Why $70 oil isn't good news for Nigeria

By On January 26, 2018

Why $70 oil isn't good news for Nigeria

Vehicles queue at an Oando Petrol station in Abuja after Nigerian oil union declared nationwide strike, Nigeria December 18, 2017
Back to square one.
31 mins ago Quartz africa

If you’re an economy that’s just come out of a five-quarter long recession that was mainly triggered by a drop in global oil pricesâ€"your main revenue sourceâ€"then there’s good reason to be excited about oil returning to three-year highs of $70. This is especially true if your budget is based on a benchmark of $45.

Except you’re Nigeria.

While Africa’s largest economy was one of the worst hit by dipping oil price s, the Nigerian government was also presented with an opportunity to make long overdue reforms and readjust. It’s an opportunity that hasn’t been taken. Given the administration of president Buhari rode a wave of goodwill into office, falling oil prices offered a pretext to make key changes in line with many of his campaign promises to cut out waste and optimize Nigeria’s economy.

The most obvious reminder of one major missed opportunity has been the snaking queues of cars that have started forming all over again in major Nigerian cities this week due to yet another fuel shortage. Fully deregulating Nigeria’s downstream petroleum market while oil prices were low could have helped avoid the shortages, says Dolapo Oni, head of energy research at Ecobank Development Company.

Despite being Africa’s largest oil exporter, a lack of local refineries means Nigeria has to import petroleum products. With the s tate oil company unable to solely handle imports and distribution nationwide, the country’s supply is reliant on independent marketers who can import and distribute the product.

Currently, the government dictates the market price but, with the marketers claiming it doesn’t cover their costs they have stopped importing, so there’s been a gasoline shortage for the past month.

Deregulating the market would allow marketers import petrol with prices dictated by market forces. “Prices will go high initially,” Oni says. “But as competition gets into the market, prices will have to come down.” Instead, given the current reality, many oil marketers will either remain inactive ensuring a major supply deficit or the government will pay an expensive subsidy on petrol to allow it continue to dictate oil prices.

Another missed opportunity is the cutting the cost of the government. Nigeria’s civil service remains bloated and Nigerian lawmakers still rank among the world’s highest paid. Despite the president’s rhetoric during campaigns, there has not been a clear attempt to reduce government waste which will essentially free up more money to plug Nigeria’s infrastructure deficitâ€"a necessity given population growth.

But there’s more bad news.

It’s now very unlikely the government will carry out these reforms anymore. With general elections only a year away, political expediency is likely to guide Aso Rock’s immediate decisions this year and with oil prices rising again, it has lost any impetus to do so. “When there’s a crisis, people are more willing to accept whatever changes need to happen,” says Nonso Obikili, research associate at Economic Research Southern Africa. “But if times are good and there’s a lot of money, people don’t see the need to reformâ€"even if it’s necessary.”

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