SIMON KOLAWOLE: Repent… for the End is Nigh!

Simon Kolawole Live!: Email: simon.kolawole@thisdaylive.com

Let me scare you a bit – crude oil could soon be selling for $10 per barrel. It means as oil revenue dwindles, we would have to start sacking workers as salary arrears pile up. Projects would be abandoned with not enough money in the treasury to complete them. We would resort to heavy external borrowing to meet basic obligations. External reserves would go down so rapidly and intensely that importing basic provisions would become a problem. We might have to start queuing up to buy essential commodities (“essenco”). Meanwhile, the naira would hopelessly nosedive as forex scarcity hits the economy because of little inflow of petrodollars.

Relax. I said I wanted to scare you. Maybe none of this would happen. But if you were in Nigeria in 1982-84, you would know that this scenario has happened before (under President Shehu Shagari, later overthrown by Maj. Gen. Muhammadu Buhari). We earned so much money from oil in the 1970s and spent like mad, but our fortune took a downward turn in 1982. We earned $22.4 billion from oil in 1980 and, by contrast, only $9.6 billion in 1982. The economy was on its knees. The foreign reserves, built mainly by the military administration of Gen. Olusegun Obasanjo, were consequently depleted. Nigeria had $10 billion in its reserves kitty in 1980; by 1983, it was down to $1 billion. The naira, which had been grossly overvalued because of the oil boom, became a living corpse.

What happened next? Imports were hampered. Inflation set in. Food prices rose by as much as 25 per cent within a year. Factories suffered shortages of raw materials and spare parts. Many of them cut back production and sacked workers. Some closed down and have not reopened till today. Civil servants were owed salaries running into months. Austerity measures were hastily introduced by Shagari. The military overthrew him and resorted to rationing the supply of basic commodities such as rice and milk (“essenco”). Governors, meanwhile, had on a foreign borrowing spree ostensibly to finance “important” projects. Nigeria became heavily indebted and enslaved to the Paris Club and the London Club of creditors.

Now, let’s go back to the future. Our overdependence on oil may catch up with us sooner than we thought. Experts have been warning us for decades, but we hardly pay attention. It’s either we think the warnings are false or that the future can go to hell. However, we are, more than ever before, facing a certain “oil doom” after enjoying “oil boom” for decades. We may be forced to regret what might have been if only we had wisely invested the hundreds of billions of dollars we earned from oil in the last 40 years. My article today is based on some developments that should really get us worried and help our policy makers plan ahead.

The first development is that the United States, the biggest buyer of our oil, has drastically reduced what it imports from Nigeria. Why? Well, unlike us, Americans have been planning for decades on a future with less dependency on oil import. The country’s production has gone up, meaning its import needs have gone down.  In 2006, US imported 60% of its oil needs. In 2011, this went down to 45%. The country is targeting zero importation. For a country that used to buy 35% of our oil export, this is no good news. Last year, US only bought roughly 20% of our production. The immediate impact, according to an Ecobank finding quoted by Reuters, is that our oil is now selling 40 cents less than the market price as we scout for buyers because of the US cut.

The second development, also highlighted in the Reuters report, is that we may lose out of the Asian market, which would ordinarily be our next port-of-call. An analyst was quoted as saying that the oil and gas industry is booming in East Africa and the proximity to Asia means the East Africans will enjoy an advantage over us. To add insult to injury, everybody is now discovering oil in Africa (even Kwara State claimed to have found oil in a farm!) In the last five years, Reuters reported, there have been close to 70 discoveries in sub-Saharan Africa, with the majority coming in East African countries such as Tanzania and Uganda. I get this funny feeling that there will be global production glut in the next 12 years and OPEC would not be able to effectively maintain high prices.

Meanwhile, back home, the delay in the passage of the Petroleum Industry Bill (PIB) means fresh investments are on hold. Capitalists want to grow their money and would not wait forever to be sure of the legal and financial implications for their investments. Every day we delay the PIB, we delay fresh investment. Every day we delay investment, we delay building of more reserves. As we delay building of reserves, we open ourselves to a future of less reserve, less production and less revenue. Oil companies will take their money elsewhere to prospect for oil. They are doing that already. Other African countries are competing for their attention and offering them better incentives and calmer climates. Oil and gas expert, Mr. Austin Avuru, has drawn attention to the fact that we are practically not building reserves again, because what we are depleting is more than what we are adding. That is scary.

The end of oil boom seems nigh, expect things change rapidly. We are faced with the prospects of low investment, depleting reserves, global production glut, reduced exports and sustained drop in crude oil prices. Our leaders, especially the president and the governors, must repent. They must sit down and critically look into these issues. In truth, are we ready to depend less on oil as at today? My answer is no. We are far from ready. Oil accounts for between 80-90% of our forex earnings and nearly 70% of budgetary expenditures by the three tiers of government. How would we survive all these odds that are piling up? By the time almost every country begins to produce oil, a glut is highly possible. We may have to start drinking “our oil”, as the Niger Delta people fondly call it.

There is real danger ahead. The writing is on the wall. The time to cut out waste (and greed) and start saving for the rainy day is now. The time to vigorously and creatively grow alternatives to oil is now. This is no rhetoric. This is no politics. This is economics.