Nigeria is better off selling palm oil. Crude oil is worth little (I)
On a whim the other day, I decided to determine what the price per liter of crude oil is. Of course I had been worried sick that this crude oil thing is a big myth. This crude oil upon which every calculation is based in Nigeria is a big mirage. I just spoke with a […]
On a whim the other day, I decided to determine what the price per liter of crude oil is. Of course I had been worried sick that this crude oil thing is a big myth. This crude oil upon which every calculation is based in Nigeria is a big mirage. I just spoke with a monetary policy person at the apex bank who also expressed worry that some of their core calculations are based on crude oil, and crude oil only. The only assumption that drives our national budget is also crude oil. The first item on all our plans is crude oil – how much of it we want to produce in a given year, and at what assumed price we hope to sell. It is as if the government even budgets for the entire 2million barrels we drill as per OPEC quota on a daily basis, as if the whole thing belongs to Nigeria and is not shared with international oil companies. If this is so, we are living a lie; a big illusion. I also do not see where the cost of producing crude oil is considered in the calculations. Most Nigerians also assume that Nigeria sells 2million barrels a day, at the prevailing price, and pockets all the money. Nothing could be further from the truth.
I don’t know why and how our illusion happened but it needs to be stated that;
- Crude oil is not so valuable
- Crude oil is not valuable enough to hinge the very existence of this country upon
- According to NEITI, Nigeria gets effectively 36% of all the revenue from what we produce.
The reason why we may have elevated crude oil to the status of be-all-and-end all must be that a certain laziness of thought overwhelmed our leaders at some point, after all we have absolutely no input in the production of that resource. I mean that Nigeria does not own any aspect of the technology in the production process. We only try to keep the books and we even fail woefully in accounting for this resource. So what exactly are we selling? I believe this laziness is borne out of the fact that this is one resource where even though we add no input, we can set up some huge monstrosities called parastatals like NNPC and run rings around the people while waiting for millions of dollars that will come from abroad. We do not only have any input in the technology and processes around crude oil, we have no input in the pricing as well. 40% of the current price of crude oil is determined by traders in the spot, forward and futures market for the product. A lot of that price depends on their whims; what they think will happen in the future. They also sometimes play the market by making the prices work in their favour. Is this the kind of product we should base a whole economy on? A product that also has huge repercussions on the environment? In a country where we do not even have scientists who are patriotic enough to help us identify fake drugs, or fake vaccines, or to even recommend to us what is healthy to eat and what is not, who is to tell us if there are serious long-term effects of all the drilling that is going on beneath the earth crust in Nigeria? To cap it all, there has been no accounting from that sector for almost 3 decades! Yet a president sits as the minister there.
Let us do some basic calculation:
- One barrel of crude oil today sells for about N18,300 (this is $60 multiplied by N305)
- One barrel contains 159 liters
- So one liter of crude oil today, sells for N115
Even at its peak in 2007/8 when crude oil sold for $140++, a barrel of crude oil in Naira terms then, was around N21,000 as Dollar sold for around N150 as at then.
This does not look like a very valuable product. It is certainly not the black gold that we say it is – except the proceeds from its sale is meticulously managed, and painstakingly aggregated. Those who will enjoy the proceed of crude oil must defer their gratification, ensure crude oil proceeds power other industries. This resource is not what you spend in advance.
Our leaders over time bought a dud. Any reasonable human being should know this right from get go. But this refusal to think goes into our ‘we are blessed’ rhetoric. Our leaders over time and till date don’t see anything wrong in sitting in office and expecting billions of dollars to drop on their laps.
How many barrels does it take?
Check this. At N18,300 per barrel we need to sell 3,300 barrels to buy a single luxury ‘status’ vehicle for some big Oga in some parastatal. Imagine how many thousands of those we buy every year? An average phone that some small girl in one of our universities will reject as a birthday gift from a sugar daddy, will cost at least 15 barrels of crude oil. Imagine how many phones are used in Nigeria where we buy the latest and the best that they don’t buy in the countries where phones are manufactured? The new headquarters of EFCC, which Mr Magu boasted was built at a bargain cost of N24billion, cost Nigeria a tidy 1,312,000 barrels of crude, even before we start to consider the cost of drilling. In Nigeria today, it still costs over $30 to drill a barrel of crude (I hear Kachikwu is trying to see how they can crash the cost to $20 but in spite of his efforts I have seen how the man has been frustrated by Buhari at every step). The crude oil trade in this country is what Yorubas call ‘agbana’ (a cursed trade where you haemorrhage money faster than you make it). Only a totally irresponsible person will spend the proceeds of crude oil the way we spend it, or build such a life of Byzantine grandiosity the way we have – among politicians and top government functionaries. Anyone reading this is free at this point to calculate everything we use and buy in terms of crude oil. Note that if we want to actually get the impact properly, we need to only consider our PROFIT on crude oil, not the gross sale value. The closest estimate of our profitability that I came across is from NEITI, whose report early this year showed that out of every one Naira we get from our crude oil, we have to pay the international oil companies 64 Kobo in terms of cost and other agreements. Pathetic!