Complexity & Shallowness of Crude Oil Prices Depression and Nigeria’s Questionable Position

OPEC Member States (Losers in the Saudi Arabia Geopolitical Stunt)

Introduction

The last few weeks opened the way for short-term strategy of crude oil price depression by Oil Producing & Exporting Countries (OPEC). A number of points are thrown around in the Anglo media and other outlets for justifications or pseudo-reasons without much traction. For Nigeria, a country with complex relationships with resource management and wealth maintenance there seem to be absence of debate on the subject. This article attempts to review the issues attributed to this development and explore plausibility of short-term knee-jerk reaction turning into long-term patterns.

Crude Oil Economy 101.

OPEC provides 80% of daily crude oil production (30 mb/d) and Saudi Arabia supplies the highest quota of nearly 10 mb/d. In the currently climate there is a violation in overproduction of crude oil by 2mb/d increasing Saudi Arabia’s output to 12 mb/d hence supply is greater than demand which means if other variables are considered price starts falling over time. Saudi Arabia is in clear violation of OPEC quota allocation ceiling set in December 2011, a serious subject condoned by many including OPEC member-states. Above all crude oil has different types from light sweet Bonny to heavy crude. Now like all things under the sun, human beings seem to be prone to self-destruction with amnesia in view of the fact that what goes up surely goes down. This is the end of the simple branch of a complicate equation. Remember the crude oil price collapse by over 70% in the 1980s! See today's price here and 2nd half of 2014 pattern of price drop below.

OPEC 2014 Q3 - Q4 Weekly Crude Oil Price Pattern

Pseudo-Reasons and Justifications

An elderly grandmaster announced that the current crude oil price depression is motivated by geopolitics. Other expert advice is unnecessary on this point however there is a serious riot of talking heads and arm-chair analysts/hollow experts who string all sorts of constructs and justifications for Saudi Arabia’s move on the matter. Now let us read deeper into the crystal ball in points below.  

• Riyadh is making a geopolitical move against Iran which circumstantially aligns with Washington DC short-term interest to humiliate Russia and Venezuela.  If there is any merit in the above assertion, it is the immediacy of its attraction to short-term memory experts and lazy adherents of history. Deeper probing of the position suggests questionable conclusion that currently dominate Western media including particularly Aljazeera.

• While US has deployed and implemented flawed geopolitical strategy of containment on Moscow, attributing the crude oil depression as part of the package is a stretch. While Russian establishment acknowledge the attack on its economic system as manipulation, President Putin stated that acceleration of Russia’s economic problems includes foreign destabilisation and internal mismanagement factors. It is also a fact that crude oil export account for less than 53% Russian economy receipts. With this global picture Russia possess a robust economy with solid structure for further expansion for a country that turned to market economy few decades ago. Meanwhile conclusion that negative impact of Russian economy will be isolated and localised is myopic. Geopolitical attacks generate geopolitical outcomes.

• If there is a strategic or fundamental problem with Russian economy it is the total alignment or underpinning of the economy on the US dollar. Until Moscow addresses this national security problem, then her economy will be open to compromise and foreign manipulation. National economy is the biggest asset of a country followed by its population and tying strategic assets to a foreign interest is suicidal. Establishment and non-establishment Russians know this position very well. Therefore the idea that Saudi Arabia specifically or circumstantially targets Russia is questionable, shallow and hollow. Even if this is stretched into the future on its geopolitical merit, Moscow is now critical on the resolution of many complex problems on Riyadh’s backyard from including but not limited to Iraq, Syria, Yemen and Palestine.

• While Iran is a proxy for Riyadh’s enmity it is far-fetched for this short-term policy to be effective for Riyadh for a number of reasons. Tehran’s position as the main regional power in consolidated while Riyadh’s influence is either marginalising or its remit is spatially coterminous with conflagration. The so-called Sunni geographies are dominated by political and economic instability with no resolution in sight. On another level, Tehran has been under sanctions for more than 3 decades with successful geopolitical power projection around and beyond the Persian Gulf.  Domestic management of Iranian economy has serious gaps in its ability to accrue, manage and maintain crude oil based wealth.

• Iran’s 8+ years experience of war with Iraq cannot be replicated by few drops in the price of crude oil rather Riyadh and Tehran need each other towards resolution of teething problems in Lebanon, Iraq and Syria. This position will become complex with a possible US withdrawal from the Middle East. It is also clear and evident that Saudi Arabia is not the most important country for US in the region as King Faisal 1970s reaction expressed without changing Washington DC policy till present.

