When experts made 2020 predictions for the energy sector, no one saw the coronavirus pandemic coming. The spread of COVID-19 has been responsible for the drop in global oil demand by 30%, putting all previous forecasts to bed. Estimates were further rattled with Saudi Arabia and Russia’s disagreement.
Analysts are still uncertain about the full effects of these crises – but we know it is bad. Last month, the International Energy Association (IEA) predicted that year-on-year global oil demand would reduce by 90,000 barrels/day – the first time since 2009.
In a search for some oil price uplift, OPEC and Russia signed an agreement this week to cut production by 10%. Still, this did not immediately lift the sentiments – Brent crude fell by more than 3% to $32 per barrel after the OPEC+ meeting ended.
History shows the price war will not be the first time that a renegade has threatened the essence of the OPEC and OPEC+ alliance. Russia’s insistence on clawing back market share has the same purpose as the 2014 Saudi-led OPEC effort to suffocate the highly-leveraged US shale industry.
For now, Saudi Arabia understands that it is sitting on an ever depreciating asset – oil, which is expected to peak within 20 years. It seems the long term strategy, is to continue flooding the market when other members don’t play ball.
What’s at stake for Nigeria?
Undoubtedly all of the politics and strategy involved in oil prices will continue to affect Nigeria.
The new cuts now set Nigeria’s daily production to an average of 1.4 million barrels per day; 300,000 barrels less than the 1.7 million barrels in the adjusted 2020 budget, signalling leaner days ahead for Africa’s biggest oil producer.
Already, Nigeria is stuck with unwanted cargoes of crude oil and liquefied natural gas (LNG), as coronavirus takes its toll on our biggest buyers.
The reason Russia and Saudi Arabia can afford to play the game of chicken is their reserves. Russia has spent the past five years building an estimated $570 billion in reserves. Officials say the reserves can allow it to cope with a low oil price environment for up to a decade.
Saudi Arabia has also built an estimated $500 billion in reserves. In contrast, Nigeria’s excess crude account which started at $20 billion in 2007 has been depleted to less than $70 million as at February 2020.
Additionally, when oil prices fall, Saudi Arabia always has the option of producing more to reduce its losses. Nigeria’s ability here is limited.
Nigeria is involved in a volatile market in which it has little control over. Today’s oil price position gives us a peek into the future. With low oil prices backed by massive low-cost and quickly deployable reserves, concentrated in the Middle East; Nigeria cannot continue without taking effective actions.
Bigger enemies await
The coronavirus will pass, but a larger threat to the oil industry awaits.
The use of renewables is rising fast and is gradually eating away the demand for oil. Soon the game will change. The Saudis recognise this, and Nigeria should keep its eyes open. With innovations, old industries die. This is what led to the demise of whaling (capturing whales for oil) in the US – it was once big enough to be the fifth largest sector in the economy.
Nigeria desperately needs to build an economy that is resilient to the volatility of oil and gas markets. Such resilience requires political cohesion, economic diversification, investments in education, science, technology and manufacturing capacity.
The recovery from the COVID-19 pandemic might offer our best chance in a long time for successfully pleading debt relief from multilateral agencies. If successful, our leaders must try and kill two birds with one stone – address the shortterm problems of today but also position the country to be less reliant on oil export earnings.
One example of this is the central bank of Nigeria’s recent ₦1 trillion stimulus in the manufacturing sector, which is aimed at boosting medical equipment production but also switching towards more local production, away from foreign imports. This will reduce our reliance on oil money to finance our foreign imports in the sector.
The fossil fuel industry will not die today, or in the next ten years, but it will not continue to grow in the long term. With oil prices hovering around $30 a barrel, renewable energy projects, with steadily reducing component prices, are increasingly able to compete with oil and gas projects in terms of economic profitability.
They are also less sensitive to geopolitics and pandemics as we see the oil industry today. The World Bank, the Rural Electrification Agency, and investors are already supporting entrepreneurs and creating energy access solutions for hundreds of thousands of Nigerians.
Countries like Nigeria need to prepare for this reality. The world will ask itself many tough questions in the wake of this virus. And we must do the same