Brent crude is extending a rebound after a recent losing streak recorded this week. Focus remains on the impact of Hurricane Francine on U.S. output, heightened tensions in the middle east and how gloomy demand outlook may further cap gains. Is Nigeria’s 2024 budget at risk if oil prices fall below $70? Bongo Adi, Professor of Economics at Lagos Business School joins CNBC Africa for more.
Brent crude is extending a rebound after a recent losing streak recorded this week. Focus remains on the impact of Hurricane Francine on U.S. output, heightened tensions in the middle east and how gloomy demand outlook may further cap gains. Is Nigeria’s 2024 budget at risk if oil prices fall below $70? Bongo Adi, Professor of Economics at Lagos Business School joins me now for more on this discussion. Prof, thanks a lot for joining us on the show today. Earlier fresh concerns were raised when we saw Brent crude trade well below $70 earlier this week Monday up until Wednesday where we now began to see some gradual rebound here. But for you now, walk us through your take on the oil price movements we've seen at a global stage and how this might affect Nigeria if this price is tanked even further in the coming days and weeks on the back of issues that we've seen so far. The escalation in the middle east, the impact of Hurricane Francine and a whole lot more, the gloomy demand outlook, your take on that? Thank you very much David for having me. I think the oil futures, if you look at it, I think that's what really will tell us where the oil price is likely to be going into the future. So, it's still above $100. So, I think this is just a momentary event because of, of course, inventory built up in the United States. And then we have to focus oil price looking at the fortune of the global economy. If you consider that the United States economy actually performed expectations just last week when the data was out. And then we've seen that inflation is beginning to rebound. I mean, they go down in many of the leading markets around the world. So, that tells us the prospect for global growth has not been revised any downwards. And as long as that is the case, I think we can see what has happened as just a momentary thing. It will just pass. But again, if it continues, definitely Nigeria badly because we have not managed to win ourselves free from dependence on oil revenue. And the economy actually seems to track, performance of economy tracks, oil price movement over time. It hasn't changed. It has even gotten worse now in the sense that in the past one year or more, oil price has been going up, but the economy has tanked. It hasn't performed as well as it used to be in the past. Part of the reason is because there's been a significant drop in production volumes. We've not managed to even hit our OPEC allowed target. So, we've been pushing, pumping below that. It's been around 1.2 million barrels per day until recently when it's going up to 1.3. And again, it depends on who you ask because the data seems to suffer some level of discrepancy here and there. But in any case, if we continue to see oil price going downwards, it means that our fiscal position is going to get bad. I'm talking about how things might pan out even further now. All marketers and Nigerians at large, in fact, the global community is waiting on how things might unfold as Nigeria counts down to the lifting of petrol products from Dangute refinery expected this weekend as well now. Our oil production still remains at about 1.78 million barrels per day for the estimates. According to yesterday's OPEC data, we're at just about 1.35%. Naira crude oil sales to begin by next month. What's your analysis of all of these different shifting grounds or shifting blocks at the same time? Your take on how Nigeria might likely steer through all of these indicators? You know, so we had expected that Dangute's refinery coming on stream will really improve Nigeria's situation, especially the refined products sphere. That was the expectation, and this was why we were all pumped up when it finally became a reality that Dangute was going to begin production. But then we've seen some sort of back and forth between Dangute and the federal government. So now nobody actually knows what the situation is and how that will impact on the economy. But let us just take it that because I've always argued that Dangute refinery is something in the nature of a very strategic intervention, not just for Nigeria, for the African oil and gas refined products market. I mean, I'm not the only one of that view. I remember the former central bank government of Kenya was rammed sometime last month in Nigeria, and he couldn't stop speaking so glowingly of Dangute refinery and what it means for Africa to really get us off the dependence on imported refined products from outside the continent. So that is something I believe that every government needs to commit to, you know, see it work, because it has that potential to improve the situation for us. Yes, let's talk about how the situation has also improved. Since May 2023, when the President announced subsidy was gone, how much of the country should have been able to save? The government pegs us at about one trillion Naira on a monthly basis now. On the back of this and how you're seeing us also move with regards to the Naira crude oil sale as well now, so many say, yes, it's a deregulated market. However, Nigerians