Why Increasing Crude Prices Will Cause More Problems

 Henry Boyo

        Crude oil prices wobbled alarmingly, well below Nigeria’s modest budget benchmark of $38/barrel for several weeks, but, unexpectedly flexed above $40 in early April to rekindle hopes that the fortuitous price spiral will be sustained to partly fund the N2tn plus 2016 projected deficit and to partially also satisfy the clearly bloated excess market demand for foreign exchange.
       Thus, if by some “strange turn”, oil prices further bounce back beyond, for example, $60/barrel this year, the almost $5bn projected external loan in the 2016 budget will become unnecessary. Consequently, further debt accumulation which already cost us an arm and a leg to service, will also become restrained.
       Furthermore, any increase in dollar income from higher crude prices should also redress the current market scarcity of dollars and supportively provide increasing cover for our import needs, particularly the raw material requirements of the real sector and the fuel imports of private sector marketers to ensure adequate daily national supply of petrol.
         The recent extended fuel scarcity has clearly demonstrated that the Nigerian National Petroleum Corporation does not have the capacity to monopolise fuel imports and successfully satisfy market demand.
Regrettably, however, increasing dollar revenue from higher crude prices may not improve the official naira rate as often popularly expected. Indeed, in this regard, we should be reminded that the naira exchange rate remained almost static around N155=$, even when oil prices exceeded $130/barrel and the Central Bank of Nigeria consolidated more than $60bn reserves. Consequently, it is therefore unlikely that a relatively more modest rise of just $60/barrel would stimulate the naira exchange rate.
          Nonetheless, the parallel market exchange rates may recede closer again to the official rate, if the CBN once more deliberately creates  opportunities to liberally allocate dollars to the black market, as was inexplicably the case, until this reckless policy was terminated earlier this year.
           Conversely, however, both the parallel and official naira rates will improve considerably if the CBN can successfully manage the naira supply at the right equilibrium that will significantly reduce the persistent burden of surplus naira which invariably weakens the value of our currency in the forex market. Thus, if naira supply is optimally managed against the prevailing level of productivity by the CBN, the local currency will gain more respect and, increasingly become adopted as a stronger store of value by patrons.
           However, the official naira exchange rate will, inexplicably, regrettably though, remain relatively static, even if crude prices spike, totally unexpectedly beyond, a “fortuitous” premium price of, say, $200/barrel. Ironically, crude prices at such an extreme level will actually cripple our economy. The bounteous dollar income will grossly compound our liquidity problems when these funds are impulsively substituted with naira allocations by the CBN. Consequently, inflation rate and cost of funds will be propelled dangerously beyond 20 per cent, while the CBN’s monopolistic auctions of the dollar it earlier captured from crude oil sales will sound the naira’s death knell and lay the economy comatose.
         In this regard, it is useful to remind ourselves that poverty actually deepened steadily in Nigeria as crude prices rose from below $10/barrel to over $140/barrel in recent years. Curiously, more Nigerians dropped below the poverty benchmark income of $2/day at a time reserves were more bountiful than when reserves were relatively much lower decades ago. Thus, in the light of our past experience, we should be wary of any propaganda that may suggest that our economic challenges will become resolved if only crude prices rise significantly once again, to swell the CBN’s dollar reserves.
          Ironically, however, higher crude oil prices have always instigated a corresponding rise in the domestic price of fuel to make deregulation of the petroleum downstream sector very unpopular. For example, open market petrol price fell below government regulated price of N87/litre when crude crashed below the $38/barrel budget benchmark this year. However, this unusually low oil price, invariably, also precipitated cheaper open market pump price without any subsidy. In fact, the NNPC reported that a net profit of up to N6/litre was actually being generated in place of subsidy. Nonetheless, as crude oil prices crept above $40/barrel, the open market price of fuel once again exceeded the regulated N87/litre. Indeed, the Petroleum Products Pricing and Regulatory Agency pricing template indicates that the open market price of fuel was about N96/litre on April 14. In this event, a N9/litre subsidy once again returned on fuel price.
       Consequently, if crude oil price unexpectedly also, for example, climbs beyond $60/barrel, the deregulated open market petrol price will invariably approach N130/litre. However, it is likely that motorists who were constrained to pay N200/litre during fuel scarcity, may not readily accept N130/litre pump price, in the absence of scarcity. Thus, although rising crude price is desirable, as it favourably boosts our foreign reserves, it also has the collateral downside of pumping up the domestic price of fuel to make deregulation very unpopular, and to unfortunately also restrain serious interest in the establishment of private refineries.
         So, while the sustenance of higher crude prices will improve our forex capacity to comfortably pay for critical raw materials and fuel imports,  the same premium crude oil prices may invariably also instigate higher pump prices to once again compulsively accommodate annual subsidy payments of over N2tn, (about 30 per cent of the 2016 budget) if the actual open market pump price approaches N130/litre. Thus, in such an event, any increase in crude oil prices will instructively become a double edged sword.
         However, there is the popular perception that since crude oil is drilled from our own backyard, it is therefore our entitlement to enjoy cheaper petrol prices. Unfortunately, this expectation is misguided, because, cheaper dollars should essentially be our actual entitlement, as tens of billions more dollars accrue to the treasury when crude prices rise. Furthermore, cheaper dollars should correspondingly translate to a stronger naira exchange rate. Meanwhile, increasingly stronger naira exchange rates would conversely make fuel prices steadily cheaper, even without subsidy. For example, if naira appreciated to say N100=$1, as it should, if crude price and output improve significantly, the open market pump price of fuel will similarly collapse below N50/litre, i.e. below the erstwhile regulated N87/litre price, if crude oil remains at current prices.
       It is also interesting that although petrol price will become cheaper nationwide, the stronger naira exchange rate will however also serve as an efficient clinical deterrent to cross border petrol smuggling. Ultimately, Nigeria’s actual daily consumption of petrol will be more correctly determined. Furthermore, up to 20 per cent per litre sales tax can be levied on petrol consumption to consolidate over N800m daily, even when the deregulated pump price still remains below the present regulated price of N87/litre.
       However, the most disturbing feature of higher crude prices and bountiful forex reserves is actually its disenabling impact on the critical monetary indices which necessarily drive diversification and inclusive growth in more successful economies. Curiously, the bountiful reserves the CBN consolidates from higher crude prices, inexplicably, instigate the distortional economic burden of persistently surplus naira values that erode our currency’s value in the money market.
        It is undeniable that the CBN has seemingly waged relentlessly futile battles to reduce persistent naira surplus in the market and avert inflation. Instructively, however, unrestrained excess naira supply weakens the naira and inappropriately fuels inflation well beyond best practice rates around two per cent. In addition, the prevailing high cost of funds above 20 per cent to the real sector, steadily weaker naira exchange rates and high fuel prices are all products of incurable excess naira supply in the market.
      Incidentally, however, the burden of persistent excess naira supply with its disenabling economic consequences, become primarily sustained when the CBN unceasingly substitutes and prints fresh naira allocations for dollar denominated revenue.