Why cheap oil spells trouble for Nigeria -By Leo Cendrowicz

The prospect of cheap oil is usually cheered by consumers and businesses, but it could spell trouble for Nigeria. As oil prices plunge around the world, the glee felt by truck drivers in Kentucky, machine factory owners in Spain, and oil heating families in Sweden is being met with alarm in Nigeria. Nigeria is particularly dependent on oil.

It accounts for 75% of government revenue and 95% of exports, helping propel the country to become Africa’s biggest economy earlier this year. So oil’s dramatic price fall threatens the entire economic edifice. How bad is it? Earlier this year oil was selling at well over $100 a barrel.

The price of Brent Crude has now fallen $67.53 a barrel, the cheapest it has been since October 2009. The result has been an oil glut, which is likely to continue for a while after Organization of the Petroleum Exporting Countries (OPEC) – which Nigeria is a member of – agreed last week not to cut their output target of 30 million barrels a day. That means prices will continue to remain low, delighting consumers, but hurting those who rely on oil exports. The reasons for this are many.

The continuing ailings in the Eurozone, and China’s slowdown have been big contributing factors, as has the shale boom in the United States, which has transformed the country’s energy market. The switch has been especially noticeably between the US and Nigeria. Seven years ago, some 40 million barrels of Nigeria oil arrived in American ports every month. But last July, not one drop was transferred, having been completely replaced by local US production.

According to Robert Windrem, an investigative reporter with NBC News, “The big fat zero was a milestone not only on the United States’ journey toward energy independence, but a signpost pointing to a new world.” It essentially means that Nigeria has lost its entire share of the US market. And the situation could get even worse.

According to a Citigroup analysis of the oil trade issued in November, overall US oil imports have fallen from 13.4 million barrels a day to 4.7 million barrels a day.

While some officials and producers insist that Chinese exports will replace US purchases, the slowdown across East Asia, along with Chinese push for nuclear energy makes that talk seem empty. Nigeria is, of course, not the only major oil exporter set to lose as prices fall. Others, like Saudi Arabia, Iran, Russia and Venezuela are all hurting.

All will have to adapt, probably by cutting public spending, if they hope to avoid or prevent a collapse of public finances. But the effects are already being felt in Nigeria. The naira touched a new record low of 183.05 against the dollar penultimate Monday, driven by concerns over a sustained low oil price and expectations foreign investors would demand more dollars to pull out of local assets.

Deutsche Bank says Nigeria needs an oil price of $120 a barrel to balance its budget.

The central bank is struggling to keep the naira within its preferred band even after devaluing the currency by last week in a bid to halt a decline in the foreign reserves, of which oil sales account for around 95%. It has also raised interest rates by a percentage point to 13% and slashed its target rate for the naira against the dollar by a further 8%.

Finance Minister Ngozi Okonjo- Iweala has warned that the government could be forced to cut non-essential spending, raise more revenue and spend half of its $4.1 billion sovereign wealth fund – down from $11.5 billion at the start of 2013 – to cover budgetary shortfalls.

And it comes as the Boko Haram violence continues to flare, prompting the government to take out a billion dollar loan from Western banks to finance the efforts to fight the insurrection.

All of which adds up to a combustible mix. Nigeria needs to find some answers soon, preferably ones that do not assume a continuing dependence on oil.