should benefit from local production of oil if the price and metrics changes a little further towards the upward range. Now, how do you see this inducing further price shocks for the average Nigerian business or household? Well, you know, the network was bad here, so I didn't hear you very clearly. But what I make out of that is that, you know, well, the only way you can incentivize local production is that, you know, the subsidy regime has to be reconsidered. I wouldn't – let me not go to the extreme of saying removed, but it has to be reconsidered. But at the same time, we have to look at the nature of our economy, the nature of things here. I believe that we still have subsidies here and there. The thing about why that on petroleum product is quite important and very significant for the economy is because, like transportation and energy, all these two are intertwined in the sense that they make use of this free stock, which is oil or petrol. So, they are indirect inputs to production. So, once anything happens to them, it immediately begins to impact on the prices of goods and services without exception. So, neutrality and importance of this in the household consumption mix and industry production mix as well. It is important for government to really consider how best to address issues around, you know, subsidy of refined products. So, yes, it is important – yeah, we need to improve the conditions to enable local production, to enable the capacity, to build up the capacity for refining products in the economy. But we also have to consider the impact it will have if we, you know, go the entire length of liberalizing the markets, allowing the market forces to determine prices. So, we've had this story that it's going to – you know, it will normalize over a long time. But then, if we could – if we had the ability to police our borders, to ensure that there is no smuggling of resources to other countries, then that would have made sense. But in Africa, we know how porous the borders are, especially in this part of the world. So, I think I've heard that from the officials of Nigerian National Petroleum, even the central bank, that, you know, part of the challenge we're having here is that people keep smuggling the refined products that are imported into the country, to neighboring countries, and as a result, placing artificial scarcity here. So, these are some things that need to be carefully considered. Definitely, Prof. Thank you so much for your time on the show today. That was Professor Bongo Ade, Professor of Economics at Lagos Business School.
Theme: Impact of Lower Oil Prices on Nigeria's Economy
Brent crude has been on a rollercoaster ride recently, with concerns mounting over the impact of Hurricane Francine on U.S. output, tensions in the Middle East, and a gloomy demand outlook. The question on everyone's mind is: How will Nigeria's economy fare if oil prices continue to fall, potentially dipping below the crucial $70 mark? To shed light on this pressing issue, CNBC Africa sat down with Bongo Adi, Professor of Economics at Lagos Business School. Professor Adi highlighted the importance of monitoring oil futures as an indicator of where prices might head in the future. Despite the temporary dip below $70, he remains optimistic, pointing to the performance of the global economy and the resilience of oil prices. However, the looming threat of prolonged low prices poses a significant risk to Nigeria, a country heavily reliant on oil revenue. The Nigerian economy's performance has been closely tied to oil price movements, with Adi noting a concerning drop in production volumes and the subsequent impact on fiscal stability. The conversation shifted to Nigeria's upcoming challenges, including the eagerly anticipated commencement of petrol production at Dangote Refinery. Initially seen as a game-changer for the country's energy landscape, uncertainties surrounding the project have cast a shadow over its potential benefits. Adi emphasized the strategic importance of the refinery for not only Nigeria but the broader African market, urging continued government support for its success. With the subsidy removal in May 2023 yielding significant savings for the government, estimated at one trillion Naira monthly, Adi underscored the need for a reassessment of the subsidy regime. While supporting local production is vital, the delicate balance between market liberalization and shielding consumers from price shocks must be carefully managed. Addressing issues such as smuggling and ensuring border security are crucial steps in creating an enabling environment for domestic refining capacity to thrive. As Nigeria navigates the complex terrain of fluctuating oil prices, production challenges, and market dynamics, proactive policy measures and strategic investments will be key to safeguarding the economy and promoting sustainable growth. The road ahead may be uncertain, but with informed decision-making and prudent economic management, Nigeria can weather the storm and build a more resilient, diversified economy for the future.
"As Nigeria navigates the complex terrain of fluctuating oil prices, production challenges, and market dynamics, proactive policy measures and strategic investments will be key to safeguarding the economy and promoting sustainable growth."
Oil prices, Brent crude, Nigeria economy, Dangote Refinery, subsidy removal, global economy, oil production