Nigeria's panic act of retaliation
by Ben Mensah
Among the professed objectives of the soldiers who overthrew the constitutional government of Nigeria ten months ago is the restoration of the economy to a healthy and buoyant state.
In pursuit of this objective the Federal military government has carried out various economic measures. Imports have been slashed, travel allowances and remittance of salaries of expatriates have been stopped to reduce the outflow of foreign currency, the public sector has been retrenched to beat down the government's wage bill and the currency has been changed ostensibly to render useless the large circulation of the naira outside the country. Since then the borders of the country have remained shut to facilitate the monitoring of the movement of the new notes across the borders by the customs officials.
Realising the importance of oil to Nigeria's economy, the federal military authorities managed to secure a con- cession from the Organisation of Petroleum Exporting Countries (OPEC) to increase the country's allo- cation of oil production from 1.3 million barrels per day to 1.45 million with the hope of raising revenue from oil by over $200 million.
Most of these measures taken to meet the IMF conditions for a massive inflow of foreign capital have however had the reverse effect of creating insecurity, unemployment and pushing up the prices of the limited supply of goods. While some sort of currency adjustment was anticipated to completely satisfy the IMF requirements for the injection of massive foreign capital into the Nigerian economy, the Federal military government has announced a $2 cut in the price of its crude oil following similar cuts by Norway and Britain.
Can this decision also be said to aim at reviving the Nigerian economy. Or was it a panic act of retaliation against Britain which also produces low sulphur grade oil and with whom Nigeria currently has very cold relations? Even though the decision by Norway and Britain was expected to influence oil prices, it is however, the Nigerian action which is looked upon by economic pundits as the most powerful catalyst to a price war among the oil producers.
The argument is that Nigeria's cut of $2 on a barrel as against $1.37 by Britain is so big that its impact on the prices cannot be escaped. But even more significant is Nigeria's crucial membership of the Organisation of Petroleum Exporting Countries. As a member of OPEC, Nigeria is bound to adhere to the Cartel's production and price levels. That Nigeria has broken faith with the OPEC treaty and unilaterally cut its price is bound to create resentment within the organisation.
However, Professor Tam David-West, the Nigerian Oil Minister and his team of advisors couldn't be bothered much by the reaction of OPEC to their action. For other OPEC members such as Libya and particularly Iran and Iraq who need money urgently to finance their Gulf War efforts have clandestinely exceeded their OPEC production quotas and have been selling their oil on the spot market for between $26 and $28 per barrel. The Nigerian action could therefore be interpreted to mean a formalisation of the prevailing market prices. In this context the possible collapse of OPEC cannot be blamed solely on Nigeria.
But in the context of Nigeria having been provoked by the British and Norwegians, the Nigerian decision to cut oil prices would rather have a very devastating effect on the country's economy.
The British oil industry, which is benefitting from the persistent slide of the pound sterling on the money market, sells the bulk of its oil on the cartels. spot market. With oil being marketed in dollars the British oil company was expecting a gain of over £1 billion from the pound's weakness. However, with the cut of $1.35 per barrel this revenue was to reduce by £600m. But again the anticipated momentous rise in the sale of British oil promoted by the reduction in price, was expected to rake in more than the £600 million.
In contrast the bulk of Nigerian oil is not sold on the spot market. Nigeria trades with African countries like Chad, Benin, Togo, Ghana etc, which do not produce oil and therefore depend for their oil supply on Nigeria. Since these countries do not have foreign exchange to pay instantly for their oil purchases, they have entered into various agreements with their Nigerian partner under which they pay for their oil supply at OPEC price levels. The instability of oil prices on the spot market therefore does not seriously affect Nigeria.
Secondly, whereas the British economy, even though with initial difficulty is likely to adapt to a possible collapse of the oil industry by raising produc- tion in the other export sectors such as arms manufacture, the Nigerian economy which is virtually monopolised by the oil industry and can hardly produce enough food to feed the 100 million population, will instantly collapse.
One significant reaction to the British price cut was from the United States Energy Secretary, Mr Donald Hodel, who showed his delight by suggesting that the true market price for oil should be $25pb. The American government has persistently registered its opposition to commodity cartels and has looked for the opportunity to undermine the power of a cartel like OPEC whose decision to increase oil prices in the seventies is readily given as the cause for the world economic slump.
In strict adherence to this policy the United States of America which has refused to sign the International Cocoa Agreement engineered by Ghana and a number of cocoa producers, is always pressuring the other western industrial countries not to encourage commodity One cannot at this stage suggest that decision to cut their oil prices and thereby undermine the cohesiveness of OPEC was influenced by the American policy on the economic cartels but there is no doubt that the Nigerian decision to unilaterally cut its oil price will lead to a row within OPEC which may never be healed at the meeting in Geneva on October 29.
A preliminary meeting of the ministers of OPEC in Geneva gave the impression that the price cuts by Nigeria, Britain and Norway will not disturb the OPEC oil structure. Sheikh Yamani, the influential Saudi Arabian oil mini- ster announced that his country and other leading oil producing countries will merely cut their production in order to stabilise prices.
Yet this same minister is expected to be in Lagos during the week to consult with the Nigerian military authorities over their price cutting decision. This trip, coupled with the outright condemnation of the Nigerian decision by such oil producing countries like Libya and Oman, give an indication of a crisis within OPEC which may burst into the open at the Geneva meeting of oil ministers on October 29.
Under normal circumstances non-oil producing countries like Ghana, Sierra Leone, Burkina, Togo etc, whose economic decline is blithely blamed by their governments on intolerable oil prices, Nigeria's decision to cut its oil price, if it should lead to a price war and lowering of prices, should ease their balance of payment difficulties.
But I am afraid the prospects cannot be said to be good. These countries have signed long contracts with the oil producing countries, the terms of which are not going to be affected immediately by the current developments on the world market.
On the contrary, the produce of these countries such as cocoa, coffee, groundnuts etc which do not enjoy cartel prices but are controlled by market forces are bound to fall in response to the lowering of oil prices on the world market.
WORLD OIL PRODUCTION: FIRST SIX MONTHS, 1984
1,000 barrels
Russia 2,254,250
U.S.A. 1,876,785
Saudi Arabia 899,920
Mexico 550,245
U.K. 465,380
Iran 400,050
China 392,500
Venezuela 327,565
Canada 319,213
Indonesia 278,775
All Opec 3,260,446
World total 20,568,000
