The price of oil

Caleb Adebayo

On 7 January this year, Chinese health officials announced the outbreak of the deadly coronavirus (COVID-19), a viral strain from the same family as the Severe Acute Respiratory Syndrome (SARS) and the Middle East Respiratory Syndrome (MERS), in Wuhan- the sprawling capital of Central China’s Hubei province. This disease has now spread to 115 countries with 116, 359 confirmed cases and over 4, 000 deaths as at today, and has led to major panic across the world. Stock prices have also taken a hit and been bearish since the virus was discovered in January. 

Expectedly, oil prices have plunged as a result of reduced demand for crude oil due to declining economic activity. China, dubbed the workshop of the world and the largest importer of crude oil has its refineries cutting down production and its factories shutting down. Also, with little or no activity and reduced flights in and out of the country, there has been a reduction in the demand for jet and vehicle fuel.

Apart from China, major oil importers like the United States and countries in Europe and Asia have multiple incidences of COVID-19, with many of these countries suffering fatalities. This has increased the rate of decline.Tanking prices are predicted to continue at an all-time low and even plummet further if the virus continues to spread at the rate it is.

Countries of the world are meeting internally to figure out backstop mechanisms to reduce the effect on their economies. As part of this, the Organisation of Petroleum Exporting Countries (OPEC) met last week in Vienna along with some OPEC+ countries to discuss oil production cuts which the organization believes will help stem the tide of declining oil prices and maintain an equilibrium.

With expectations high and the stock market hopeful ahead of the meeting, the Friday OPEC meeting did not yield the anticipated result as Russia did not agree to the oil production cuts and rather choseto maintain production levels, with an aim to put  the US Shale Oil producers out of business. The move has also been said to be retaliatory in response to some of the USsanctions that affected Russia’s oil business.

In reaction to Russia’s position, Saudi Arabia took a stance to increase its production and drop the prices of its crude sale to the US, Europe and Asia- a move aimed at forcing the hand of Russia by grabbing their market share. Now, the world faces an oil war at such a critical time, and everyone is on the edge of their seats, adopting a wait-and-see approach for whatever may happen in the coming weeks. Investors are leaning towards commodities like gold and oil producers are terrified by gloomy days ahead.

One would wonder how long Russia and Saudi Arabia, who are major oil producers, can keep up this blinking contest. It also remains to be seen if the war against Shale can be won by Russia now or ever. Even more concerning about Russia’s stance is whether this -the period of the viral outbreak- is the best time to play “Star Wars”and take out its grouse against Shale.

There is also the issueof the economics of producing a lot for a market that is not demanding as much as is being produced also arises, especially for Saudi Arabia that has dropped its prices even further and pushed up production. Whether these two countries who have oil as a key part of their economy can survive the effect of their decisions in the long term is a question everyone is asking, while keeping hope alive that someone will budge and the countries will return to the table.

In response to the outbreak of the virus and the outcome of Vienna, Nigeria -Africa’s top oil producer- has sought to revisit its 2020 budget which was pegged to the Brent Crude price of $57 per barrel, now selling at $31 per barrel (and predicted to fall even further). The situation also props us as sitting ducks because our economy is crude-based and makes up 90% of our foreign exchange earnings. We also don’t have sufficient foreign reserves or fiscal buffers. While struggling to bounce back from the 2016 recession, Nigeria now has to battle another looming recession. It would seem we are paying the price of oil- the true price of utter dependence on it.

It was expected that after the 2016 recession that resulted from the 2014 crash in oil prices, Nigeria would have worked arduously to diversify its economic base, but that was not the case. We face another dire oil quandary and we are hardly any wiser than we were in the recent past. To put it tersely, we are now at the mercy of Russia and Saudi Arabia- and perhaps the coronavirus.

Our main share index has experienced the biggest daily fall in two years and the naira is facing intense pressure. The question on the lips of many is if the Central Bank would devalue the naira. Also, there are concerns that we would accumulatemore debt by borrowing to fund the shortfall on the budget.

While we work hard to combat the effects of the crude price decline, I believe this is an instructive moment for African governments, especially Nigeria, to work to diversify their export and economic bases.

Adebayo, a lawyer working at the intersection of Energy, Environmental Law and Finance, writes from Lagos