The steady decline in the price of crude oil in the global market is spreading anxiety in Nigeria and other countries that derive the bulk of their revenue from oil. This is a legitimate concern for Nigerians be­cause the current volatility in oil price may have far reaching negative impact on government’s fiscal operations, cur­rency exchange rate, capital flow, the stock market, foreign reserves, inflation and interest rate.
In a nutshell, the falling oil prices por­tend grave danger for the nation’s econ­omy. The urgent message from this de­velopment is that we need to diversify our economy and develop the capacity of the non-oil sector to generate much more revenue into the national till.
Over the last one week (and still count­ing), oil prices dropped significantly when Iraq became the latest member of the Organisation of Petroleum Exporting Countries (OPEC) to cut its prices. This followed the decision of another major oil exporter, Saudi Arabia, to lower its prices because of growing fiscal deficits. The consequences of these actions have been breathtaking. The price of a barrel of Brent crude oil, a global benchmark, fell last Thursday, October 16, from a near four-year low of $87.74 to $82.73, down from about $115 a barrel in June. Besides, a barrel of the American bench­mark, West African intermediate crude, was trading $1.87 lower. That pushed its price below $80 a barrel, to $79.90.
Since January this year, crude oil prices have dropped 15 percent. This has put some pressure on the 2014 federal bud­get which was based on $77.50 per bar­rel. Even though the drop in the price of crude oil is still some notches above the budget benchmark, government’s well-known imprudence and opaque public accounting still make any appreciable drop in the oil benchmark worrisome, particularly since the Nigerian economy is about 95 percent dependent on oil for its foreign exchange earnings, and 85 percent, for its total revenue.
Also, with Nigeria’s economy estimat­ed to be over 80 percent dependent on imports, fiscal deficits seem very likely in the months ahead. The chances are that this will have a serious effect on Ni­geria’s short-term economic and fiscal growth. Already, government has hinted at a cash crunch, with an appreciable de­cline in the revenue accruing into both the Excess Crude Account (ECA) and the Federation Account. There may also be delays in salary payments across the states of the federation as a result of dwindling revenue from oil.
It is not difficult to understand why global oil demand is diminishing. It is largely due to the fact that more countries are discovering oil and al­ternative sources of energy. Also, the resultant reduction in revenue inflow will limit the capacity of government at all levels to fulfill their statutory obligations. This situation calls for prudent spending and a transforma­tion of the economy to reduce em­phasis on the oil sector.
Until now, government has only paid lip service to the diversifica­tion of the economy. Revenue sta­tistics show that the non-oil sec­tor accounts for only 10 percent of total revenue. Also, the report that Angola may soon overtake Nigeria as Africa’s largest oil producer may worsen Nigeria’s woes. The impact of declining oil prices on monetary policy and foreign capital inflows is also of great concern, if the slide persists. As regards monetary poli­cy, since the traditional disposition of the Central Bank of Nigeria (CBN) is to defend the nation’s currency through increased supply of foreign exchange, this will have a negative impact on our external reserve which has also experienced a decline in re­cent months.
While the CBN is likely to respond to the current dip in oil prices by tightening monetary policy, this will further push up interest rates, raise the cost of funds to investors in the economy and limit access to invest­ible funds. In fact, reports indicate that the falling oil prices have un­nerved global investment markets, with many investors already seek­ing the relative safety of government bonds, driving their prices higher and their yields lower – leading to a slump in business activity and weak consumer spending.
The good news in this development it that it will bring down the cost of fuel importation, which has always taken a big chunk of the country’s revenue. Over all, government at all levels should see the declining oil prices as a wake-up call to seek al­ternative sources of revenue and en­sure better management of national income. The situation also calls for a realistic oil benchmark for the 2015 Federal Budget. In this regard, the newly proposed benchmark of $75 for the budget may not be realistic. Let the 2015 budget be based on a realistic benchmark so that the fis­cal estimates for next year are not imperiled from the outset.

As crude oil prices tumble