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Looking Beyond Oil Price Collapse Towards Post Recovery Savings (Part 2)
By Austin Okere
I will attempt to share the justification for this projection from the insights expressed by experts at various fora, and my own informed postulations.
Depending on which expert you talk to, and the perceived direction of the Chinese economy, you get three different views; a school of thought holds that the price of oil may be far from the top but closer to the bottom, while others believe that oil price will bottom out at about $20 per barrel. Yet another group holds that Oil price has reached equilibrium and will oscillate between $40 and $45 per barrel.
The optimists believe that oil price will recover to between $70 and $80 per barrel towards the end of the year, and remain within that band, as a sustainable balance between demand and supply is reached.
According to the 2015 OPEC annual statistics bulletin, world crude production in 2014 was 73.4 million barrels per day (mbpd) while demand was 91.3mbpd.
With the significant scale back in shale production arising from the steep price drop from late 2014 to levels that make shale production unviable, it will be safe to assume that production has dropped considerably while demand has more or less remained steady.
The major issue for me is the question of the so called glut. If there is indeed a glut, what is the accurate size of the glut and therefore, how long will it take for supply and demand to balance out.
I listened to an expert at a recent forum argue very eloquently against the widely touted 850 million barrel excess crude inventory.
Based on the data he and his firm have meticulously collected, he believes that the excess supply cannot be more than a quarter of the touted figure.
This means that the glut is overstated by 600 million barrels. Meanwhile, Iran’s return to the market has been less dramatic than the Iranians said it will be, adding only 220,000 barrels per day (bpd) in February 2016 according to the International Energy Agency (IEA); only a fifth of their forecast of 1mbpd.
The IEA also believes that non-OPEC output will fall by 750,000 bpd in 2016, while US production alone will decline by 530,000 bpd this year.
The other possible disrupter to oil is the incentive to explore alternative forms of energy such as renewables, majorly solar and wind, in response to the impending carbon tax fuelled by fears of global warming and pollution.
According to Amy Jaffe and Jeroen van der Veer, leading experts on global energy policy, factors such as technological advancements, the falling price of batteries that power electric vehicles, and a post-COP21 (UN Climate change conference in Paris in 2015) push for cleaner energy could drive oil use below 80 million barrels a day by 2040.
These threats to oil do not seem practical on a meaningful scale in the near to medium term.
The example in Germany seems to buttress the fact that renewables may not make sense in Europe and other cold climes, and that they can only be achieved with very steep and unsustainable subsidies.
It is reported that Germany, the poster boy for renewables has so far invested about $500b on wind and solar energy. And yet renewables account for only 3.5% of global energy use, while oil and gas accounts for as much as 60% (this excludes shale, peat and coal, which account for 10%).
Electricity accounts for 18%, while biofuels and waste account for the balance 12%. In simple terms, the eight major oil companies, with a cumulative valuation of $1.4trillion generate as much as 20 million barrels per day versus the $2trillion invested so far to generate the equivalent of 7million barrels of oil per day in renewable energy. How sustainable is this huge subsidy?
For the switch to electric cars to happen, we would need to replace refineries producing petrol with power plants that will produce the additional electricity required to charge the electric cars. How quickly can this switch happen, even if it were practical?
My theory on the oil narrative is as follows: Saudi Arabia being the biggest reserve holder wanted to drive the shale producers, whom they saw as ‘squatters’ out of the market.
They opened their taps to drive prices down, knowing that shale needed an oil price of above $40 to produce at break even.
The high oil prices were driving cheap capital into shale and improving technology and yielding high returns and thus attracting more capital and repeating the cycle, thereby iteratively making shale a bigger threat.
I believe that the Saudi plan was hijacked by the Oil traders, who thrive on price arbitrage fuelled by uncertainty.
They rode on the back of increased Saudi production to shout ‘oil glut’! They increased the FUD (fear uncertainty and doubt) with news of huge inventories coming on stream following the lifting of sanctions against Iran, but the general view is that Iran’s oil was already finding its way into the market through the back door, resulting in an insignificant net increase in supply.