• Venezuela is not subject to Saudi Arabia’s attack. Venezuela has been experiencing intergenerational inflation since crude oil was discovered in the country with the consequence of bringing much wealth in an erstwhile agricultural economy. This wealth exploded with mismanagement, corruption and massive urbanisation which particularly eliminated the former way of life. Most of the wealth is held by small minority of powerful elite. For a long time Venezuela is high on importation syndrome with insignificant domestic production. The emergence of Commandante Hugo Chavez is in part to redistribute the huge national wealth in favour of the previously poor majority who abandoned the extra-urban areas for Caracas and other cities for at least 2 generations. Inflation in Venezuela is entrenched and difficult to manage, and will remain non-trivial and complex for generations to come.

Riyadh vs United States

It is easy to jump to the conclusion that US allies share the same interests on every policy and strategy. While European politicians are not robustly respectful of their national interests, other US allies have divergent motivations. Western media is mutating with the view that Saudi Arabia is motivated to increase production against potential introduction of shale crude oil/tar sand oil to the world market. There are a number of holes in the argument although one must be careful to identify them. There is no evidence of any convergence of these policies.  Bearing in mind that the current US president is given to compromise as a doctrine it is understandable that his policies do destroy the country’s economic interest. Example is the recent past counter-reaction of Moscow to limit opportunities for MasterCard and Visa in Russia.

First of all, there is no evidence that the current crude oil priced depression is long-term. Riyadh cannot afford it.  By implication shale crude oil/tar sand oil will surely enter the world market regardless of dropping levels of US imports from Saudi Arabia. It will be foolhardy for the White House and the State Department to put their imprimaturs on this preposterous initiative. The problem is at what price will $70+ cost of production US shale crude oil be sold profitably? If we bear in mind that US president is in his last term of office he can afford to slight some of his Wall Street constituencies including the crude oil industry.

Nevertheless the short-term geopolitical gain of Saudi Arabia will start biting soon for reasons including imminent problem of succession of the King, bubbling social problems, limited foreign reserves, potential return of religious combatants from conflicts in Iran/Syria and reconfiguration of the region.  Each of the issues mentioned require huge resources to maintain and sustain. The rosy picture painted of Riyadh by Western media lack robust foundation in full knowledge that crude oil prices depression is unsustainable even in the short-term. Riyadh cannot afford to jump from one major conflict with geopolitical implication to another one with geopolitical implication within a short space of time.

How much supposed losses to oil company will be calculated or substantiated remains as mysterious and crude oil price depression. Time is the only variable of importance even it must be admitted that either by design or conspiracy, oil companies seem to be vanished from the debate radar.

The danger impacting shale crude oil producer in the US is potent. Similar experience can be extrapolated to the European economy with the difference that it possesses a betrayed political class. For an economy hardwired to crude oil, the consequences in USA will be testing. Consumers will be eyeing downward move of fuel pump prices anticipating lowering prices. Huge loans/credits were drawn & invested to make the industry with wild expectation of subsequent profit. In the current climate, those investments in the US are frozen and thousands of workers will be laid off, bankruptcies filed and many banks will call back loans which mean repossession of toxic assets. Many states invested in shale production and short-term negative outcome will turn into political upheavals.  To some extent US politicians will make (geo) political capital against Riyadh on the basis of defending their national interest.

Beneficiaries of Short-Term Myopia

The narrative in Western media has been dictated by oil producers naturally anticipating profit for their products. However what is apparent in this narrative is the absence of unity among crude oil (OPEC & non-OPEC) producers and as Russia rightly pointed out, that OPEC has lost her political initiative. Along the same line OPEC is facing new realities as an organisation and a geopolitical entity. Be that as it were the voice of oil importers and non-oil producers is absent and dismissing. It is difficult to capture their narratives in the Western media unless their national media are individually reviewed.

Nevertheless the main countries benefiting from the short-term crude oil price depression include Brazil, Turkey, China, India and Japan. These countries and other resource-poor countries run huge current account bills in crude oil imports at high prices and in return run various levels of inflation in their domestic economies.  These are the scions of the emerging economies with almost 50% of global population. It is a welcome outcome for many countries whose development is hamstrung by huge cost of energy. Interestingly these mentioned countries have in the last few months and years cooled relations with Washington DC with accelerated interactions with Moscow except Japan.

If consideration is given to the future direction of global geopolitics and global economy, it is safe to confirm that these countries partly make up BRICS, constitute countries with impressive economic growth rates and possesses the largest portfolios of investment fund targeting opportunities around the world.

Now Then Nigeria

Monitoring Nigerian media in the last few weeks reveals total dismissal of the issue and limitation of debate. In a period drifting towards another national (s)election, the subject is best placed as an important element to explore stewardship of the current national and state leaderships. Now there is no suggestion that the current crude oil price depression has anything to do with current economic problems. Nigeria’s problems have nothing to do with crude oil prices, rather everything to do with 1970s Gowon Syndrome i.e. ontological disposition to waste accrued national wealth and corruption of huge resources.

