Oil price fall: How the mighty are crawling
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.