People & Money

High Oil Prices, Low Government Revenue: A Nigerian Paradox

If there is no electricity or petrol, it must be solely that the Nigerians involved are greedy and corrupt, not because of our systems and policies. …Nigeria did not incentivise investment to boost oil production. In fact, peak oil production has been stuck at 2 million barrels per day since the 1970s”.

There are no easy ways to explain the disaster that has invaded the Nigerian oil and energy sector, government finances, and the situation around subsidy at the moment. As Nigerians, we think highly of ourselves. We believe the Nigerian experience is so unique that it explains every dysfunction we face, especially in relation to the economy.

If there is no electricity or an increase in the price of oil, it must be solely that the Nigerians involved are greedy and corrupt, not because of our systems and policies. When food prices are high, greedy middlemen must inflate prices, and domestic producers wrongfully export what should be consumed at home. It cannot be due to the basic laws of economics.

Our situation reminds me of a scene I saw while watching a TV show — Snowfall — which focused on the drug trade in the US. The following conversation ensued between two drug dealers:

“Prices are rising; the product is now $15k a key.”

“A 50% increase just like that?”

“Have you been reading the news? The United States Drugs Enforcement Agency (DEA) is on a rampage.”

“I thought you were immune to that.”

“Why do you think I am not subject to the basic laws of economics”? 

This dialogue contains a simple truth about Nigerians — we do not believe we are subject to the fundamental laws of economics. And so we equate everything to Nigerian tendencies. We assume that policies and ideas that work or do not work elsewhere cannot apply to Nigeria. Interestingly, the actor who committed this gaffe is of Nigerian descent.

This resonates when you look at the oil sector today.

The economy and government finances are in terrible shape when the oil price is at historic highs. How come an economy that derives 90% of foreign exchange earnings from oil and gas exports is experiencing such financial misfortune, including a foreign exchange scarcity, at a time of rising oil prices? This is a position in which net importers in the petroleum industry find themselves.

Oil importers suffer from rising oil prices because they have to spend more foreign exchange on importing oil. This often results in currency devaluation, inflation, and reduced economic output for net oil importers. Nigeria had once been the largest oil producer in Africa. This was not supposed to be a problem for Nigeria. How did we get here? 

Also Read: BIG READ: Fuel Subsidy Reform: How Five Countries Avoided Fiscal Suicide

The apparent reason is that oil production has been at its lowest in more than five years. Hence, every increase in oil price becomes a burden due to the demand for oil subsidies. 

Nigeria cannot generate export surpluses that would more than compensate for growing subsidy bills. We can attribute the weakness in oil production to crude oil theft, but that would be convenient. The lack of investment in the oil and gas sector is a big problem, as existing infrastructures are not as productive as they once were.

Nigeria did not incentivize investment to boost oil production for the longest time. Peak oil production has been stuck at 2 million barrels per day since the 1970s through the 2010s, indicating that we only continued to invest in sustaining that capacity over time.

Similarly, we ignored the damage to host communities, and insecurity continued to be a debilitating issue. I guess the lesson is that you cannot suddenly start producing more oil without investing, but maybe Nigeria is unique.

In the current environment, petrol subsidies are crippling government finances. In 2021, the cost of petrol subsidies at N1.4tn was more than the Federal Government’s total oil revenues of N970bn between January and November. This would worsen in 2022, given the rapid rise in crude oil prices and persistent weakness in oil and gas industry revenues. 

The rich in Nigeria and neighbouring countries mostly benefit from subsidies, so imagine the cost to Nigerians that there is no money to fund public goods like healthcare, education, and the private sector. The failure to remove subsidies in the past means there is no flexibility today. One, households are under enormous pressure from high and rising inflation. Two, it is not politically expedient to remove subsidies given the upcoming 2023 elections.

Our wounds are self-inflicted. Nigerians believe because we produce oil, there should be a decline in oil price. The prices of other derivatives (kerosene, diesel, etc.) of crude oil are not fixed. Why petrol? I suspect it is because its consumption is widespread. But so is the agricultural sector and the consumption of palm oil, maize, rice and other food items. We produce them in Nigeria too. Why are we not protesting rising prices on these items? Why are Nigerians happy to endure high food prices without protests, but the price of petrol is untouchable and we keep craving for oil price plunges?

Oil and the food items listed above are globally traded. The price increases in many global commodities are rarely permanent. The average price of crude oil was $130 per barrel in 2009, and this week it is down to $98 per barrel, suggesting a collapse in oil prices and is way more affordable today than 13 years ago.

The main problem is the extreme volatility in commodity prices and aggregate demand, which should be expected given the uncertainties around global demand and supply, as we can see with the recent Russia-Ukraine war. However, this is always temporary, and many countries have found ways to tackle this volatility. Some maintain reserves for essential commodities and make their economy more efficient by using less oil over time to produce a specific output, say $100 of GDP.

In Nigeria, we would instead obsess over how prices must not change even in the face of massive costs. We say high petrol prices will kill the poor when the rich consume more petrol, and the subsidies they enjoy could be used to improve the lives of the poor. We say removing subsidies would translate to higher inflation when the most significant determinants of inflation are left unchecked.

Have we asked ourselves why petrol prices are not lower even though crude oil production is cheaper than ten years ago? Have we asked ourselves why food prices are permanently high even though global agricultural production has been reasonable over time? 

Answering these questions would shed light on the challenges that make life unbearable for Nigerians. If the devastating economic situation is not a good enough signal to spur action, we do not need to convince Nigerians to ditch subsidies.

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