The surge in oil prices comes with serious implications for both oil producing and non-producing countries alike.
The price of crude rose on Monday to $130 a barrel, the highest since 2008 as the United States and its European allies considered banning the importation of Russian oil in protest against Russia’s invasion of Ukraine.
Brent crude futures jumped $12.61, or 10.6 per cent, to $130.72 a barrel by 0449 GMT, while U.S. West Texas Intermediate (WTI) crude climbed $10.41, or 9 per cent, to $126.09.
Monday’s intraday highs were near record levels seen for both contracts in July 2008 when Brent hit $147.50 a barrel and WTI touched $147.27.
The expectation is that oil exporting countries will rake in revenues and grow their foreign reserves, while the cost of goods will rise globally. But for a country like Nigeria, which sells crude and buys refined fuel, the effects will not be as straightforward.
The chief executive officer of the Financial Derivatives Company Limited, Bismarck Rewane, said Nigeria can reap from the development but said there were challenges too.
He compared the present situation to what obtained in 2008 under former President Umaru Yar’adua and Central Bank governor, Charles Soludo, when Nigeria’s external reserve was $60 billion, its excess crude account was $22 billion, and Naira traded at N158.00 a dollar.
Nigeria’s reserve currently is about $39 billion while the excess crude account plunged to just about $35 million. Naira is trading at N570 and N580 at the black market.
“In other words, with the same price of oil we are having a currency which is 300 per cent weaker than what it was in 2008,” Mr Rewane said in an interview on Channels TV business morning show on Monday . “We call it the paradox of oil. Oil price is up, the naira is down. Oil price down, naira down.”
“And all of us should be happier. But the reality is that all things being equal, the naira should appreciate, the reserves should be higher and all of us should be happier.
“We have revenue problems, management problems and then we have shocks. So what happens is that it is like the prodigal son, you spend all that you saved, you borrow some more and then you go back to your father to say father I have erred. That’s what it is,” he said.
Paul Alaje, economist at SPM Professionals, said, “The increase in pump price to an unprecedented amount in recent years has shown that the Nigeria government will earn more in revenue from crude, however, as soon as this revenue comes, the Nigerian government will give it out to refineries around the world.
“The direct implication of this is that the government will now need to pay more in subsidies beyond the gauge that was received from revenue. This will also further deplete the potential share of the revenue,” Mr Alaje said.
He said it will impact the potential share of revenue to all the state governments.
“As the war between Russia and Ukraine continues, the positive impact will be reduced or eliminated within the shores of Nigeria,” he said.
“As this goes on, it will get to a point where the government will be pressured to remove subsidies or to partially reduce the impact of subsidies.
“One of these two will be happening in the coming months. I don’t think the Nigerian government will have the finances to 100 per cent finance subsidies for the next 18 months. We might see the government coming to offload some of the pressure of subsidy directly on Nigerians.
“These are possible things that we are likely to see in the coming months as things unfold,” he added.
Samuel Bamidele, head, Research and Intelligence, Phillips Consulting Limited, said while Nigeria as a major oil exporter should earn more in foreign exchange, it is constrained by its inability to meet up with its production quota.
“There is just a little we can do with the fact that our capacity to produce is still low when compared to other oil exporters,” he said.
“However, away from production capacity, the increase in the oil price which is supposed to give us some improvement in revenue, may not last. The excitement is short.
“This is the fact; we still import petrol. So it’s a mixed impact for Nigeria,” Mr Bamidele said.
“What that means is that we are going to be importing PMS at a higher price. So whatever gains that Nigeria is supposed to get from the oil price is already undermined by the fact that we have to import fuel,” he said.
“If oil prices keep standing high can the government afford to continue paying the subsidy which will keep going up?
“I’m sure by the time you look at the subsidy payment by the next one month it will be at a very unprecedented level because we have fuel scarcity going on in the country.
“So, the question is, are oil prices going to return to 165? That’s the conversation that we probably need to have at a broader contest and Nigeria might need to start getting ready for the price of PMS to trend at an unprecedented level based on what is happening in the global oil market,” he said.
“What that means is that everyone using petrol, businesses, transport inflation will hit so hard on people, food prices will likely jump up because those using petrol to move goods from one place to another, and transportation will increase prices.
“For now, I think we just need to look up what is going to happen in response from the government in respect to how Nigeria is managing the rising oil price because it will affect the price of PMS that Nigeria is importing,” he said.
“The rising oil prices are supposed to get more money for Nigeria but we can only do as far as we produce, production is still a challenge.
“In terms of looking at the cost and the benefits, are the benefits more than the cost? Is the cost more than the benefit? I haven’t done the analysis but I can tell you the fact that it is not going to be easy on Nigeria at the moment and that’s why the minister is currently saying that the pricing of oil from Russia needs to ease up as quickly because the cost might eventually outweigh the benefits and the pressure will come on everyone, ” he added.
The implications of the war in Ukraine for Africa will also be dire.
Ross Harvey, a natural resource economist and policy analyst, said the repercussions of Russia’s behaviour “are truly global, and the negative impact on African countries cannot be overstated.”
He said while the increase in oil prices is good news in the short run for oil-exporting African countries, it is economically destructive in the medium to long term.
“African oil exporters do not refine enough of their oil domestically to avoid fuel imports. Oil rents may temporarily provide a buffer to fund fuel subsidies, but this crowds out the incentive to add value locally,” Mr Harvey said in a piece on Good Governance Africa.
“When the oil price escalates on the back of global insecurity created by Russia, import-driven inflation skyrockets, driving up transport and food prices. This eliminates expenditure potential on other items, rapidly reducing economic activity and wealth,” he said.
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