The Middle East region has been embroiled in an unprecedented dimension of crisis of late yet rather than climb, the prices of crude oil have been on a downward spiral. I think this trend signposts the end of the era when the prices of oil shot through the roof whenever the region erupted in crisis.
Less than six months ago, oil was trading at $106 per barrel, up from a low of $91 per barrel earlier this year.
Since 1990, there have been 21 "destabilizing" events that have occurred in the Middle East. From Operation Desert Storm in 1990 to the Anbar Clashes in 2013, the area has had both major and minor political/military disruptions. Over the last 23 years, on average, oil prices have risen by 5.4% 30 days following the beginning of a disruption.
Usually, following the first period of price surge, still-higher prices follow. Historically, three months after the start of the crisis event in the Middle East, oil prices have risen by 9.2% from their pre-crisis levels. If this average holds true, oil prices should be approaching $112 per barrel by now. But this has not been the case as the prices have crashed by about 27% in three months.
When oil prices rise, oil-producing countries including Nigeria, which exports over two million barrels per day, benefit.
Historically, the OECD countries (large, developed countries) have been the largest consumers of oil in the world. However, that historical truism has changed over the last number of years. The OECD (developed countries) consumed 72% of the world's oil production in 1992. Today, that percentage has fallen to 49%. The non-OECD (developing) countries now consume 51% of the world's energy output.
Besides, oil consumption in the U.S. has declined from a high of almost 21 million barrels per day in 2004 to the current 18.8 million barrels per day while the country, which was the largest buyer of Nigeria's crude no longer buys our hydrocarbon. This is simply because the United States' domestic oil production has risen from less than 5 million barrels per day to 12.8 million barrels, currently. What that means is that its oil imports are running at an annualized rate of around six million barrels per day, down from well over 12 million barrels per day in 2004.
A process known as 'fracking' has made all the difference for the world's largest economy.
Fracking, the common name for hydraulic fracturing is widely used to extract oil and gas, particularly from deep shale formations. A single well requires the use of millions of gallons of water and tons of sand.
Fracking has lead to a boom in U.S. energy production, with a number of beneficial effects. According a 2014 report from the Federal Reserve Bank of Kansas City, in states where natural gas fuels a significantly higher proportion of power plants, average electricity prices have fallen.
Fracking has led to an abundance of oil in the United States of America, which has in turn reduced the demand for import, and consequently stability in the prices of crude oil on the international market.
Sliding oil prices means declining revenue for Nigeria, and other oil exporting nations.
At a recent Senate committee session on the Medium Term Economic Framework (MTEF), which serves as a basis for the preparation of the estimates of revenue and expenditure for the annual budget, Mrs. Ngozi Okonjo-Iweala, Finance Minister and Coordinating Minister for the Economy, admitted that the Nigerian economy was facing challenges on account of the oil price drop. To put it succinctly, the Nigerian economy is facing serious crisis as a result of drop in oil revenue due to slowing global demand and the rise in US shale oil production.
Further price drops may result in further difficulties, considering that our 2014 national budget is predicated on a benchmark of $77.50 a barrel and daily production of 2.39 million barrels.
The activities of crude oil thieves and oil pipeline vandals are also making it more difficult for Nigeria's output.
There is still demand for Nigeria's crude from Asian economies like China but the outlook is worrisome. What if the economies of Asia, with their heavy investment in research and development, discover cheaper sources of energy in their backyards? And this could be sooner than later.
Nigeria is in a typical Catch-22 situation: the demand for our crude is shifting at a fast pace to new buyers who may not have the capacity for large volumes; and we do not have significant refining capacity in our country. So a significant proportion of crude oil earnings go out to import processed petroleum products.
The drop in global oil prices makes it imperative for Nigeria to urgently diversify its revenue base.
There is now a compelling need to unlock the potential of agriculture. With over 84 million hectares of arable land, Nigeria should be a net exporter of food, which should enable the country earn substantial revenue outside oil. The maritime industry is also good as an alternative source of revenue if accorded necessary priority.