Do we beg Saudi or United States as the falling oil price buffets economies?
Umpteen writers, analysts and policy makers including Janet Yellen, Chairman of United States Federal Reserves were of the opinion that OPEC underestimated United States resilience in the global crude oil supply war as the price of oil continued to shatter economies with indescribable blows. Initially the surge in oil production in America was seen as the country’s dynamic drive to achieve energy independence and extricate itself from the jaws of enemy nations that could use America’s huge dependence on oil from foreign countries to douse its might. However, it has become apparent that U.S quest for energy independence is beyond satisfying domestic consumption by not relying on external suppliers, but it could be used as a strong economic arsenal in geopolitical war trenches, pushing for the country’s foreign interest and disciplining some countries who are not in sync with democratic dictates, human rights or those consumed in wanton corruption.
Conspiracy theory holds that the current global somersault of oil price is as a result of jingoism orchestrated by United States and Saudi Arabia who are two global top producers in cahoots to use their economic might to discipline the market and tame some nations termed recalcitrant such as Russia, Iran, Venezuela and some other African States. The advocates of such theory also believe that the United States and Saudi Arabia had an understanding to leverage their importance as new world top oil producers, and reduce competition immediately United States exceeded Russian to become number one global gas producer and was coasting to ebb Saud Arabia in the prime oil production spot. It should be recalled that while Saudi Arabia exports about 14.3% of its crude oil to USA, 13.7% to China, 13.6% to Japan and 9.9% to South Korea, it also imports 13.5% of its goods and services from China, 13.2% from USA and 6.7% from South Korea.
U.S decided based on its foreign interest to co-operate with its number one ally in the Middle East and age-long friend in the corridors of investment in this neo-systematic economic combat. Pretty much, OPEC member countries and some Non OPEC and non producing nations are being pummeled economically while United States is enjoying a net positive situation with consumers gaining more and helping to strengthen the economy of the world’s largest market. Today, Obama’s approval rating has touched the 50% mark which shows great progress and approval of the acumen of his team. Saudi Arabia external debt to GDP has reached historical low point of 2.68%. Saudi Arabia is gaining new attention as a country that has arrived as an economic stronghold, globally consequential and not to be messed with since it can thwart the market with over supply.
As the foreign reserves of most OPEC member nations are sapped and their credit ratings soon to be downgraded, it could amount to betrayal that Saudi Arabia which is OPEC number one producing nation lured other members onto a canvass that will not only dash the economic conditions of most member nations, but could also make their leaders that supported the so called views to over flood the market with supply of crude oil to lose political control of their countries.
The current global trend shows the naivety of some of the world leaders especially those from developing nations. It has always been clear that Saudi Arabia has the largest proven reserves of petroleum in the world and could increase production at high pace, but it was also a known fact that ten years ago Saudi Arabia did not have enough infrastructures to accommodate high production capacity.
It took the House of Saud the past 8 years to enhance development of infrastructures and facilities that would carry increase in production. Within same eight years, Saudi Arabia whose economy is highly dependent on oil ( 85% of its total export revenue of 2014 according to OPEC Annual Statistical Bulletin) has been diversifying its economy to Service sectors, encouraging private enterprises and expanding its natural gas, refining and petrochemical industries. United States which has the best infrastructures in the world for oil and gas production also fine tuned its unconventional hydrocarbon technology which helped to shoot the country on top since 2013 as the world’s largest producer of petroleum liquids followed by Saudi Arabia. Evidently, on the part of world leaders from some of the OPEC and NON-OPEC countries that have their economies largely dependent on oil with little diversification, it was a case of Nero slumbering while Rome was burning. They did not make haste while the sun was shining and did not prepare their nations for the surging assault.
As the oil price continue to be trampled and slide down the cliff, devaluation of currencies and dissipation of foreign reserves in some countries and pangs of economic turmoil are very noticeable. Banks have started withholding on the amount of loans they give to oil companies for fear of defaulting.To add salt to the injury to the looming woes of the number one economically strong nation of Africa and OPEC’s prime member - Nigeria, United States have stopped buying Nigeria oil and now gets more supply from Saudi Arabia. White house has posited that U.S non –buying of Nigeria’s crude is not political but more from economic perspective. Some analysts are of the opinion that there are people in White House that have huge axe to grind with the government of President Jonathan of Nigeria for not been able to wrestle effectively the menace of Boko Haram terrorist group and curb corruption. This situation some industry observers think might trigger a change of baton in Aso Rocks come February 14th, 2015 when Nigeria will have a presidential election between the incumbent and former military Head of State Major Gen. Muhammadu Buhari.
While the catalogue of woes of Nigeria for instance is building up, China and India that used to be also major buyers of Nigeria crude now prefer to purchase more of Angola grades. As at last month Nigeria still have more than twenty five shipments that have not be sold while Angola’s Cabinda was sold off remaining only 4 ship load. Even if the price of oil resurrects in the 3Q of this year and a country such as Nigeria continue to have many ship loads of crude oil not sold the contagion situation as a result of high cost of storage might still affect the country’s future earnings.
Nigeria as a case in point has done so well in managing and growing its economy up till this time that the dastard face of the market propelled by falling oil price could destroy the gains the country has made in the past 10 years. Nigeria – popularly known as the “Giant of Africa’” is one of the most developed nation in the continent. Its output grew by 89% and since April 2014 emerged to be the largest economy in the region ahead of South Africa. After the country’s independence in 1960, Nigeria’s economy was heavily dependent on agriculture and following the oil boom of 1970’s the nation’s economy leaned much on oil. Recent changes in Nigeria’s economy and diversification made services to be the largest sector of the economy and crude petroleum making up 11% of the country’s total GDP.
Prior to the Paris Club debt relief in 2004, Nigeria’s overall debt stock was very exorbitant, with total debt amounting to US$46.2 billion which was 64.3% of GDP. Under the leadership of Ngozi Okonji-Iweala, Minister of Finance and Economy, Nigeria effectively managed it debt and brought it down in 2007 to US$17.3billion, constituting 11.8% of the GDP and by 2013 the external debt of Africa’s number one producer and largest economy slipped down to US$6.5billion. Unfortunately, the current market hazard manipulated by man through the forces of demand and supply is buffeting Nigeria and other economies. Bad enough, Nigeria has devalued its currency, its foreign reserve is almost drained and the country’s total debt stock at the end of 2014 has skyrocketed to US$9.377 billion. If Nigeria is plunged into economic calamity it will erode the economic foundations of most of the countries in the region that are some how dependent on Nigeria. This destroys the United Nations ambition to eradicate hunger and improve standard of living in Africa and the rest of the world.
The woes and economic catastrophe of OPEC countries continue to multiply, Iran for one was reported to have gone to have talk with Saudi Arabia to cut down production in order to beautify the oil price again and help build the economy of Middle East countries which they alleged to be trounced by Western powers. With the situation of things, it is clear that the amelioration of the market to favor all parties is not be handled solely by Saudi Arabia and not just United States. OPEC should sit up and have better understanding with United States and other huge buyers such as China and India and find a way to give Russia a second chance to air its views on the way forward.