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Published On: Mon, Nov 3rd, 2014

2015 Budget: How realistic is $78 per barrel oil benchmark?

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Okonjo-Iweala_Ngozi (1)With the decline in global oil prices taking a big toll on the country’s revenue, Aminu Imam explores how realistic is the envisaged $78 per barrel oil benchmark proposed by the Federal Government for the 2015 Budget.

The Senate, last Tuesday at plenary, set the benchmark for Nigeria’s 2015 budget at $78 per barrel (pb), based on 2015-2017 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper, as against $77.5pb in the 2014 Budget.

The document, which forms the basis for preparing the budget, assumed oil production of 2.27 million barrels per day in 2015, down from 2.38 million barrels in 2014.

A higher assumed oil price means a slightly looser budget for 2015 than for 2014, although that was to be expected given this is an election year, when demands for funds from politicians tends to surge.

In theory Nigeria saves money over a benchmark oil price in its Excess Crude Account (ECA), which then provides a cushion for when oil prices fall or extra cash is needed for spending on infrastructure.

Lawmakers tend to inflate the benchmark price if they believe it is too low, which often bring them into conflict with the Finance Minister, Okonjo-Iweala.

The price of crude oil has recently continued to tumble, falling drastically from more than a $100 per barrel to about $82 now. This will have a major impact on the world economy and the overall fiscal policies of most developed countries and Organisation of Petroleum Exporting Countries (OPEC) countries will also be seriously affected by the downslide, especially countries that are heavily dependent on the exportation of oil, such as Nigeria.

There is also the problem of illegal bunkering particularly oil coming from the Islamic State ISIS which is sold at a massive discount; by some estimates, the cost of oil from this source was being sold as low as $ 25 per barrel contributing in no small measure to the worsening market scenario.

In Nigeria the outlook is grim. According to Okonjo-Iweala, Nigeria and other oil producing countries are receiving shocks from both the price and quantity of crude oil produced. She, however, maintained that Nigeria will not borrow to maintain its expenditure, but would look inward to generate revenue and cut down on spending. It is important to note that the 2014 budget was based on the reference oil price being $77.5 per barrel and presently the oil price is hovering around $82.5. If the price continues to drop, the implication would be a huge budget deficit and most likely some economic crises.

Okonjo-Iweala sought to allay concerns over falling oil prices in Tuesday’s press conference, arguing that the country still had funds to pay salaries and keep its debt obligations. Brent crude, the benchmark against which Nigeria’s oil is measured, has declined by around 25 percent since June, when it peaked at $114.68 per barrel. The decline is as a result of increased supply from the OPEC, rising shale oil production in the United States and weak demand from Europe and Asia.

The fall in the price of crude oil has long been expected by economic pundits, who have always insisted the situation a bubble waiting to burst and continually advised Nigeria’s economy handlers to start seeking alternatives to oil. That it has even lasted this long is an indication of the resilience of the world economy. The continual rise in the price of crude oil encouraged major consumers like the United States, to start giving serious consideration to alternative sources of energy. Biofuels, natural gas, hydro, solar and wind power became plausible and cheaper alternatives. However, the most spectacular of all of these alternatives was the extraction of crude oil from a huge reserve of shale rock in the USA.

The country, which is the highest consumer of crude oil and Nigeria’s biggest customer, increased its production of shale oil and today, it has reduced drastically its importation of crude oil.

It is a no-brainer knowing that if there were to be any sudden external shock in terms of petroleum prices, on which we depend for much of our earnings, it means we’d have no cushion.

Chairman, Senate Committee on Environment and Ecology, Senator Bukola Saraki, last Friday declared that the $78 oil benchmark being proposed by the Federal Government for 2015 budget is unrealistic.

Saraki, who also demanded a full disclosure of the state of the nation’s economy, stated that the revenue base was caving in under the stress of falling price of oil in the international market.

Saraki said the proposed oil benchmark of $78 per barrel for the 2015 budget was not realistic, adding that the Federal Government needed to tell Nigerians the truth about the financial status of the country.

“We have a problem in our hands, but not one that cannot be surmounted with the right political will,” he said.

According to him, “These are troubling times for the Nigerian economy. Our revenue base is caving in under the stress of falling price of oil in the international market. Due to the drastic and persistent nature of this fall from the highs of $115 in June, it is my considered view that we can’t continue to give the impression that it is business as usual.

“The fact that the free fall in the international oil market price has seen it losing over 25 per cent of early June highs means that correspondingly, our economy has lost over 25 per cent of budget revenue estimates of the period as a result.

The former governor of Kwara state called for a meeting of the National Economic Council, to proffer a collective and workable decision on the national contingency and viable benchmark for oil price.

In fact, there is not likely to be a marked difference between the proposed 2015 Federal Budget and previous ones, as it is never designed to impact significantly on the lives of the citizens. The budgets always come with enticing captions, and lofty promises but it is the same unpalatable menu Nigerians have been fed with over time which has never moved us forward.

Even when crude price was over $100 for a long spell, there was no evidence that it translated into the well-being of ordinary Nigerians. The same policies that have failed the nation in the past are recycled to no avail.

Who in truth are the beneficiaries of the N1.22 trillion subsidies on petrol and kerosene? Is it the poor Nigerians who still buy kerosene for N130 or more per litre or the fat cats implicated in the subsidy scam probe? Why is it that budget after budget, neither interest rate nor inflation now put at 8.3 percent has come down? Why is there still high exchange rate and surplus cash in the system, which the Central Bank of Nigeria is ever mopping up at the public expense by paying interest to the banks? Why are there so few jobs created in the economy despite claims of 7 percent growth rate?

Indeed, it would appear that the nation’s economy managers are toying with the intelligence of Nigerians. In the face of fluctuating crude prices and output, we have never been given the true position in terms of the shortfall from production neither are we told the excess in terms of price.

We must reduce our dependence on crude oil and start looking for alternative sources of revenue.

At this time, the last thing Nigeria needs is a government more concerned about theoretical economic indices and the assessment of rating agencies, than about the economic catastrophe that surely awaits if this administration continues in the direction in which it is currently headed.

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