.

Saudi Ara­bia needs oil at $106 a bar­rel to bal­ance its bud­get. Other wealthy pro­duc­ers like Kuwait and Qatar are in even bet­ter fi­nan­cial shape. Ac­cord­ing to a re­cent IMF fore­casts, the bal­ance of as­sets to debt in th­ese coun­tries will barely be harmed in the next five years. Kuwait needs a bar­rel at $49 while Qatar needs $56 a bar­rel in or­der to break even.

Un­like th­ese rich coun­tries which could still do with oil at the cur­rent price, IMF in its World Eco­nomic Out­look Data­base for Oc­to­ber 2015 showed that poorer pro­duc­ers like Venezuela, An­gola, Nige­ria and Al­ge­ria, are in more dire fi­nan­cial straits as they have been forced to dra­mat­i­cally cut spend­ing amid mas­sive pro­jected short­falls.

Al­ge­ria needs oil at $96/b, An­gola $110, Nige­ria needs oil to sell at $122 per bar­rel while Libya needs $269/ bar­rel oil to be able to bal­ance bud­gets but th­ese prices are far from re­al­ity.

A CNBC re­port said Venezuela’s lat­est bud­get more than dou­bles ex­pen­di­tures in 2016, widen­ing a deficit that al­ready stood at about 30 per cent of GDP in 2014. It has Chi­nese debts to pay, a weak­en­ing credit rat­ing and dwin­dling cash re­serves. Fuel prod­ucts make up 98 per cent of all ex­ports from Venezuela, which has the largest oil re­serves in the world. The low prices are a se­ri­ous blow to a coun­try that is al­ready deal­ing with fis­cal mis­man­age­ment is­sues.

Some other non-OPEC and top world oil and gas pro­duc­ers are hav­ing a share of the beat­ing from the dwin­dling price of crude.

US-based Pro­fes­sor of En­ergy law, Prof Emeka Du­ruigbo said al­ready, the im­pact is be­ing felt more and more here in the U.S. He said some oil com­pa­nies are fil­ing for bank­ruptcy, lay­ing off work­ers, liq­ui­dat­ing as­sets or oth­er­wise cut­ting op­er­a­tions.

“A few days ago, a lead­ing en­ergy law firm that only re­cently had about 140 lawyers and 5 of­fices in the U.S. an­nounced that it will be shut­ting down its law prac­tice be­cause of the ef­fect of low oil prices on new drilling con­tracts,” he said

Ac­cord­ing to re­ports, crude’s col­lapse from mid2014 has al­ready pum­meled Rus­sia, which re­lies on oil for about half its bud­get rev­enues and 40 per cent of its ex­ports.

The govern­ment di­vided whether to raise tax amid sav­age spend­ing cuts that could throw the econ­omy deeper into re­ces­sion.

Nige­ria's Ibe Kachikwu and OPEC Sec­re­tary Ab­dul­lah al-Badri pre­pare to exit an OPEC meet­ing, re­cently.

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