EFFECTS OF DO NOTHING STRATEGY BY OPEC. This week, the Organization of Petroleum Exporting Countries (OPEC) held a meeting in Vienna to craft and execute strategies to respond to the downward spiraling oil prices. Although we have conflicting reports on the internal disagreement on what could constitute a right approach, the meeting rose with a resolve not to cut their production quotas.The 12 nations have a combined production quotas of 30 million barrels per day. Nigerians current quota is 2.5 million barrels per day. While members like Venezuela, Nigeria and Libyan representatives pushed for cut, a strategy aimed at reducing the supply in order to stimulate price having in mind the simple economic law of demand and supply: the lower the supply, the higher the price; a few Gulf countries led by Saudi Arabia refused. While shouldnt they carry the day? Of all the proven oil reserves in the world, OPEC members boast of 81% but the Middle East Counties own 66% compared to Nigerians 3.1%. The message that that decision sent to the market was to further crah the oil prices to the lowest level in many years. The worst is that they would not meet to review this strategy until after 6 months (an extraordinary event can fast forward the meeting). The Saudis have no qualms maintaining the same level because their economy is not under threats. They sit on a foreign reserves worth $745 billion compared to Nigerians $38.3 billion as at early this month. And our woes are not just going to end any time soon. Check out this small maths: If price falls by $30 as it has already and we produce 2.5bpd, our annual loss would be (2,500,000pbd × $30× 365) $27,375,000,000 or 27.4 billion US dollars. The Central Bank had reported that our reserves went down for 16 consecutive days and Deutsche Bank analysts say that we need the price of oil to fly to $126 before Nigeria can balance its budgets. I wonder how this will happen. Although price cuts dont affect Saudi Arabia that much because of hefty cash (they have the third largest reserves in the world after China and Japan), another school of thought is that they want the prices to go down further to force US shale oil producers out of business because of their higher cost of production. However, the shale oil producers have responded that further price cuts wont hurt. At this stage, its unclear whether that was just business propaganda or a statement of fact which means that the rat race may be on for sometimes. At the risk of sounding like a broken gramophone, some implications are likely: 1. Governments may ax down some projects to reduce expenditures. Turnkey projects which contractors finance with the hope of being paid back soon will be the most hit because the contractors especially foreign ones wont be sure of early payments. 2. Importation of a few items many be be contrabanded or their duties increased. 3. Strict implementation of some old policies on import regulations may be seen. 4. Banks may cancel unconfirmed credits meaning that suppliers under such arrangements may not be paid. 5. State governments receipts from the central government would go down by as much as 40% meaning that so many projects may not be completed with many of them on their way out. Some will resort to heavy borrowing which will only postpone the evil day. 6. Many governments would introduce many types of taxes to make up. Tail or head, we lose! 7. The CBN will try to introduce many policies to stem the tide but all will translate to less loans or expensive loans to the real sector. 8. Governments are likely to default on their bonds which will increase the cost of borrowing for them as the bond prices crash. International rating agencies will promptly downgrade our country and banks which means that foreign banks would start cancelling credit lines granted to Nigerian banks. 9.Misery will increase and so will many vices - 419, kidnaping, assassination for money, robbery etc. 10. Political/ Economic riots may break in some volatile areas and BH may leverage the confusion.
Posted on: Sat, 29 Nov 2014 11:19:33 +0000
Trending Topics
Recently Viewed Topics
© 2015