• With low oil production, inflation, dollar scarcity to worsen
• States, FG may borrow more, struggle with budget implementation
• Govt may be forced to increase petrol price, stakeholders say 

If the ongoing conflict between Israel and Palestine escalates further, setting off a chain reaction, Nigeria, yet to recover from the economic crisis that followed the invasion of Ukraine by Russia, may have to deal with another energy crisis that may force the government to spend N644.8 billion subsidising Premium Motor Spirit (PMS) alone monthly.

Just as diesel price is already rising above N1,100 per litre, with the National Bureau of Statistics (NBS) stating that price of Kerosene surged by 57.18 per cent, reaching N1,272.40 per litre in August, manufacturers and households in the face of poor electricity supply are set to face fresh hurdles over the development.

Israeli Prime Minister, Benjamin Netanyahu had declared war on Hamas Saturday after the group’s forces poured across the border from Gaza, clashing with Israeli forces and pushing into large sections of territory in the southern part of the country. Death toll in Israel had risen to 600 as of Sunday evening while the Gaza Health Ministry said 370 Palestinians have been killed in the second day of the war.

The war follows attempts by the US to broker a deal that would normalize Saudi Arabia’s relations with Israel—and ease oil prices.

The war declaration allows the Israeli government to tap into a larger trough of military reserves and also increases the chances of a ground invasion into Gaza.

A bigger concern on the horizon is the possibility of a broader conflict after “a brief exchange of strikes with Lebanon’s Hezbollah militant group” in the north, according to the AP.

“The flare-up on Israel’s northern border also threatened to draw into the battle Hezbollah, a fierce enemy of Israel’s which is backed by Iran and estimated to have tens of thousands of rockets at its disposal. Hezbollah fired dozens of rockets and shells on Sunday at three Israeli positions in a disputed area along the border and Israel’s military fired back using armed drones.”

Another sign of possible spread via Reuters: “In Alexandria, two Israeli tourists were shot dead along with their Egyptian guide.”

With the dollar already exchanging for over N1,000 at the parallel market while Nigeria’s refineries remained dormant, there are indications that the foreign exchange crisis may worsen as the Nigerian National Petroleum Company Limited may spend the federation’s earnings on importing fuel while other marketers scramble for available dollar to import diesel and aviation fuel.

With PMS trading at $1,023.00 per metric tonne at the international market as naira exchange at about N1,020/$, crude oil price at about $100 per barrel would push the difference between the current pump price and the actual price to about N400. This difference amounts to about N644.8 billion monthly given the current consumption of about 52 million litres daily.

Although Nigeria had increased its crude oil output by about 110, 000 barrels per day, helping to stabilise the global oil market and pushing the Organisation of Petroleum Exporting Countries (OPEC) output to 27.73 million barrels per day (bpd) in September, analysts are projecting that the ongoing war might disrupt supplies in the Middle East if other countries join, a development which would throw the market into turmoil from today.

While President Tinubu’s administration returned subsidy payment on petrol using NNPCL to manage the situation through its access to dollars from crude oil sale and crude advance loan, the subsidy on petrol now stands at about N400 per litre.

Nigerian Midstream and Downstream Petroleum Regulatory Authority, (NMDPRA) in August, said the nation’s petrol consumption dropped by 16.8 per cent in July, 2023 to 52 million litres daily compared to 64.96 million litres recorded in June.

By implication, the nation’s would have been incurring N20.8 billion daily and N644.8 billion on monthly basis going by the rate of subsidy and the volume of product being subsidized.

With cooking gas price and Compressed Natural Gas prices also rising at a time that JP Morgan is projecting a $150 per barrel oil price, Federal Account Allocation Committee (FAAC), had showed that in August 2023, the Nigerian Liquefied Natural Gas (NLNG) paid $275m as dividends to Nigeria via NNPC Limited. NNPC Limited used $220m (N169.4 billion at N770/$) out of the $275m to pay for the PMS subsidy, holding back $55m.

Coming as State governments borrowed about N46.17bn from three banks to pay salaries between January and June 2023, this development followed an $800 million loan from the World Bank taken by Tinubu to cushion the supposed removal of subsidy.

This follows an alleged loan of $1.95 billion from the World Bank in the first four months of Tinubu’s administration. The loans are reportedly for education ($700 million), power ($750 million), and women empowerment ($500 million).

Amidst the ongoing crude oil theft in Niger Delta region where 1,301 illegal refineries have been discovered in the oil region, Nigeria is only pumping about 1.2 million barrels of oil a day compared to the 2023 crude oil budget benchmark of 1.69 million bpd.

Former President of Chartered Institute of Bankers of Nigeria (CIBN) and professor of economics at Babcock University, Segun Ajibola said the renewed hostilities in the Middle East would create economic disruptions globally, especially in the oil market.

“For Nigeria, it is a major paradox. The attendant shortfall in supply resulting from disruption in production in the middle east is expected to boost oil supply revenue for Nigeria. But the country can hardly harness those benefits because of the unending limiting factors ravaging the Niger Delta and oil production. Nigeria has not been able to meet her OPEC quota as a result of this. Hence, not much may be gained by way of increase in supply at least in the short run,” he stated.

