Leadership (Abuja)
Jerry Uwah
7 October 2008
Oil prices dropped to a new record yesterday on fears that demand would tumble further as investors confidence on US bail out package for the financial system continue to flounder.
The price of London Brent crude, the equivalent of Nigeria's Bonny light, dropped to $86.78 per barrel.
There were fears among Nigeria's budget makers that the tumbling oil prices might destabilse projections for the 2009 budget, which would soon be sent to the National Assembly for consideration. Although the oil reference price for the 2009 budget has been fixed at $56 per barrel, which is still below the current low plunge of oil prices. There were fears yesterday, "within the nation's budget circles that plummeting oil prices would eat deep into the excess crude account which the Federal Government often uses to cushion the effect of massive oil shut-in caused by the activities of militants in the oil rich Niger Delta region.
Nigeria curently produces about two million barrels of oil per day while close to 600,000 barrels per day are shut in as a result of the crisis in the Niger Delta region.
Oil prices have been tumbling precipituously since the US financial system was plunged into crisis by an alarming number of non-performing mortgage loans.
The US Congress last week passed a bailout package of $700 billion in a desperate bid to buy the non-performing loans to enable banks advance credits to the cash-starved economy, but that is yet to win the confidence of global investors who nurture fears of an impending global recession.
Oil prices soared from a scant $20 per barrel in 2002 to a record $147 per barrel on July 14, 2008 largely on a combination of demand surge and outright speculations.
The surging oil prices were driven in part by the alarming rate at which the Chinese economy was growing. The Chinese economy has sustained double digit growth for a number of years without signs of a slowdown. However, with a total of $360 billion in Chinese investment seemingly trapped in two of America's troubled mortgage firms, there are fears that the Chinese economy might face considerable slowdown which would impact negatively on demand for oil.
Market watchers contend that the recent drop in oil prices has confirmed OPEC's position that the surging oil prices of two months ago were fuelled more by speculations than inadequate supply to the market. Consumer nations had accused the cartel of manipulating supply to drive up prices.
The cartel, however, countered that the energy crises complained about by the consumer nations was the handiwork of oil traders who pushed up prices based on their interpretation of developments around the globe.
The rise of the US dollar to a 13-month high has added to the downward pressure on oil prices. Investors consider oil and other commodities as safe haven when the US dollar plunges.
Now that the dollar is firm, more investments are being made in dollars than in commodities. Nigerian budget makers are not the only ones agonising over the jitters that tumbling oil prices has sent down the spine of planners. The Iranian oil minister complained yesterday that oil prices lower than $100 per barrel were not acceptable since production costs had not changed. He called on OPEC to take steps to beef up oil prices.
Meanwhile, there were signs on Monday that the bailout plans by governments all over the world have failed to rescue the global financial crisis that is tearing off economic models and rubbishing the thinking caps of global economic gurus.
Instructively, the massive divestment by institutional investors which CBN Governor, Professor Chukwuma Soludo said was responsible for the downturn in the Nigerian capital market has continued to cause havoc in the global stock market.
Meanwhile, the World Bank President, Robert B. Zoellick, yesterday advised that the way the world tries to solve its economic problems needs to be rethought amid today's global crisis, including turning the G-7 into a Steering Group that empowers rising economic states.
Referring to the upcoming U.S. election, Zoellick said the new president will have to move beyond "the firefight of financial stabilization" to address the "economic aftermath". Whoever wins the White House should work with others in modernising the multilateral system as there needs to be a greater shared responsibility for the health and effective functioning of today's global economy.
"The G-7 is not working. We need a better group for a different time," Zoellick said in a speech to the Peterson Institute for International Economics in Washington D.C. "For financial and economic cooperation, we should consider a new Steering Group including Brazil , China , India , Mexico, Russia , Saudi Arabia , South Africa , and the current G-7."
Speaking ahead of the annual meetings of the World Bank Group, Zoellick said the new Steering Group should be more than just replacing the G7 with a fixed-number G14, as this would be using old world methods to remake the new. The Steering Group should evolve to fit changing circumstances, including new emerging powers, while serving as a network for frequent interaction.
"We need a Facebook for multilateral economic diplomacy," Zoellick said.
Warning about the effects of the financial crisis, Zoellick said: "The events of September could be a tipping point for many developing countries. A drop in exports as well as capital inflow will trigger a falloff in investments. Deceleration of growth and deteriorating financing conditions, combined with monetary tightening, will trigger business failures and, possibly, banking emergencies. Some countries will slip toward balance of payments crises. As is always the case, the most poor are the most defenceless."
According to AFP report, world stock markets plunged yesterday, striking four-year lows in London and New York , as the financial crisis showed no sign of abating despite a multi-billion-dollar bailout for US banks.
Equities from the European axis, the model of world economy, were rattled by fresh troubles after a weekend meeting of the leaders of France , Britain , Germany and Italy failed to produce a joint European financial rescue package.
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