Nigeria is a weak client of United States and the current leadership and those in the past except General Murtala Muhammed and General Muhammadu Buhari respectively, have toed lines assigned them by underlines of US State Department. In association to this development, comments by the Finance Minister, Dr Okonjo-Iwuala that more borrowing from foreign lenders can only be construed as questionable. After being in office for nearly a decade, there is no evidence of sustainably managed savings and the first order of cushioning new economic problem is returning to foreign lender; World Bank and IMF. As a former employee of World Bank, one wonders where her allegiance lies; Nigeria or World Bank?

Despite the fact that the current crude oil price depression is not Nigeria’s problem and equally acknowledging that the mains problems are the twin devils of domestic corruption and mismanagement; a number of information attributed to Nigeria demands exploration. Only Saudi Arabia can explain her reasons for deploying the crude oil weapon when it did. Some OPEC members have done excellently well with their resource and accrued wealth, Nigeria is not one of them.

It is also a fact that since shale crude oil became a reality in the United States, US importation of light crude oil from Nigeria has diminished which implicitly justifies reviewing Abuja’s relevance to Washington DC and vice versa. Nigeria is not short of customers as India has taken over as the biggest importer of her crude oil. China is another major importer. Nigeria’s geopolitical significance in crude oil is attributed to the high quality of its light sweet (Bonny) with very low sulphur content. This product is easy and cost-effective to refine in dedicated refineries which currently exclude all refineries in Nigeria. Leaders, elite and policy makers concluded that domestic refining is anathema so it is better to import petroleum products even from Senegal that in turn purchased the base crude oil from Nigeria. You can read the national security implication!

A Venezuelan analyst attributed a reason for the sudden crude oil price depression to security and protection of huge Asian markets share by Saudi Arabia and Nigeria offering discounts as a result of shrinking imports of light crude oil by United States. Saudi Arabia can afford such short-term instrument for a strategic deal with India, China and Japan because it possesses huge foreign reserves which are tied to the US dollar with the 1976 agreement. The stipulation is that all Saudi Arabia crude (OPEC) oil be sold in US dollars and all Saudi receipts will be reinvested in the United States economy (banks & Federal Reserve Bank). Mind you US Federal Reserve Bank masquerading as central banks is a private entity. In return United States will take care of Saudi Arabia’s security concerns.  What happens when US no longer needs Saudi oil?

For Nigeria leaders to even move in this direction is worrying because fossil fuel is a limited resource. It means that crude oil must be sold at any cost to retain production. The extra capacity of 2 mb/d overproduced by Saudi Arabia could have been distributed by OPEC member rather than nodding in agreement to a policy of one member hurting the rest of the cartel. On the other hand it is apparent that Nigeria lack capacity to store extracted crude oil against immediate sale/export at any price. As new economies expand and grow, demand for crude oil will increase of which shale crude oil/tar sand oil will be part of the mix.

Market security for a country with one of the best products in the world is determined by specific demand, criteria of choice and production capacity of producing country.  Countries do not just swing and change crude oil type overnight and building new infrastructures/refining capacities to accommodate the swing. This was the main reason US sanction on Iranian crude oil collapsed on implementation as the Asian customers like China, India, South Korea and Japan couldn't be compelled to reverse a hugely expensive turnaround. Even United States was indirectly importing Iranian refined products for her occupation project of Afghanistan.

Nigeria is ill-prepared for such draconian and expensive move. There is little or no foreign reserve left. There are no markets lost for her precious product in the short and long-terms considering that new commercially viable crude oil field discoveries are diminishing with time. Therefore it is against the national interest for such policy to be deployed if there is any veracity to it.

In a normal economy it will be politically dangerous to project such policy with national elections around the corner because the ruling party is potentially exposing itself to massive defeat. It is not an election winner to increase more pain on the electorate. Of course Nigeria is more complicated and complex than the aforementioned considerations.  Still Nigerians are concerned about the state of already accrued wealth from crude oil over years which they have not benefited from.

Conclusion

The current crude oil price depression is a short-term geopolitical strategy deployed by Saudi Arabia to pursue her national interest objectives. Consultations with other capitals are considered at best improbable and at worst tepid. This policy is not sustainable in the long-term, is diversionary and divisive. Above all the policy calls into question the raison d’être of OPEC at a critical time in global geopolitics. There are winners and losers and most of the winners are not sworn enemies of Russia. Nigeria’s position remains unclear and the leadership response is questionable both in context and quality. Only time will tell how the current crisis will be resolved but whenever it is, OPEC’s geopolitical footprint will be seriously reconfigured. Such reconfiguration will equip it if possible for the next generation.