Nigeria’s economy short circuits despite oil gains

Nigeria’s long-awaited Dangote oil refinery is expected to start production towards the end of this year. The event could not come soon enough for citizens, who are feeling the pinch of high inflation and the effects of a frayed energy system. 

In 2021, Nigeria’s economy grew at its fastest rate since the 2015 oil price crash. But recent reports from the West African country paint a grim picture of the state of the continent’s largest economy: Nigeria has recently been gripped by fuel scarcity, worsened by substandard imported oil, which caused residents to queue for hours at petrol stations. The crisis lasted two months. 

Last month, Nigeria’s power system — which already experiences frequent outages — suffered a total collapse. This as skyrocketing oil prices caused manufacturers to complain about the escalating cost of running diesel-powered generators.

Recent events lay bare the longstanding frailties of the country’s oil-dependent economy, which analysts say have left it unable to cash in fully on the war-induced oil price rally.

Huge loss

In February, oil prices soared to more than $100 dollars a barrel in the wake of Russia’s assault on Ukraine. Such elevated prices, last seen in 2014 amid strong economic growth in the US and China, ought to have been a boon for Nigeria, which is Africa’s largest oil producer.

However, operational issues in the country means its economy hasn’t seen the full effects of higher-than-usual oil prices.

According to data from the Organisation of the Petroleum Exporting Countries (Opec), Nigeria’s crude oil production declined to 1.38-million barrels a day in 2021 from 1.58-million barrels a day in 2020. Opec recently raised Nigeria’s oil production quota from 1.735-million barrels a day to 1.753-million. 

Last month, Fitch affirmed Nigeria’s stable credit rating, owing to healthy oil prices in 2022 that are expected to drive an improvement in external liquidity and near-term economic growth. 

The ratings agency noted, however, that Nigeria’s oil production will remain likely below capacity.

Nigeria’s economy will inevitably see some benefits from high oil prices, Abuja-based economist Adedeji Adeniran said. However, he pointed out, the country is losing out on about half a million barrels of oil a day. “If you multiply that by $100, that is how much we are losing — about $50-million — all because we are not able to meet higher demand. And that is huge.”

Adreniran also noted that, as oil prices increase, so too does the fuel subsidy, which artificially keeps oil prices low for Nigerian consumers. The fuel subsidy, which is a fiscal expense, dampens the benefit of higher global oil prices to Nigeria’s budget.

Last August, President Muhammadu Buhari signed a provision that would eliminate the regime subsidising imported fuel. However, in January, the Nigerian government made a U-turn — choosing to extend the fuel subsidy for another 18 months. 

With elections set to be held next year, the extension means that the elimination of the fuel subsidy won’t happen under the current administration, Adreniran noted.

Nigeria is also not able to benefit fully from high oil prices because of its crumbling oil infrastructure, Adeniran said. “So it is kind of a modest benefit that is not near to what we aspire to achieve.” 

Isaac Matshego, who specialises in macroeconomic and emerging market analysis for Nedbank, said Nigeria cannot fully take advantage of high oil prices and higher production quotas because of low investment in new oil fields and the sabotage of existing oil-production infrastructure.

“Lack of investment in refining capacity has resulted in the high dependence on imported refined fuel,” Matshego added. 

“Encouragingly, the Dangote Group’s investment in a new refining plant will alleviate fuel shortages.”

‘We still haven’t gotten it right’

Nigeria imports almost all its fuel. The country’s chronically underperforming government-owned refineries were shut down in 2020. “Our refining capacity is less than 10% of what we need as a country,” Adeniran said.

“That is our big problem and why we are this big producer of oil, but we still have the challenge of not having enough. We get the raw crude oil and we sell it. We then go back to the international market to purchase refined oil.”

The country’s oil sector, Adeniran pointed out, is riddled with problems, including political ones. Last year, Buhari signed the Petroleum Industry Act, aimed at reforming the sector after 20 years of failed efforts, which were mired by divisions among legislators.

“We have been here for years. We have a lot of refineries. We’ve spent a lot trying to get them to function. But we still haven’t gotten it right,” Adeniran said.

He noted that early plans for the Dangote refinery began in 2013. “Around the same time, the Nigerian government was making plans to revive its refineries … But now, later this year the private sector’s Dangote refinery will be up and running. With the government’s plans, we still don’t know where we are.”

Nigeria’s recent oil crisis caused inflation to tick up to 15.7% in February. Speaking on the economic Effects of the two-month  fuel shortage, Adeniran said: “It was not a pretty experience.”

“Personally, I spent six hours trying to get fuel at one point. It was as bad as that,” he added. “For the economy, that’s a loss. Something productive could have been done during that time. Something that you should have gotten done in 10 minutes, takes you six hours. That’s the kind of disruption it causes.”

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Sarah Smit
Sarah Smit
Sarah Smit is a general news reporter at the Mail & Guardian. She covers topics relating to labour, corruption and the law.

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