Ajibola said the likely increase in the price of crude should have brought some fortunes to Nigeria but the fact that Nigeria imports refined products, the increase in the price would ultimately lead to increased landing cost of refined products.

He said if the government is not disposed to increasing the retail price of refined products, the government has to absorb the increase in the landing cost to maintain the subsisting retail prices.

Energy Economist at the University of Ibadan, Prof Adeola Adenikinju stated that the situation is still volatile, adding that if the development escalates further, the response of the Gulf states remains a situation to watch.

“This would further exacerbate the subsidy issue. There is no doubt that the Nigerian state cannot afford petrol subsidy at this time. However, we are not willing to pay the cost to rebuild a strong economy with a revitalized downstream petroleum sector.

“We will simply spend a longer time in this low economic growth, high unemployment, and high poverty equilibrium. We will simply continue to borrow to take care of our fixation with petrol subsidy,” Adenikinju said.

A leading oil and gas policy expert, Ademola Adigun stated that the current reality is tough for the country.

Adigun said: “Given the limited resources the government might have to adjust retail prices of petrol. The economy can’t really afford subsidy payments. The sad reality is that it is already tough on all of us.”

Human rights lawyer and former president of the Movement for the Survival of the Ogoni People, Ledum Mitee said the government must develop policies towards ensuring that citizens’ welfare is protected otherwise it would be failing in its responsibility.

According to him, the escalating situation in the Middle East would undoubtedly have an effect on oil prices worldwide, but whilst many other countries would make determined and clearly discernible efforts to reduce the impacts on their citizens, Nigeria would, as always, leave the citizens to the fate of market forces.

He asked the government to intervene any time the citizens’ welfare is threatened, stressing that leaving either its currency or petroleum products which affects every aspect of the economy to so-called market forces is not acceptable.

Renowned oil and gas expert, Prof Wunmi Iledare said like the Ukraine invasion by Russia, it is more likely than not that the global market dynamics would be affected as a result of the attack on Israel.

According to him, the impact on oil prices is likely going to be less traumatic if the Arab World denounces the action against Israel as a terrorist act rather than a fight for liberation of right.

“However, if the war persists for long, then the price of crude oil may rise but gradually judging from history. The implications on the landing cost of PMS in Nigeria will be significantly more because of forex instability in Nigeria than the volatility in the global oil market.

“Unfortunately, Nigeria society has not come to terms with the negative impact of subsidised PMS consumption on Nigeria’s economy. There is not much one can say to persuade them of the peril of subsidies. When a nation spends a quarter of its budget on subsidising petroleum consumption with no plausible justification, it is very worrisome! More so when the PIA and NASS budget resolutions do not support the actions,” Iledare said.

Legal practitioner and former management staff at Shell, Madaki Ameh do not expect the war to drastically affect oil prices.

He noted that the region has always been in one form of turmoil or the other without any major escalation in the price of oil in the international market.

Ameh however said Nigeria needs to better manage its domestic petroleum products pricing process by reining in the indices which makes domestic petroleum products pricing dependent on the international price of crude oil.

“As long as this is not decoupled, the scam of alleged products subsidy will continue to rear its ugly head and hold the citizenry to ransome.

“My take is that this ought to change permanently by using the wellhead cost of production of oil as the basis for domestic products pricing, not the international price of crude oil, since we are an oil producer and not an oil purchasing country. How an economy can continue to be run in such an inefficient and unthinking manner for decades still baffles me, when there are so many talents in Nigeria who can set things right in no time,” he said.

Director, Centre for Transparency Advocacy (CTA), Faith Nwadishi said while the direct impact of the Israel-Palestine conflict on Nigeria might seem distant, the ripple effects on oil prices and supplies could have profound implications for the economy, stressing that policymakers need to weigh the immediate economic needs against long-term sustainability and be prepared to make tough decisions.

Insisting that the situation could have serious economic strains, Nwadishi said the development could further exacerbate fiscal challenges, given the country’s dependence on oil revenues and foreign exchange from oil exports.

To her, foreign exchange reserves, which are already under pressure due to fluctuations in oil prices, could face further stress if global oil prices rise dramatically, though there has been a decline lately while higher petrol prices, even if subsidized, would according to her result in increased transportation costs, leading to a rise in the prices of goods and services.

Nwadishi said: “If the government decides to borrow more to cover the subsidy, it would increase our external debt profile which is already in a bad state. Given the existing concerns about the nation’s debt sustainability, this could raise alarms among international creditors and investors.”

Partner, Head Mining Sector Business Development, Habeeb Jaiyeola said there are indications that the war would impact crude oil prices and affect petroleum product prices in Nigeria in the short and medium terms.

He said the impact would be more felt if the country escalates, adding that there was a need to control the situation early enough.

According to him, Nigeria would benefit from crude price increase but would be affected through increase in importation of products.

Jaiyeola said diesel and aviation fuel would increase as well as gas prices at the upstream end as well as at the domestic downstream level.

He raised concerns over safety of ships carrying crude and products along waterways in the region, noting that the economy in Nigeria is seriously bleeding amidst strike talks by labour unions.