Food for thought part 2

 

  

Food for thought Part 2 - Oil.

 

I write as a lay man….

 

What if there is a decline in the demand for oil in the very near future? What if there was a massive shift towards other cheaper and efficient sources of energy today?  If major consumers of oil like USA, EU and China etc find cheaper and alternative sources, where does that leave us? According to the IMF, Oil/Petroleum contributes about 95% of foreign exchange earnings to our GDP and 80% of the Federal Government of Nigeria's (FGN) revenue which only benefits 1% percent of the population in Nigeria. Did I hear you say 1%? Yeah you heard right . Agriculture also accounts for 25% of GDP which is a major source of income for two-third (2/3) of the population (didn't know that). There are still other non oil sectors like telecommunication, services, retail etc that are making a substantial contribution. But the worrying aspect for me is that 80% of our revenue comes from the oil sector. Can you imagine this being wiped out or to suffer a substantial hit/dent? I shudder.

With western economies experiencing financial difficulties, upward trend  of unemployment levels, rising cost of energy - like the UK where the cost of gas and electric have been on the rise, people are having to make tough decisions between their needs versus wants.  According to the telegraph, 1.3 million people have been driven off  UK's roads this year as a result of rising costs of petrol. Fuel efficient vehicles and electric cars are very much the desired vehicles to have. The United Sates is no different as a report in 2010 stated that that US was spending approximately a $1billion a day overseas on oil. I would like to think that this wouldn't go in indefinitely. In the US, Vehicle manufacturers are now being mandated to make fuel efficient cars. There is a proposal by the white house to the motor industry to achieve a 56.2mpg from its current level of 27.3mpg by 2025 for today's average cars and trucks and not meeting this requirement will result in a pay/fine for every car that fails to achieve this standard. The US motor industry is already struggling to meet a 2016 deadline of 35.5mpg and from 2017 carmakers will be required to achieve a 5% improvement in fuel efficiency. Now whether these will be achieved is a matter for debate but we can all agree that the US (and other various governments) government is taking necessary steps to reduce their dependence on petrol/oil. Also going on in the West is the 'GREEN' revolution. It is now fashionable to be 'green' and the otherwise is socially frowned upon.

 

Now what's our (Naija) strategic plan for all these? Are we diversifying quickly enough? Are we re-investing the revenues from the oil sector towards the other non-oil sectors? Check this out, the projected budget sale price of oil for 2011 is $65 per barrel at an estimated export rate of 1.9 million barrels per day and expected revenue is £52.2 billion. As at 31st July 2011 Brent crude was £117 and as at the time of this write-up its $109.37. When you do the sums, we should have a huge surplus of more than $40 billion. So, if we believe what the World Bank is saying, this money would have been shared or is being shared by a certain 1% of the population (OMG, Na so!)

The idea would have been that due to the astronomical cost in crude especially in the last few years, this would have presented a great opportunity to invest in a different sector like agriculture which is currently a major source of income for two- third of the population. Our biggest trading partners are really re-thinking their attitude towards oil/petrol consumption but I am not sure if they can really wean themselves of crude as quickly as they'll love to but I bet that they can reduce their consumptions. The mere fact that they're thinking about it should be a wake-up call for Naija. The United States account for 40% of our oil exports (our largest trading partner) and as stated previously here, they're making considerable efforts to reduce dependency on oil. The United Kingdom and EU account for 24%. The EU is even more stringent than the US in the area of Co2 emission for cars and machineries and this is the reason for the growth of fuel efficient cars on EU roads.  In the UK, the cost road tax (having your vehicle on the road) is dependent on Co2 emission of the said vehicle. For example, a 2005 Mercedes M- class (ML320 CDI SE 5D Tip Auto) will cost about £460 per annum to keep on the road, while the 2006-2008 model will cost £260. The UK practices a band system where all vehicles fall into categories A to M.  With 'A' paying nothing at all, 'B' - £20 per annum and at the end of the spectrum – 'M' costing $460 p/a. In the EU, a huge number of the new cars manufactured are more fuel efficient compared to their previous models, although expensive to the average person for now, the strategic idea is that in 10yrs time these new cars will become second hand vehicles, very affordable to the average people and we'll have more on the road. As the trend continues, a time will come where only fuel efficient vehicles will be on the road. Future cars will be better at fuel consumption when compared to their 2010/2011 counterparts and this will in turn reduce fuel consumption by EU on a considerable proportion.

Asia, Brazil and South Africa who account for 20%, 10% and 4% of our oil exports respectively are also seeking to make changes as there is a huge outcry from international bodies for all and especially Asia to reduce its carbon emission/Co2 and the likes. The outcry to reduce CO2/carbon emission is now global, whether this will happen or not, we'll wait and see.

 

Summarily , the world is making strategic plans to go green, be fuel efficient, reduce CO2/carbon print, seeking alternative  source of energy; are we as a country supposed to sit idly-by and watch whilst this happens? With our windfalls in oil revenue, isn't it sensible we try investing in multiple sources of income for the country? Even if the world continues in their oil consumption, shouldn't we still invest in other places? It can be argued that oil consumption is here to stay for the foreseeable future but it can't be overlooked that steps are being taken in the West to reduce consumption.  It is very possible that we might get to a time when these Western countries who make up for more than 60% of our oil exports begin to import less due to better efficiencies re their machineries and it's also very possible that when this happens the huge demand for oil may not be there anymore causing the price in oil to drop considerably. I know that this write-up has focused mainly on vehicles but as at 2009, that's about 900 million vehicles (cars and light trucks) worldwide we're talking about – roughly one car per eleven people. That's a lot of petrol/diesel cars that will be forced to improve their fuel efficiency. I also know that factories apply oil in their processes and also crude derivatives are used in plastics and other various products; but there is a general/worldwide trend towards reduction in Co2 emission from cars, factories and machineries. The big question is do we do nothing and hope that oil will always be in demand a thousand years from now or do something like investing in other sectors, seek major multiple streams of income  and diversify? Irrespective of global trends towards oil, let's hope the latter. Lastly, I stand corrected on anything in my submission above.