The architects of the 2015 budget proposal might have been working with an exaggerated projection of oil prices in the international market for 2015. The truth is that even the chronic optimists among international oil market watchers are reviewing their oil price projections for 2015.
Goldman Sachs, America’s investment banking giant, has reviewed its oil price projections for 2015. Its earlier projection was that oil price would hover around $100 per barrel in 2015.
With the trend of events in the global oil industry in recent weeks, the bank now believes that the international oil market would open 2015 with oil price at $85 per barrel, and that it would plunge to $80 by the second half of the year.
The projections are built around such factors as weak demand, global oil supply glut, and upsurge in shale oil production in the U.S.
Global crude oil demand for 2015 is expected to be weak because leading industrialized nations in Asia and Europe are still battling sluggish economic growth.
The oil price projections for 2015 might also have been informed by the mindset of economic tacticians in Saudi Arabia, the world’s largest exporter of crude oil. The Saudis are not keen on fighting the southward journey of oil prices with production cuts. They are rather fashioning out a magical formula that would firm up oil prices by first plunging it deeper.
The Saudi hypothesis is that if oil price plummets below $80, the production cost of shale oil would surge above profitable limits and force producers out of business. That is the logic behind the plan to crash crude oil price to $80 or below.
No one knows how long it would take the Saudi formula to stabilize oil prices, but the simple logic is that it might tumble below $80 in 2015.
That puts a huge question mark on the 2015 budget oil reference price of $78. It is simply not sustainable under the brewing market turmoil. Even if oil price remains marginally above the budget reference price during the year, the projection of the architects of the 2015 budget boils down to the philosophy of the Corinthians of the days of the Apostle Paul: “Let us eat and drink, for tomorrow we will die”. The 2015 budget is built around consumption. It does not believe in leaving anything for the so-called rainy day. If the 2014 budget reference price was $77 in a year that oil price was never expected to drop below $100, then it would be foolhardy to hike the oil reference price when all indicators in the international market point to $80 and below.
The current reference price is informed by government’s relentless, indecent profligacy and starchiness about spending cuts. The World Bank has ordered Nigeria to build its excess crude account (ECA) above $6 billion. But government has defiantly drawn down the account to $4.11billion due to tumbling oil revenues. With oil prices projected to drop to $80 in 2015 the ECA would not only be depleted further, but Nigeria would face severe cash crunch. The situation is even more precarious because tax revenue is expected to tumble precipitously as worsening power outages cripple the productive capacity of local industries.
The federal government is expected to respond to the cash crunch with huge borrowings to balance its budget. Nigeria’s external debt currently stands at $6 billion or about three per cent of gross domestic products (GDP). With a rebased GDP putting Nigeria in the prestigious middle class economies of the world, and many developed nation’s battling debt burdens of 90 to 105 per cent of GDP, Nigeria is a pretty bride to international creditors. There is a seeming irresistible temptation to sustain the profligacy with huge borrowings.
But spending cuts remain the best solution to the brewing cash crunch. The federal government maintains a maladroit machinery of governance that consumes close to 80 per cent of its budget, leaving pittance for investment in decaying infrastructure.
The most tempting target for hacking by the architects of the budget is fuel subsidy, which consumes almost 20 per cent of government spending. But in an election year, no one in Aso Rock would dare the frayed nerves of an impoverished populace. It could trigger street protests that could truncate the general elections.
Government must therefore look inwards for the inevitable fiscal surgery. It must cut its senseless spending in foreign travels. Hundreds of civil servants and political appointees travel with the president each time he attends an international event. The aim is just to chalk up estacode at tax payers’ expense.
Hundreds of advisers to the president and ministers who in turn have their own advisers, have no place in the tight budget that the current cash crunch dictates.
The time has come when the constitutional imposition which compels the president to form a cabinet of 42 ministers, must be discarded.
Barack Obama runs America’s $13 trillion economy with a cabinet of 15 members. Goodluck Jonathan on the other hand, manages a $550 billion economy with a cabinet of 42 ministers. That analogy gives a graphic picture of the constitutionally imposed profligacy that must be discarded.