Nigeria fact of the day

Rising crude oil prices are set to send Nigeria’s bill for fuel subsidies rocketing, threatening to exacerbate the already precarious economic situation of Africa’s largest oil producer as it heads into election season.

Although Nigeria produces 1.7m barrels of crude per day, it has very little refining capacity and imports roughly 90 per cent of its fuel, negating much of the benefits oil-producing nations accrue from high crude prices.

When crude prices plunged to about $30 a barrel in 2016, it sent Nigeria’s oil-dependent economy reeling into a recession from which it has barely recovered. While a rally has since pushed the oil price past $85, Africa’s most populous country is not set to reap the benefits. This is because its subsidy bill is likely to surge beyond the $3.85bn annual tally the oil minister estimated earlier this year when prices were 20 per cent lower, said Tunde Ajileye, a partner at SBM Intel, a political and economic risk consultancy.

That is from Neil Munshi at the FT.

Comments

What are the historical reason that so many resource rich developing countries use subsidies vs. cash payments? IIRC in Alaska gas is sold at market prices but everyone gets a few thousand dollars a year (depending on the price of oil) paid out of oil revenue.

They don't have the infrastructure to deliver cash payments.

Also the pipeline for cash normally led to Switzerland.

The subsidies are a legacy of the first oil price shocks of the 1970s, when socialism and working with price controls was more fashionable than today. Incidentally this is also why ag policy in the OECD is so messed up today. Once it's locked in it's hard to change

So when the oil price is down, the country hurts. When it is up, the country hurts. I am almost sure the oil price is not the problem here.

Yup, I'm reminded of the Econ 101 homework question where the students are asked what happens to the consumer's utility when the price of housing changes. If you're a renter, you prefer prices to fall. If you're an owner (but also possess other goods or more accurately a stream of the services from other goods) whose endowment point happens to be your optimum consumption point at current prices, you get higher utility from either a price fall or a price rise. If prices fall, you take advantage of the cheap housing and buy more of it. If prices rise, you sell/rent out some housing to get oodles of the cheap other goodies.

Nigeria as an oiler owner seems to be in the opposite situation of that homeowner: they're worse off regardless of whether the price rises or falls. As other comments have said, the problem is almost certainly institutional and systemic. Meaning especially a corrupt and incompetent government, but the problems go deeper than that; they could replace every single one of the leaders of their government and I doubt that would solve anything. In fact IIRC they've already done that a few times via coups.

We throw the bums out here in the U.S. every few years, and it doesn't solve anything either.

Sad.

"Meaning especially a corrupt and incompetent government, but the problems go deeper than that; they could replace every single one of the leaders of their government and I doubt that would solve anything."

Yes, it's sad that such is the story of Brazil.

Roughly 90%-95% of all Nigerian exports consist of petroleum and petroleum products.

They're more oil dependent than Iran.

Oil production has been falling steadily for years.

Government debt to GDP has tripled from 7% to 21% over the last decade.

Annual GDP growth has been sluggish for years and GDP growth per capita has been *shrinking* since 2014.

This story does not have a happy ending.

A hundred million fucking themselves to oil-dependent penury near the gulf. Welcome to Lagos, indeed. Oil/petrol subsidies are always dumb.

This 'fact' is absurd. When the price of oil increases, then yes, the opportunity cost of giving away oil for domestic political purposes (or selling it at a given, low price) increases, of course. But unless they're doing that with all their oil, then the increase in the price means more money for Nigeria -- exactly the opposite of "exacerbat[ing] the already precarious economic situation".

You are correct that generally a higher oil price implied a little better economy.( At least when i lived there.) But due to lower refining capacity, they import petroleum products (Gas, diesel etc) , which are higher priced when oil prices are high . And although subsidies for gas are not high as in the Middle east , they are still significant.

More refineries may be on the way:

"NNPC earlier this month said it was considering plans to establish a 100,000 bpd brownfield refinery at its Port Harcourt and Warri sites in collaboration with private sector investors.

Baru said the condensate project was part of strategies aimed at eliminating imports of petroleum products and guaranteeing energy security in Nigeria.

Africa’s richest man, Aliko Dangote, is building a 650,000 bpd refinery near Lagos, which would meet Nigeria’s current demand and also for export.

NNPC will seek partners to invest in the project, Baru said, adding the initiative would increase NNPC’s refining capacity to 645,000 bpd. The state oil company could cede control in the project, he said."

https://www.reuters.com/article/nigeria-refinery/nigerias-nnpc-to-conduct-feasibility-study-for-oil-refinery-idUSL8N1VK3QR

Unfortunately Dangote's refinery may not come on line until 2022:
https://www.reuters.com/article/us-nigeria-dangote-refinery/billionaires-huge-nigerian-oil-refinery-likely-delayed-until-2022-sources-idUSKBN1KV0WA

I've worked with the palm oil sector in Nigeria. They are the world's third-largest producer, but a net importer. Their exports are virtually zero. In the north of the country it's cheaper to import from SE Asia than it is to get it from the southern states.

I know it's the continent's largest economy and there are plenty of Nigeria bulls, but does anyone have thoughts on genuine prospects for reform, etc.?

At least the last 3 or 4 transitions have been democratic ; a far cry from when the winner of the 1993 election Abiola was imprisoned and dies in prison. And the current ruler Buhari generally has a reputation for personal integrity. But a long way to go.

Of course, in the U.S. we have an oil dependent economy that's built on an oil-dependent political economy.

Of course, none of that is true.

Why doesn't Nigeria reinvest its oil revenues into productive capital? Why doesn't Nigeria reinvest its oil revenues into productive capital? Why doesn't Nigeria reinvest its oil revenues into productive capital?

Priorities. I recall reading that during the oil boom in the late 70’s Nigeria was the number 1 importer in the world of champagne.

IIRC, subsidies in Indonesia last decade were based on a predicted price of something like $35. That did not go well when prices exploded.

IIRC, Mexico has had issues in the past with fuel subsidies. Mexico also has little refining capacity - so they import refined products from the rotten Yankee.

Rising prices will end global warming. This is good.

The FT also said a rich guy is building a 650K barrels per day capacity refinery in Nigeria expected to be running on 2020 https://www.ft.com/content/50f53eac-8370-11e8-96dd-fa565ec55929

0.65/1.7 = 38%, that's what the new refinery can process of the country production. Not bad.

Bullish, bearish?

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