How Oil Prices At $84 May Affect  2022 Budget  

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Olusola Bello

 

 With the price of crude oil climbing $84 per barrel on Tuesday, one of the implications is that the landing cost of a litre of petrol is now moving between N300 to N400 per litre depending on the foreign exchange rate used, while the pump price of petrol is still pegged at N165 per litre

 

This might have huge impact on the 2022 budget which rely heavily on revenue from oil, because it would lead to government paying colossal amount as subsidy when the Nigeria National Petroleum Corporation (NNPC) decides to take the money from government.

The only thing that could help mitigate its effect is if crude oil production level increases significantly. As it is now, no one is certain how long it would take for the country to increase its production capacity, some stakeholders stated.

Nigeria’s production is limited by some factors which includes, quota limitation from OPEC. It is currently producing 1.2 million barrels a day against the 1.8 million barrels quota granted it.  Also there is infrastructure limitation. Because of this, it has commenced maintenance work on some of the oil facilities, just as it is still battling with crude oil theft.

 

The subsidy that the government is paying on PMS keeps increasing every day with its attendant consequences on the economy.

As at two week ago when a barrel of crude oil was $82 per barrel, the landing cost of Petroleum Motor Spirit (PMS) or Petrol was about N278 a litre. The exchange rate was N410/$1

The price of Automative Gas Oil (AGO) which is deregulated currently fluctuates between N313 and N340 per litre. This may lead to increase in cost of production by companies.

Also the price  of Liquefied Petroleum Gas (LPG) or cooking is gradually going beyond the reach of an average Nigerian, as the 12.5 kg cylinder is likely to cost about N10,000 and above as we move towards December.  The price of the commodity was just about N4000 early in the year.

 

Except some drastic actions are taking by the policy makers, the economy  may sink deeper than what it is presently, and this would not be too good for the citizens, an industry operators said

 

 He said It is the Nigerian economy that is taking the heat as much of the money that should have gone to bolster other sectors of the economy is diverted to PMS as subsidy.  Instead of the government to deregulate, it refused and yet it is claiming it has no money.

 With huge amount paid as subsidy, there would reduction in the amount of revenue that goes to the federation account. This is means that the amount of money available for sharing between the federal, states and Local governments would continue to shrink .Consequently, payment of salaries by these arms of government would begin to have some challenges.

 

With the continuous rise in the prices of crude oil at the international market, it is obvious that the nation is living in self-denial if it continues on this lane of capping the price of petrol. The bubble may burst sooner than later, industry analysts have said.

 

Oil rose towards $84 a barrel on Tuesday, within sight of a three-year high, supported by a rebound in global demand that is contributing to energy shortages in big economies such as China.

With demand growing as economies recover from pandemic lows, the Organization of the Petroleum Exporting Countries and allied producers, collectively known as OPEC+, are sticking to plans to restore output gradually rather than boost supply quickly.

“OPEC+ will push ahead with its cautious approach to supply in the year-end period. Set against this backdrop, oil bears will remain in hibernation mode,” said Stephen Brennock of oil broker PVM.

Brent crude was up 2 cents at $83.67 a barrel by 1215 GMT. On Monday it reached $84.60, the highest since October 2018. U.S. oil gained 29 cents, or 0.4%, to $80.81, having hit its highest since late 2014 on Monday at $82.18.

Jeffrey Halley, analyst at brokerage OANDA, said the lack of significant change in prices on Tuesday could be because the market looks overbought based on short-term technical indicators such as the relative strength index.

“It would not surprise me in the least if we saw a sharp sell-off of $5 to $8 a barrel at some stage this week,” he said.

The price of Brent has surged by more than 60% this year. As well as OPEC+ supply restraint, the rally has been spurred by record European gas prices, which have encouraged a switch to oil for power generation.

European gas at the Dutch TTF hub stood on Tuesday at a crude oil equivalent of about $169 a barrel, based on the relative value of the same amount of energy from each source, according to Reuters calculations based on Eikon data.

Power prices have surged to record highs in recent weeks, driven by widespread energy shortages in Asia, Europe and the United States. The energy crisis affecting China is expected to last through to the end of the year.

With prices rising, OPEC+ has come under pressure from consumer nations. A U.S. official on Monday said the White House stands by its calls for oil-producing countries to “do more”.

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