It then became a self-fulfilling prophesy which snowballed, with the producers pumping recklessly to maintain market share and preserve earnings, which drove prices further down, exacerbating a bad situation.
I believe that the oil traders and bankers are trying to make up for a lost bet on the back of overenthusiastic exposure to the oil market. This is captured by the screaming headline in the Financial Times of March 22, 2016 ‘$150b losses on energy company bonds spur default fears’.
The article further states that the total debt among oil and gas companies including loans almost tripled from $1.1trillion in 2006 to $3 trillion in 2014 quoting the Bank for International Settlements.
Twenty of Europe’s biggest banks have energy loans totalling $200b, enough to wipe out a quarter of their common equity, while twenty of the leading US banks have loans totalling $115b or 11% of their equity.
With the desperation arising from a risky bet gone awry, one does not need to dig too deep to glean a motivation to drive prices down, buy on the cheap and subsequently sell on the high to cover the huge debts.
I believe that in the end, the market will wave its magic wand, and supply and demand will correct themselves and reach equilibrium with price. You cannot hide a pregnancy for too long.
It is not at all surprising that the heads of the world’s largest oil trading houses, six of which sell enough oil to meet almost a fifth of global demand were unanimous in calling for an end to the two year price slump at a Financial Times conference in Lausanne.
What should be more important to all of us, beyond these theories is whether Nigeria will finally learn from her past mistakes and institute a mechanism for saving when oil prices rebound, as I believe they eventually will. And what if the optimists are wrong, and prices do not rise. We would have lost nothing.
We would have learnt to diversify away enough from oil to live comfortably within the current price. If on the other hand the optimists are right, then we will save the equivalent of $36.5b per year (i.e. 2.5mbpd X extra $40per barrel X 365 days).
In any case we would have nothing to lose by preparing and having to wait a while longer than anticipated. Success only happens when opportunity meets preparation.
Austin Okere is the Founder CWG Plc and Entrepreneur in Residence, Columbia Business School, New York. He also serves on the World Economic Forum Business Council on Innovation and Intrapreneurship.
Nigerian Postal Service (NIPOST) has vowed to clamp down on courier companies found to be aiding the trafficking of drugs and other illicit items through the country’s logistics network.
In a statement issued on by Franklin Alao, director of Corporate Communications, NIPOST expressed outrage over a recent report in some newspapers with the headline: “Nigerian courier services easily transporting hard drugs since Tinubu became president – NIPOST.”
The agency described the headline as false, misleading, and damaging to national security efforts. According to NIPOST, the article falsely attributes the claim to the postal regulator, thereby creating the impression that the agency had endorsed or confirmed such allegations.
“This is categorically FALSE,” the statement said. “At no point has NIPOST made such a statement or associated these activities with the administration of President Bola Ahmed Tinubu.”
NIPOST maintained that while it respects the role of the media in promoting accountability and transparency, the publication in question was reckless and sensational.
It warned that inaccurate reporting on sensitive national issues like drug trafficking not only misinforms the public but also undermines the collaborative work being done to sanitise the courier and logistics sector.
Restating its position, the agency said it strongly condemns the use of courier services for criminal purposes, including drug trafficking.
It reaffirmed its zero-tolerance policy toward the misuse of Nigeria’s postal infrastructure and said it remained committed to regulating the sector with integrity, transparency, and accountability.
NIPOST noted that it had embarked on a range of interventions aimed at improving surveillance and enforcement across the logistics industry.
It stated that all courier operators are currently undergoing a revalidation process and that Know-Your-Customer protocols and compliance audits are being enforced to tighten controls and prevent abuse of the system.
The postal regulator said it is also working closely with the National Drug Law Enforcement Agency, the Nigeria Police Force, the Nigerian Customs Service, and other relevant security institutions to investigate and deter the use of logistics channels for the transportation of narcotics and other contraband items.
In addition, NIPOST said it had intensified engagement with courier operators, transport unions, and logistics associations to promote sector-wide vigilance and encourage the reporting of suspicious packages.
