The massive drop being recorded in the Nigerian Naira against major world currencies such as the Dollar, Euro and Pound Sterling has been a major cause of concern for many Nigerians. However, the concerns raised by the falling Naira pales in comparison to fears arising from how the falling oil prices could make it harder for the average Nigerian to put food on the table.
This sense of foreboding stems from the fact that the Nigerian economy is heavily reliant on crude oil sales and our ability to keep the economic cogs of our nation running is mostly dependent on how much revenue we are able to generate from crude oil sales. This piece seeks to explore the causes behind the persistent decline in global oil prices and what it means for the Nigerian economy.
Reasons Behind the Drop in Oil Prices
As at June 2014, we were selling oil for around $115 per barrel and by January 5 2015, we were selling crude oil for less than $52 per barrel to account for a 54% drop in six months. For added perspective, oil prices have rarely dropped below $100 per barrel since 2010; hence, you can see that we are now in some serious trouble.
The main reason behind the falling global oil prices is a change in the market dynamics of the demand and supply of oil. The supply of oil is currently greater than the demand; hence, the price of oil must fall to account for this disparity.
The first reason behind the drop in oil price is the supply glut in the oil market as oil producing nations increase their production capacities. In addition, the shale oil boom in the United States has brought in additional millions of barrels of oil from shale formations where it was once not economically viable to drill for oil.
Interestingly, the Organization of Petroleum Exporting Countries (OPEC) (Nigeria is a member) has solidly refused to impress the need to scale back on production and supply on her member nations. . Hence, the international oil marketplace is currently experiencing a glut in oil supply and this is not likely to change in the short term.
The second reason behind falling oil prices is the reduced global demand for oil. The U.S. now seats on about 58 billion barrels of oil in its shale formations; hence, the country now imports a lower volume of oil than in the previous years. In addition, technological advancements have delivered a sophisticated array of energy efficient technologies that has drastically reduced global energy consumption.
How the Nigerian Economy Will be Affected
We are already seeing the effects of falling oil prices as the Naira drops in value against hard currencies. In December 2014, the CBN devalued the Naira by 8.4% from the N155 that was adopted in 2011 to the current N168 benchmark. However, the benchmark has largely failed to hold in the real market as the Naira goes for a low as N183 in open market.
Secondly, imports will become more expensive as the country generates lesser revenue from its exports. Hence, you can expect to pay more for electronics, automobiles, and machinery among others. In addition, parents with students outside the country can expect to pay more in tuition fees and other expenses.
Thirdly, we should "technically" expect a drop in the pump price of petroleum products under normal circumstances. However, the hazy nature of the facts surrounding the Nigerian oil subsidy system suggests that it might be long before the average Nigerian records a significant drop in the pump price of petroleum products.
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