As oil price drops below budget benchmark: Dangers for Nigeria!

Nigeria’s 2025 budget is couched on an oil price benchmark of US$75 per barrel; but on Monday, February 24, 2025, for the first time this year, the price of Brent crude slipped to US$72.64 per barrel. The next day, it only inched up to US$72.68 per barrel. All through January 2025, the average price of Brent crude stood at around US$80 per barrel.

This declining crude oil price directly poses a threat to the N54.99 trillion 2025 budget (though yet to be assented to by Mr. President), with an inbuilt deficit of over N13 trillion. The budget projects an oil revenue of about N20 trillion, at an assumed oil price of US$75 per barrel and daily production of 2.06 million barrels.

The downward spiral in crude oil prices is due to many factors, including the current pressure from the U.S. on Iraq to restart oil exports from Kurdistan—a move that is certain to ease supply constraints that have persisted in the market for almost two years. Kurdish crude flow has been disrupted since March 2023.

Many operators in the global oil market are also closely watching Russia-Ukraine peace negotiations, which could influence future sanctions on Russian oil and global crude flows. U.S. and European Union (EU) sanctions on Russia have significantly altered global oil trade, with Russia redirecting crude exports to China and India.

Also, the geopolitical developments in the Middle East (Israeli-Palestinian war), and U.S policy shifts—all impact the global oil market. In point of fact, President Donald Trump, in his inaugural address on January 20, 2025, made it his priority not only to ‘bring down’ the price of crude oil, but also to make America a net exporter

Trump’s sweeping new energy policy aims to “encourage energy exploration and production on Federal lands and waters, including on Outer Continental Shelf, in order to meet the needs of our citizens and solidify the United States as a global leader long into the future.”

The U.S. President has followed up his new energy paradigm with a message at the World Economic Forum in Davos, Switzerland, asking the Organization of Petroleum Exporting Countries (OPEC) to bring down oil prices, citing the impact of high fuel costs on the Russia-Ukraine war. Trump said he intended to ask Saudi Arabia and OPEC to reduce oil prices, which he believed would help the conflict.

Trump said: “We will bring prices down, fill our strategic reserves up again right to the top, and export American energy all over the world.” And no doubt, these Trump’s Presidential pronouncements and actions since his inauguration have turned a key damper on crude oil prices.

Unwittingly, the direct import/impact of all this is the loss of the U.S. as a market for Nigeria’s oil. The declining oil price trend particularly imperils the funding of Nigeria’s 2025 budget—since the Appropriation Bill is hinged on significant income from crude oil sales. The budget in–the-making is already laden with an indeterminate quantum of deficit—due to the declining oil prices.

Ironically, Nigeria used to build up an “excess crude account, ECA”—a special account established to warehouse excess revenues from the prevailing crude oil price at the international market. The funds in this account are meant to be used for development projects, serve as buffer during economic downturns, and provide a stabilization mechanism to mitigate the impact of fluctuations in global oil prices.

Unfortunately, successive Governments have neither been prudent nor transparent in the management and utilization of the ECA—as a result, over a US$100 billion that accrued in the account between 2004 and 2018 was practically frittered away.

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Now, the declining oil price in the global market presents Nigeria with a burgeoning deficit in its 2025 budget, even before the Presidential assent. This has already plunged the budget into deficit financing, with its numerous challenges—one of which is continuous borrowing from within and outside the country.

From all indications, the price of crude in the international market is likely to hover between US$70 and US$73 per barrel for the better part of the year. The collapsing oil price is therefore a pointer to more borrowing for Nigeria, and growing public debt which, according to the Debt Management Office (DMO), stood at N142.32 trillion (US$89 billion) at end-September 2024.

In recent times, Nigeria has practically been on a borrowing spree: from local and external sources—especially the World Bank Group, the IMF, African Development Bank (AfDB), AfreximBank, the UK, U.S., China, etc. In fact, as of September 2024, Nigeria owed the World Bank’s International Development Association (IDA) US$17.2 billion. This makes Nigeria the third-largest debtor to the IDA.

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Locally, the Federal Government through ‘Ways and Means’ advances had almost wrecked the macro-economy under the immediate past administration, by raising over N23 trillion from the apex bank. The deleterious impact of this is yet driving inflation and interest rates to dizzying heights. Deficit financing (especially, massive borrowing) from the money and capital markets has crowded out most private sector operators.

This accounts for why the Federal Government through the DMO and the Central Bank of Nigeria (CBN) has been endlessly issuing bonds and Treasury Bills—all driving up local public debt. Nigeria’s total domestic public debt as of September 2024 stood at N74 trillion, according to the DMO. The recent local dollar-denominated bonds, Naira bonds and the T-Bills sales have seen the debt portfolio ballooning.

The burgeoning budget deficit occasioned by the widening gap between oil price benchmark and the actual crude price presents Nigeria with more desperation for revenue generation. No wonder the Government has been trying all manner of initiatives from the ridiculous to the absurd in levying taxes, tariffs and charges on the citizenry.

Removal of subsidies from virtually all public goods and utilities is largely in pursuit of higher revenue generation. Whether it is the subsidy on fuel (Premium Motor Spirit, PMS), electricity, water or hiked tariff by Customs or Nigerian Ports Authority (NPA), or re-tolling of roads: they are all for more revenue generation.

However, low(ering) oil prices is also a direct threat to Nigeria’s foreign exchange (FX) earning, since crude export still accounts for over 80 per cent of the country’s FX income. The lingering weakness of the Naira against the dollar in the FX market has been largely as a result of paucity of the green back: reflecting in consistent excess demand over supply.

Already, some chunk of the external reserves are being deployed by the CBN in propping the local currency in the FX market. According to the CEO of the Financial Derivatives Company Limited, Bismarck Rewane, “there are many things that are happening: reserves of over US$40 billion are coming down. We have also borrowed US$4 billion in bond issues. When you look at all that, we have spent US$8 billion to support the naira at the current levels.”

Speaking on Arise TV program, Rewane said that the CBN’s intervention in the FX market was playing its role in maintaining external reserves to safeguard the international value of Nigeria’s local currency. But with Nigeria’s unrealistic 2.06 million barrels per day crude oil production projection for 2025, at US$75 per barrel price, the FX income expectation is also faulty.

At a time Nigeria has remained neck-deep in huge deficit financing in its public finance management, the emerging scenario to be triggered by oil price volatility presents a dreary prospect. Already, there has been a few ‘missteps’ in the making of the 2025 budget, including the ‘whimsical’ additions to lift the total budget to N54.99 trillion. When assented to by the President, the budget (as is being speculated) would become retroactively effective from January 1, 2025.

These awkward processes, including the presentation of the Appropriation Bill two weeks to the end of 2024 in violation of the Fiscal Responsibility Act 2007, leaves the budget shrouded in absurdities. Already, depressing oil price headwind and stakeholder resistance to motely local taxes and tariffs are threatening the budget.

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• The author, Okeke, a practicing Economist, Business Strategist, Sustainability expert and ex-Chief Economist of Zenith Bank Plc, lives in Lekki, Lagos. He can be reached via: obioraokeke2000@yahoo.com (08033075697) SMS only