THE fall in the price of crude oil in the international market is sending economic and political shocks around the world.
The hardest hit has been countries whose economies depend largely on oil for appreciable percentage of their foreign exchange earnings.
According to experts, crude oil accounts for about 95 of Nigeria’s foreign exchange receipts.
The reality of possible crippling budget shortfalls also stares many oil exporting countries in the face as the priced commodity has hit its lowest price level in four years.
Crude oil prices started dropping in the international market from as high as 110 dollars per barrel in January to the current level of 58 dollars.
Nigeria’s reference crude, the Bonny Light, is currently trading at about 62 dollars per barrel.
It is noteworthy that crude oil is not just the principal export commodity of the country, but indeed all aspects of the nation’s economy rely on the commodity as the major source of revenue.
The annual budgets, which define the direction that the country, is based on crude oil price benchmarks.
While the 2014 budget was based on 78 dollars per barrel, the 2015 has been predicated at 65 dollars per barrel.
According to Dr Ngozi Okonjo-Iweala, the Minister of Finance and Coordinating Minister of the Economy, the fall in oil prices has led to new austerity measures.
The minister said the country would begin to feel the negative impact of the fall in global oil prices, cautioning that the country would need to brace up for tougher times ahead by reviewing its expenditures and building economic buffers through budgets based on modest oil prices.
She said that the decline in crude oil prices had assumed a disturbing dimension.
``Without a doubt, this slowdown in global economic activities, coupled with the end in the quantitative easing in the U. S., will affect the sub-Saharan African economy, in addition to regions’ other specific challenges.
``As we all know, many countries on the continent depend on commodity exports as their main sources of revenue.
``Nigeria and other countries on the African continent must step back and learn the lessons of the ongoing economic transformation.
``The Federal Government has set up a strong stabilisation policy, but the most important being that we must be able to sustain the drive”.
But a former Governor of Lagos State Governor, Alhaji Bola Tinubu, in an essay on ``Slump in Oil Prices: A Progressive Way Out’’, has argued that the austerity measures proposed by the government would further enrich the affluent.
He said that the austerity measures would put average Nigerians into more hardship and economic depression.
Tinubu said that the austerity measures embarked by some countries in the Euro zone had not solved their economic problems in the past five years since the global financial crises.
``All that austerity has done is to tighten the grip of the wealthy on the economy, while weakening the position of the middle class and the poor”.
Mr Kazeem Bello, an energy expert, said the impact of Nigeria’s continued dependence on oil as major revenue earner is very grave.
According to him, the glut in the oil market following the discovery of crude oil in many parts of the world and the new wave of alternative energy sources, particularly shale oil, have had adverse effects on Nigeria.
``In the face of such dreadful challenges, we have no option than to put our economy in order. First, we diversify in terms of other viable frontiers of international revenue earning.
``Secondly, we must make the private sector our engine of growth in order to generate more exportable goods and services.
``Thirdly, government should demonstrate the political will to fight corruption and mismanagement which are part of a `lachrymal waste pipe’ of public resources and finally, we should create the enabling environment for direct inflow of foreign investment,” he said.
Mr Idris Simon, Managing Partner, Magnet Oil Company, said that Nigerians should be ready for harsh economic measures in the nearest future as a result of the continued fall in the prices of oil.
Simon said that the current steps by the Federal Government were good, but wondered if the current measures could actually cushion the impact of the fall in oil prices.
He, however, said that the most important thing was the fact that government accepted that it had to do something with respect to the falling oil prices.
``What we are seeing now is not a short-term phenomenon, whether the therapy is adequate is another issue. But I think it is a good move and it has not ruled out other moves’’.
Mr Samuel Kalu, another energy expert, said that government’s resolve to adopt austerity measures was not surprising.
According to him about 80 per cent of our earning is from oil and so it is not a surprise that the government is adopting austerity measures, considering the fast decline in oil prices.
``This is actually the beginning of things to happen, apart from imposing tax on luxuries,

