As the prices of crude oil keep soaring on the international market, Dr Babajide Agunbiade, a fellow of the Nigerian Society of Engineers and Director at National Oilwell Varco, has shared his perspective on the current situation on what it means to consumers and oil-producing nations.
Oil tops over $100 per barrel, the highest seen in more than seven years following the 2014 recession, Russia – Saudi Oil war, and Covid-19 pandemic, among others. Higher projections are anticipated due to the ongoing Russia-Ukraine tension, which has already further driven up international crude oil prices. The invasion of Ukraine has heralded concerns about global energy supplies at a time when global economic recovery is still fragile, and inflation is surging.
The gradual recovery from the two-year Covid-19 pandemic hit and high oil prices will likely translate into higher pump prices which inadvertently will have an enormous economic impact on economies dependent on imported oil. However, the impact of higher oil prices on economic growth in OPEC countries would depend on various factors, mainly how the unexpected gain in revenues is managed.
2. Global Oil Price Increase and Its Implication
Oil prices remain an important determinant of Nigeria’s economic performance as it has a significant effect on Nigerian foreign exchange earnings. It is the basis upon which government budgeting, revenue distribution, and capital allocations are determined (Musa et al., 2019). Hence, an increase in oil prices leads to an increase in foreign exchange earnings. Conversely, a decline in oil price leads to shortened revenues in dollars, causing exchange rate volatility, and rightly so as Nigeria’s economy is monolithic with crude oil as the major source of foreign exchange earnings.
Thus the cascading effect of an increase in oil prices cut across the entire economic ecosystem and food chains, as highlighted in this article.
2.1 Operators and Servicing Companies
This price increase provides additional incentive to produce more oil so as to maximize profits and plug shortages, which will increase investments in the exploration and production of Oil and Gas. This bears good news for EPCI contractors and other Servicing Companies who can profit from the increased investment with proper positioning. Key services that are expected to get more jobs to include Maintenance and Repairs to improve efficiency and output on already existing facilities, Retrofits, and Upgrades which will be focused on increasing the capacity of facilities as well as well-drilling and appraisals.
2.2 Jobs and Workforce Retention
The oil price crash of 2020 triggered layoffs and an increase in unemployment. With the new $100 per barrel outlook, capital projects which has been suspended over the last 2 years are coming back alive, and increased employment in the Oil and associated Industry is envisaged.
2.3 Government Budgets
Higher oil prices will favor oil-producing countries such as Nigeria and Ghana as they have higher revenues and can utilize the additional income to increase national reserves as well as budgetary spending. These funds can be used to finance investments in critical sectors of the national economy such as healthcare and education, as well as for infrastructure projects such as roads, rail lines, and ports to facilitate trade. Investment in infrastructure will improve quality of life, create jobs and opportunities, and help build more robust economies. This will also reduce the burden associated with borrowing and financing loans and can help strengthen the national currency in the foreign exchange market.
2.4 Inflation and Manufacturing
The current global energy mix depends on oil and gas, which supplies about 60% of global energy consumption required for manufacturing, transportation, and various other key sectors. The effects of shortages and increased prices present new difficulties for various industries that will seek to remain profitable and increase prices. The effects on the Nigerian economy, which relies solely on imports for the supply of petroleum products despite being an oil-producing country, will be damning as this reliance on imports can drive inflation figures higher and further weaken her economy and the buying power of the citizenry.
2.5 Ordinary Citizens, Households, and Small Businesses
Sub Saharan’s power sector is significantly underperforming. This has necessitated the dependence of ordinary citizens, households, and businesses that need electricity on PMS or AGO to power their homes and business. For decades, in Nigeria, trillions of naira have been spent on the subsidy of petroleum products, and the apparent will of the present administration to stem the continuous theft of government funds through subsidy has been defeated by widespread agitations from labour and many civil society organizations who dread the consequence of a free market where the prices of these petroleum products will rise with oil prices, and personal expenses will skyrocket and lead to further hardship for the common man. But in actuality, now happens to be the best time for the subsidy removal to maximize the gains of the additional income and not lose this to the payment of subsidies which in practice benefits few elite Nigerians who smuggle these products through porous borders to neighboring African countries for personal gain. Source:Rising Crude Oil Prices…What Does It Mean For Oil Producing Nations, Consumers? | Energy News Africa