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Looking Beyond Oil Price Collapse Towards Post Recovery Savings (Part 2)

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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.

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FG May Include Telcos, ICT Firms in Forex Priority List

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Technology and telecommunications companies may become the latest addition to the forex priority list of the Central Bank of Nigeria (CBN), according to Adebayo Shittu, minister of communications

 

Shittu, said there are ongoing talks with the CBN to achieve this.

 

He was speaking while inaugurating the ICT, Computers/Devices Service Centre in Abuja.

 

During 2016 recession, the CBN had created a forex priority list to conserve forex and ensure that the same is available for important parts of the economy.

 

Shittu was represented at the event by John Emeawa, director of planning, research and statistics (PRS) at the ministry.

 

“In this regard, I will proudly say that Nigeria has an array of young people with great energies and creative abilities to launch Nigeria into the league of world leading economies by leveraging on ICTs,” he said.

 

The minister said the Certified Computer Manufacturers of Nigeria (CCMON) collaborated with the ministry and its agencies in establishing the centre to ensure a competent workforce.

 

“Our collaboration with CCMON is intended to transform and build the capacity of the workforce in digital literacy and in preparation for a full implementation of the National e-Government masterplan.

 

“ICT Roadmap and also equip benefitting tech-savvy youths with entrepreneurial and job creation skills.

 

“I am happy to inform you that the Computer Service Center aligns with the implementation of the federal government’s Local Content Initiative.”

 

Shittu said the centre will support all systems bought in the public service, saying it was a pilot project of the ministry with plans to be replicated in every MDAs to provide after sales and services support.

 

“Such after sales support will ensure that computers bought by the government are duly maintained. This will stop all incidents of breakdowns and malfunctioning of computers used for government business.

 

“Consequently, the centre is for skills acquisition of staff that will provide services to various MDAs.

 

“The programme, therefore, will save costs for government and eliminate huge maintenance costs in government IT infrastructure.

 

“I wish to state that our ministry will continue to support CCMON as well as other equipment manufacturers to provide policy direction, who may wish to set up an assembly plant in Nigeria in the future.”

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Electricity Workers Threaten to Shut Power, Demand Sack of TCN MD

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Electricity workers threaten to shut power, demand sack of MD – Electricity workers yesterday in Abuja threatened to shut down power, unless the Federal Government sacks Usman Mohammed, managing director, Transmission Company of Nigeria (TCN)

 

The workers, under the auspices of the Senior Staff Association of Electricity and Allied Companies (SSAEAC), are accusing Mohammed of high handedness and anti-labour practices.

 

The union threatened to ground the entire power structure, if the government refused to heed its advice to relief the managing director of his appointment.

 

The workers’ threat followed the alleged administrative irregularities and high handedness of the Mohammed-led management.

 

TCN emerged from the defunct National Electric Power Authority (NEPA), following the merger of the Transmission and Operations sectors on April 1, 2004.

 

TCN represents one of the 18 unbundled business units under the Power Holding Company of Nigeria (PHCN) and was issued a transmission licence on July, 1, 2006.

 

The development prompted workers of the organisation to picket the TCN premise where they disrupted vehicular and commercial activities for several hours.

 

The workers, who spoke through Umar Abubakar, SSAEAC’s general secretary, accused Mohammed of allegedly flouting most of the administrative procedures, which they claimed were inimical to their welfare.

 

According to them, the MD allegedly single handedly conducted examinations for staff due for promotion without recourse to input from other management staff.

 

They alleged that the MD had defaulted in remitting taxes to the Federal Inland Revenue Service (FIRS), a development that also led to the sealing of the organisation even before the workers staged their protest.

 

The workers also claimed the MD had hijacked some funds provided by the World Bank for projects in the power sector, including his alleged interference in union activities by his attempt to polarise the union.

 

They also alleged that the MD cleared a large consignment of electrical materials from foreign donors at the ports but failed to deliver same to the warehouse of the organisation for proper accountability, before distribution to the relevant sections.

 

The protesters said efforts by Sen. Chris Ngige, minister of Labour and Employment, and Babatunde Fashola, his counterpart in the Ministry of Power, Works and Housing, to intervene in the matter, proved abortive as Mohammed failed to turn up in several meetings.

 

“Our grievances stem from the fact that the MD on his own handled the promotion exercise and started to conduct it in his own way through the aid of consultants that to us is not the ideal process.” the angry worker said.

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LSETF & Coca-Cola System Sign MoU to Empower 1,000 Women under Coca-Cola 5by20 Programme

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The Lagos State Employment Trust Fund (LSETF), Coca-Cola Nigeria Ltd and its bottling partner, Nigeria Bottling Company on Wednesday signed a partnership agreement to empower 1,000 women in Lagos State.

 

Through this partnership framework the selected women will receive training in financial literacy and business skills as well as start-up capital to integrate them into the Coca-Cola value chain as retailers of the Company’s beverage products.

 

This partnership is anchored on Coca-Cola’s 5by20 Programme which is the Company’s global commitment to enable the economic empowerment of 5 million women entrepreneurs across the its value chain by 2020.

 

Akintunde Oyebode, representing Lagos State Employment Trust Fund at the MoU signing ceremony, stated that LSETF’s mandate is aimed at creating an enabling environment for Lagos residents to realize their business aspirations by providing leverage & access to finance for them to thrive, while ensuring employment and innovative opportunities for all residents of the state.

 

He said that” partnership with an organisation such as Coca-Cola assures us that we are working in the right direction and strengthens our commitment to building entrepreneurs within the state.

 

“We understand that to empower a woman, is to empower a whole generation.

 

“We will continue to provide accessible and affordable credit to support women as they seek to start or expand their businesses; because when we do, we create wealth and employment that alleviates poverty.”

 

Mr Bhupendra Suri, Managing Director, Coca-Cola Nigeria Limited, reiterated the company’s commitment saying, “Now more than ever, we are certain of our commitment to the well-being of our communities, a critical part of which are our women.

 

“As pillars of their communities, women invest a sizable portion of the income they earn on the health and education of their children and in their local economies, creating a tremendous economic impact.

 

“Lagos State Employment Trust Fund is our partner of choice for this initiative considering our shared vision on women empowerment and its vast network across the State.”

 

He further stated that realizing the vision of enabling the economic empowerment of 5 million women by 2020 depends on building scalable models and powerful partnerships, across business, civil society and government, which is vital to maximizing the impact of their programs and making them more sustainable.

 

Mrs Sade Morgan, Legal and Public Affairs Communication Director, Nigeria Bottling company, in agreement, said, “As a part of The Coca-Cola System, we understand the importance of partnerships.

 

“Our business and its growth in Nigeria are a result of strategic partnerships with distributors, retailers and our consumers.

 

“Whenever there is a call to collaborate for sustainable impact, we ensure we are there to support it with our expertise.

 

“We will work to position each beneficiary in strategic locations that are profitable and link them up to our distribution network, so that the ripple effect of individual growth can be felt across our society.”

 

Coca-Cola and its bottling partner, Nigeria Bottling Company, will provide access to Coca-Cola trade assets (including coolers, tables, umbrellas and Coca-Cola beverage products); peer networks, funds for training and support beneficiaries in the set-up of retail outlets in commercially viable locations; linking them to the nearest Coca-Cola distributors.

 

LSETF will fund the trade assets and co-fund the programme implementation while also leading the identification and recruitment of participants to the programme.

 

This timely and welcome public private partnership is the second one between Lagos State Government and Coca-Cola System, the first one having been launched in 2012 and has so far empowered 300 women in the State.

 

 

 

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