FG’S OIL REVENUE, SUBSIDY COST MAY RISE –EXPERTS
Against the backdrop of the recent increase in global crude oil prices, experts have said the Federal Government can record higher oil revenue and petrol subsidy cost if prices go higher. The International oil benchmark, Brent Crude, rose above $70 per barrel this month following the killing a top Iranian General, Qassem Soleimani, by a US air strike earlier January 3.
Crude oil price stood at $68.64 per barrel as of last Monday, up from $67.91 per barrel as of December 31, 2019, according to data from the Central Bank of Nigeria. The Chief Executive Officer and Executive Secretary, Major Oil Marketers Association of Nigeria, Mr Clement Isong, described the increase in crude prices as a good development “because the country’s primary product is crude oil.”
He said, “So, the higher the crude oil price, the better for the country. The key thing is that we need to optimise our production to take full advantage of the price increase, and then we need to optimise what we do with the increased revenue. “The downside is that for as long as we continue a petrol subsidy regime, the subsidy will grow – which is not what we want. What we want is for the increased revenue to impact the lives of Nigerians. It has to go into the right type of investment and not into consumption. If it does, it is positive for the country.”
Analysts at CSL Stockbrokers Limited, said in a recent note that the impending face-off between the United States and Iran put the supply of crude oil in the international market at severe risks even as the Organisation of Petroleum Exporting Countries and its allies continued their move to tighten oil supply from the bloc. They said, “Concerns of disruption of oil supply are very valid on two fronts: US has threatened to attack Iran’s oil installations while Iran sits at the very top of the Strait of Hormuz where about 20 per cent of global crude supply passes (Saudi Arabia, Oatar, Iran, etc.).
“These threats have since led to a spike in oil prices with Brent Crude Futures breaking the $70 per barrel mark before settling lower on Monday the 13th of January, 2020.” The analysts noted that the Federal Government’s 2020 budget was based on an oil price benchmark of $57 per barrel and production benchmark of 2.18million barrels per day. They said, “We consider the production benchmark rather optimistic given historical production levels have barely breached the 2.0 million bpd mark while Nigeria’s commitment at the OPEC+ supply cut agreement remains a limiting factor to expanding production.
“However, the geo-political tensions in the Middle East, if prolonged and becomes more severe would likely push oil prices higher which would be positive for Nigeria’s oil revenue target. “While we note that the excess revenue above the budget price benchmark flows to the Excess Crude Account, the presidency has the power to withdraw from the account to share between the federal and other tiers of government if the need arises.”
The analysts, however, said the higher oil prices could worsen the cost of fuel subsidy, considering that the Federal Government “continues to operate its implied subsidy regime through the ‘under-recovery programme’ with the Nigerian National Petroleum Corporation,”. They said, “Our previous estimate of subsidy payments amounted to N33.60/litre when Brent hovered between $66/bbl – $67/bbl. Considering Nigeria’s consumption of about 20 billion litres of Premium Motor Spirit per annum, Brent climbing higher could see the Federal Government spend more to subsidise PMS as we expect subsidy to trend high above N40 per litre. “Overall, we believe the positive effect of increased oil revenue and foreign exchange reserves would outweigh the increase in the cost of fuel subsidy.”