Crude oil prices on Tuesday jumped to $90 per barrel, sustaining the gain that saw the price reach $88 last week.
Brent crude, the global benchmark, has surged above $90, marking an increase of over 12% since the beginning of the year. Simultaneously, West Texas Intermediate, the U.S. benchmark, has reached $87 per barrel, marking its highest point in seven years.
The gain is sustained by the voluntary production cuts by both Russia and Saudi Arabia – leading members of the Organization of Petroleum Exporting Countries (OPEC). Saudi Arabia has cut its production by one million barrels per day until the end of 2023. Russia also declared its intention to prolong its export reduction by 300,000 barrels per day for the same period.
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However, the increase creates a fresh dilemma for Nigeria, which is currently facing an economic downturn largely tied to low oil output and cheaper prices.
In May, Africa’s largest economy announced the removal of fuel subsidy, a government initiative that has sustained the cost of petrol at a cheaper rate for Nigerians for years – but has gulped large sums of money from the country’s annual budgets.
Nigeria’s $75 oil benchmark for 2023 has created a $15 vacuum as oil prices hit $90. This means that unless a fresh fuel subsidy provision is made, Nigerians, who are currently paying up to N617 per liter of fuel, will have to pay higher.
The situation is exacerbated by the nation’s FX crisis which has seen the naira plunged below N920 against the dollar in the parallel market. The naira was floated in June as the Central Bank of Nigeria aims to unify the country’s multiple exchange rates. However, the move has accelerated its free fall in the FX market due to dollar illiquidity resulting from low oil exports.
Against this backdrop, there is a projection of an imminent increase in the cost of petrol, despite assurances from the Nigerian National Petroleum Company Limited (NNPCL) that it has no plans to conduct further upward review of petrol pump prices.
Last week, analysts projected that, with the spot rate of N930 and the N775/$1 exchange rate in the Investor & Exporter window, the next stock of petrol landing if the CBN is unable to provide marketers with dollar liquidity that will keep the FX rate stable – will cost N674 per liter in Lagos and around N712 in other parts of the country.
But there is a catch
With crude oil price hitting $15 above Nigeria’s 2023 oil benchmark, the nation’s Excess Crude Oil (ECA) is expected to receive a revenue boost. This means more money for the Federation Account Allocation Committee (FAAC), which will be shared between the three tiers of government.
The NNPCL said last week that Nigeria’s crude oil production level (including condensate) has risen to 1.67mbpd.
With more money in their purse, the governments are expected to boost disposable income by increasing the minimum wage. Economists said it will strengthen the spending power of Nigerians, thereby mitigating the effect of the high cost of petrol.
Organized labor unions in Nigeria are demanding that the government review the minimum wage upward, from the current N30,000 per month to N200,000. However the government has described the demand as unrealistic because of the current state of the country’s revenue.