With the price of a barrel of West Texas Intermediate (WTI), the benchmark for US crude oil, sinking into negative territory on Monday for May deliveries, and the price of Brent Crude - the benchmark used by Europe and the rest of the world - down by 25% to $19 yesterday, it was not just oil producers and traders that were racing to rein in their losses. Governments of oil producers like Nigeria, whose economies were already reeling from the headwinds brought on by COVID-19 must have been wondering what they would have to do to shore up their revenues from alternative sources.
Since 2016, markets have had to deal with a supply imbalance, even as OPEC introduced a declaration of cooperation with the alliance partners but the scenario today is beyond what OPEC's market share can handle. In the US, traders stuck with oil future contracts were offering high discounts to offload the contracts as storage capacity filled up resulting in negative prices for future contracts. The COVID-19 pandemic has not just caused a global economic crisis, but more importantly, has exposed the vulnerability of resource-rich economies like Nigeria with weak supply chain capabilities - and low local value addition.
Just a month ago, the Nigerian government revised its 2020 budget by slashing the oil benchmark from $57 per barrel to $30 per barrel, effectively resulting in a downward revision of its expenditure framework on capital expenditure for the year. But as governments around the world locked down their countries in an attempt to contain the spread of COVID-19 and demand for crude oil fell in an already over-saturated market, the price of the commodity plunged concomitantly.
As it stands, there is no sign that oil prices will recover in the near future as countries around the world adjust to the "new normal". The new normal will be one where the race to discover a cure or vaccine for COVID-19 continues in earnest. But as the world waits expectantly for a medical breakthrough, there will be less domestic and international travel, lower productivity, billions will lose their jobs, many who manage to hold on to their jobs will be forced to work from home, which in turn will lower demand for rail and road transportation. The outlook for oil has never been so dire, even as the new normal unfolds where demand is significantly lower than what it has ever been.
The big losers in the new scenario are oil exporters such as Nigeria with no refineries, which with generous discounts still struggle to sell their oil but have to import refined products to meet the needs of their large population. Nigeria has a population of over 200 million people - easily a captive market that should motivate the creation of refining capacity - but the situation is pathetic in that the country still produces raw crude solely for exports.
Yet, this stark reality presents Nigeria with a unique opportunity to adjust to the uncharted territory in which it finds itself. Without further ado, it will have to revise its budget for the second time and base all future budgets on $20 a barrel. This must be backed by strong legislation to save and protect excess crude oil earnings to shield the economy from exogenous shocks.
Lower oil prices also present a window for a low cost energy scenario that can make businesses and industries more productive and competitive. The Petroleum Products Pricing Regulatory Agency (PPPRA) is currently fixated with the pump price of petrol, forgetting that its mandate includes the prices at which diesel, kerosene, and aviation fuel are sold at fuel outlets and depots. Despite lower oil prices in the last two months, oil marketers have remained unresponsive and have kept the price of diesel, which is used by businesses and industries as an alternative energy fuel to run their organisations, high. With lower prices of diesel and even gas that is piped to thermal power stations, businesses should be able to benefit from lower energy costs.
Furthermore, the government needs to urgently meet with current promoters of new refineries (with particular emphasis on the Dangote refinery) and introduce enhanced incentives/special foreign exchange window to super-accelerate the completion of all on-going refineries in the industry. Other than the benefits of import substitution, the completion of the Dangote Refinery and modular plants will go a long way to making Nigeria a net exporter of refined petroleum products to other African countries.
The prompt passage and implementation of the Petroleum Industry Governance Bill (PIGB) and new privatised model for the national oil company and independent regulator - creating efficient, leaner models - will also go a long way to reduce the cost of production. Significantly winding down the federal government's equity in the joint ventures to raise capital to shore up infrastructure funding shortages/and fund enhanced social protection structures is another area that should be explored.