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luxuries, they should look at how to diversify the economy by creating the enabling environment so that industries can thrive.
``Increasing or taxing more utilities is not the major solution; the government should now make more effort at diversifying the economy.
``They should make concerted efforts at ensuring that the agricultural sector and a few others are working.
``Nigerians may not worry much about the tax issues because they are expected, but tax revenue should be used wisely.
``It should not end in the pockets of a few individuals because the country’s earnings are mostly from oil, it means that a fall in the price of the commodity will deny the country a lot of income to provide roads, power plants and many other things that will benefit the ordinary Nigerian,’’ he said.
Mr Seyi Gambo, a former National Public Relations Officer of PENGASSAN, advised the Federal Government to tackle the issue of wastages in the economy by slashing the emoluments of members of the National Assembly.
He also called for reduction in the expenses of running the executive arm of government.
According to him, there is no sense in keeping 10 aircraft for the president at a period when revenue is going down.
Gambo, however, expressed fears that although the austerity measures, announced by the government, were bound to trigger panic actions in the money and capital markets, but the long-term measure should be to diversify the economy.
According to him, with the decline in crude oil prices, all things being equal, should translate into reduction in pump prices in the local market too, but this would depend on the level of price decline.
``But the reduction in pump price is unlikely in the Nigerian scenario at this time,’’ Gambo said.
``One has to look at the dynamics of fuel pricing at this moment to ascertain the landing cost from the decline in oil prices at the international markets vis-à-vis the subsidy gap paid by government.
``I think the pricing template should be adjusted to reflect the current price reality. If that is implemented, which I think the PPPRA would have adjusted; we may then see a drop in the amount of subsidy paid by the government.
``So, I think the decline in crude oil prices in the short run will be a big positive for countries that depend largely on oil imports for their oil consumption. But for Nigeria, the situation could be in a dilemma.
``We earn less during a price decline as a producer, which reduces our revenue base.
``On the other hand, we are better off as an importer of refined crude oil, which reduces our import bill and also lowers the subsidy burden for the government which should even make it easier for the government to make case for deregulation of pump prices.
``But the current scenario may not be tenable because of the anticipated public outcry that may follow, particularly as election year approaches.
``Just recently, the government of Rwanda announced a reduction in fuel pump prices by about 4.95 per cent mainly due to reduction in oil prices at the international market.
``Again, this is where the need to fix our refineries or get more private investors to invest in building more refineries in the country just like that of Dangote that is billed to come up by 2018,’’ Gambo said.
Mr Kunle Stenvenson, the Managing Director of Legacy Communications, said the oil glut would remain in the market and oil prices would continue to fall.
``Since the announcement, prices have fallen sharply. As at the time the announcement was made, the reference price was around 76.3 dollars per barrel, few minutes after, it fell to 74.5 dollars, and of course it is not relenting.
``You can understand what this would mean for Nigeria because we just set our 2015 benchmark oil price at 65 dollars. It means there will be no excess crude account if the decline continues,” he said.
Stenvenson said that the country might not see significant growth in production as a result of oil theft, stressing that the contribution from the oil sector to revenue could significantly reduce.
``Oil accounts for up to 95 per cent of foreign earnings, but production has stagnated in the past two years as a result of oil theft and slowdown in investment’’.
The challenge is for government to come with long-term solutions to stave off impending economic depression. (NAN

When the exchange rate of a dollar was 155 naira, lets assume the price to get a liter of petrol to apapa was 80 cents which is 124 naira, the government subsidizes it to 97 naira . Now the price of crude oil have gone down by 50%, so that means 50 % of $0.8 is $0.4 , coverting this to naira will give you 77.6 naira , with the exchange rate at 194 naira.
During the wind fall oil prices where booming, nigeria did not diversify is it now that there are no funds to pay salary not to talk of diversification of the economy

Oil Prices Shock on Macroeconomic Volatility (General Price Level) In Nigeria’s Economy

Nigeria benefited from the two oil price hikes in the 1970s, receiving windfall profits like the Middle Eastern oil producers did. The huge oil revenues notwithstanding, Nigeria has accumulated foreign debt like other non-oil exporters, and it suffered prolonged economic stagnation in the...

http://www.scharticles.com/oil-prices-shock-macroeconomic-volatility/