Obama’s shale subsidy means more stress for Nigeria

If predictions by analysts that the United States of America (USA) would subsidise her shale oil producers to prevent them from bulking under current falling oil prices materialise, Nigeria may be in for a longer crisis, economic and policy watchers said last night.

The Obama government is believed to be working hard to achieve energy self-sufficiency, a national security issue for the US.

The analysts also say that the Federal Government’s current austerity measures and monetary tightening may

not bring the much needed respite to the economy, at least in the immediate, as the expected cutting from the capital vote and continued fall in oil prices would lead to low purchasing power, with its negative impact on consumer sentiment.

The Central Bank of Nigeria (CBN) may be forced to embark on more tightening, to encourage foreign investors to take advantage of the higher yield, so as to enhance our dwindling foreign reserves.

Meanwhile, the price of oil which is Nigeria’s main foreign exchange earner further plunged yesterday, to $71 per barrel.

They argue that the situation may assume more dangerous dimensions as Saudi Arabia and other oil producing counties waiting in the wings may retaliate by pumping more oil into the market, with its adverse effects on Nigeria’s economy.

“If oil prices plunge to unbearable levels, the government may come in to subsidise production costs for the major players, to help them sustain their production output to the end that the US remains an energy self-sufficient country, an international analyst wrote last week.

According to analysts at the Rennaisance Capital, “The government’s proposal to cut spending in FY15 and the recent tightening of monetary policy by the Central Bank imply that the consumer will face further headwinds in 2015. We now expect consumer confidence to deteriorate further and remain negative until YE15 (vs our previous view that it would turn positive in 4Q14).”

“Following the fall in oil prices, it is questionable whether the Central Bank will continue to defend the currency and we expect a tightening of monetary policy and government spending to result in an even more constrained consumer environment in 2015. We have reduced our revenue growth forecasts for FY15 as a result, although lower global commodity prices lead us to believe margins will be sustained despite our assumed naira devaluation to NGN197/$ by YE15E, even in the absence of selling price increases,” the analysts further said.

A recent research report stated that at $60 per barrel, only 30 percent of US shale producers can operate at a profit,  fueling speculations that OPEC’s decision to maintain output levels at 30 million barrels per day may not successfully hurt shale producers.

Besides, the analysts are of the opinion that Obama’s decision to subsidise shale oil producers will have a negative consequence on the revenue profile and consequently, budgeting and service delivery in most sectors of the Nigerian economy.

Also, the naira may lose more of its value until the Jonathan administration implements foreign exchange management reforms based on a better understanding of the dynamics of the forex markets—official, interbank and black markets.

Also, fuel price at the pump may rise, unless the government chooses to retain the fuel subsidy, the handling of which continues to fuel corruption in the country.

This will lead to the unmasking of western diplomatese that discourages emerging markets like Nigeria from deploying subsidies to support domestic producers, a development which they say could  hurt Nigeria –US relations that is already under stress over the Boko Haram insurgency in the country.

Additional insights come from the mean price reversal school of thought which says that oil prices are returning to their 30-year mean/average price (which is $50, adjusted for inflation), engendered by oversupply and weak demand. This also has important  implications for Nigeria, where a mean price reversal scenario means that  Africa’s largest economy by population and gross domestic product (GDP) will struggle to find buyers for her oil in the international oil market in the near term.

Yet another scenario invokes a conspiracy theory suggesting that oil price is being manipulated to emasculate Russia for her role in trying to silence President Petro Poroshenko of Ukraine. This may not be a popular view but proponents do exist.

Businessday