It also revealed that a new Digital Postcode and Parcel Identification System is being deployed nationwide to enhance traceability, eliminate anonymity, and improve parcel screening from the point of dispatch to final delivery.
“The Nigerian Postal Service is fully committed to restoring the integrity of Nigeria’s courier and logistics industry,” the statement said. “Any operator found to be involved in criminal activity will face immediate regulatory sanctions, including license suspension or revocation, and be reported to appropriate authorities for prosecution.”
The agency urged members of the public to use only licensed courier companies and to report any suspicious activity either to NIPOST or relevant security agencies.
It also called on journalists and civil society groups to approach issues in the sector with accuracy, caution, and a shared sense of responsibility.
Defence Industries Corporation of Nigeria (DICON) has entered into a Memorandum of Understanding (MoU) with Homeland Protectors and Supplies Limited, a Saudi Arabia-based security company, to begin local manufacturing of drones, satellite systems, and advanced communication equipment.
The agreement, which was signed at DICON headquarters in Kaduna, will see Homeland Protectors bring in production lines and technology to Nigeria to manufacture satellite systems, laser equipment, border security drones, and sophisticated communications solutions.
Major General Babatunde Ibrahim Alaya, director general of DICON, shortly after signing the MoU, described the deal as a “major milestone” in Nigeria’s drive for defence self-sufficiency.
He said the collaboration would not only meet local demands but also position Nigeria as an exporter of security technology to other African countries.
According to him: “Today is another milestone for DICON. What Homeland Protectors is bringing on board is expertise and experience in the field of satellite, laser systems, communications, and border security drones.
The agreement we have just signed is for them to bring the production line to Nigeria and start producing here, so we can satisfy the defence industry requirements, other security agencies, and export the excess capacity to other African countries.”
He expressed profound appreciation to President Bola Ahmed Tinubu for what he called his “constant support and firm belief in DICON,” especially for signing the DICON Act 2023, which has now paved the way for international partnerships of this magnitude.
Alaya also thanked the Minister of Defence and Minister of State for Defence for their unwavering backing, stressing that their support made the joint venture possible.
Mr. Ali Hussain A. Aldayhani, managing director and chief executive officer, Homeland Protectors and Supplies, who led the Saudi delegation to Nigeria, hailed the partnership as a game-changer for Nigeria’s security architecture.
“I am in support of this amazing job today in collaboration with Homeland and DICON. This is in support of the Nigerian President and the Minister of Defence to bring security satellite communication technology to Nigeria,” he said.
He disclosed that the venture was designed not only to meet Nigeria’s internal needs but also to open up export opportunities to other markets, stressing: “We are going to have a huge joint venture and also for export outside Nigeria with regard to technology communication.”
The Homeland CEO thanked the DICON Director General for what he called “the support of the huge success in signing the Memorandum of Understanding (MoU).”
He assured that this would not be the last of such engagements, promising more frequent visits and deeper collaborations in the near future.
With this move, Nigeria joins a select group of countries on the continent working to domesticate critical security manufacturing — a step expected to save foreign exchange, create jobs, and bolster national security.
Vice President Kashim Shettima has affirmed Nigeria’s unwavering stance against nuclear weapons testing.
He made this known during a meeting at the Presidential Villa with a delegation from the Comprehensive Nuclear-Test-Ban Treaty Organisation (CTBTO), led by Dr Robert Floyd, executive secretary.
According to Shettima, Nigeria, like many other African nations, is grappling with numerous socio-economic challenges, including widespread poverty and the adverse impacts of climate change.
He stressed that Africa’s immediate priority is to confront these existential threats, not to engage in the pursuit of nuclear weapons capability.
“The outcome of any nuclear conflict is never a win-win situation; it is always the opposite. We are fighting poverty; we are fighting a war against the relationship between the economy and ecology in sub-Saharan Africa. We have no business dabbling in anything that has to do with nuclear weapons,” he said.
The Vice President also commended CTBTO for its broader civilian contributions, such as detecting tsunamis and seismic volcanic activity, and for supporting global ecological stability.
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