Nigeria, Africa’s largest economy has proposed a budget of $30.1 billion for 2016 with the hope that it produces 2.2 million barrels of crude oil daily and sell each barrel for at least $38. Oil accounts for more than 80 percent of government earnings.
Minister of National Planning and Budget, Udo Udoma disclosed this on Monday after a Federal Executive Council (FEC) meeting presided over by President Muhammadu Buhari.
“At today’s Council, the Council approved the Medium Term Expenditure Framework, MTEF which sets out the policies of government over the next years. It sets out the fundamental economic underpinning of the budget,” Udoma told journalists after the meeting.
“The highlights are as follows: we project and we are working with $38 crude oil price, we consider that to be very conservative but because of the uncertainty, we felt that we should start with a conservative crude oil price,” he added.
But as conservative as $38 may be — when compared to this year’s benchmark price of $53 per barrel — Nigeria still needs to be worried. OPEC’s latest decision which indirectly endorses limitless output means the reason for the slump in oil prices will persist in 2016.
The energy sector witnessed the worst slump since the 2008 global financial crisis with oil glut sending the price of Brent, a global oil benchmark, to a six-year low. This price slump has depleted the profits of major oil companies and has seen the currencies of oil-based economies plunge. Oil has sold below Nigeria’s benchmark price for most part of the second half of the year, this among other effects of the low prices of oil forced the Nigerian government to draw up a supplementary budget to fund the remaining part of the year.
With oil now selling below $40 per barrel and falling further upon OPEC’s infamous resolve, 2016 prices remains a tough guess. However, with more Iranian oil expected in the market next year, a price recovery for oil may be far-fetched.
Nigeria, which has been tardy in its diversification plans has two worries ahead of next year. Production in the country is sustained by offshore fields as frequent rift between oil companies and oil-producing communities has often discouraged onshore production. But production of a barrel of oil costs $30 offshore, meaning if oil sells below $30, Nigeria will not only run a budget deficit, it will also be selling its crude at a loss. Several oil companies will shut down production if it gets to this.
At current prices, oil will remain in excess supply in 2016 as producers bank on turnover to be able to fund their economies. Although members often ignore output ceilings, OPEC’s supply cut often triggers a price increase. The cartel accounts for 33 percent of global oil production and 80 percent of its reserves. With OPEC failing to set a production ceiling at its latest meeting, Nigeria like other members of the bloc can get their acts together and pump more oil into the market for more revenue.
OPEC’s de facto leader, Saudi Arabia is not moved yet and can afford to continue its market share war as it can produce at less than $10 per barrel. It also has $726 billion in foreign currency reserves. But Nigeria cannot survive the current trend. Africa’s largest oil producer is already struggling to fund its budget and its foreign reserves are dwindling.
Nigeria needs oil to sell at over $130 per barrel to support its economy. But while the country won’t get such price anytime soon, what Nigeria cannot afford right now is oil below $30 per barrel. If OPEC/Saudi remains defiant about output cut in 2016, the country’s economy, as well as other smaller OPEC members, would be in great distress.
The $38 price proposed by the Nigerian government is subject to approval by the country’s parliament.