Just over one year ago, Hamas terrorists launched arguably the most brutal attack on Israeli civilians since the Holocaust resulting in death of over 1000 people.
In the past year, the Israel Defence Force (IDF) has been involved in a brutal conflict with Hamas in Gaza which has spilled over to Lebanon where Hezbollah has a significant presence.
The onslaught of the Israeli military pushed oil prices up by as much as 4% after Yemeni Houthi rebels in solidarity with Hamas began attacking ships in the Red sea.
In the past few weeks, we’ve seen Israel come on the brink of full-blown conflict with Iran after attacks on Iran-backed Hezbollah militants by Israel and assignation of top Iranian military commanders.
Just one week ago, Iran fired over 180 missiles inside Israel in escalation of the ongoing conflict, the Prime Minister of Israel had promised to retaliate and analyst are saying Israel plans to attack Iran’s oil facilities.
In the wake of this current attack, oil prices have shot up to $80 per barrel and there are projections of nearly reaching $100 if Israel attacks Iran’s oil facilities as predicted. Conflicts in major oil producing regions has always resulted in higher oil prices and going back to the 1970s oil crisis caused by the Yom Kippur war in Israel and the Iranian revolution.
The most recent scenario occurred in 2022 after Russia invaded Ukraine where crude oil prices closed the year at $97 per barrel compared to $69 in the previous year. In fact, the post pandemic recovery of oil prices stems from the Russia-Ukraine war.
For countries like Nigeria whose economy is heavily influenced by the swing in oil prices especially in the post-subsidy era, oil prices could be a double-edge sword.
Crude oil does two things to Nigeria’s government finances- provides revenue for government and foreign exchange for the CBN’s external reserves which is used to back the Naira.
However, in this post-subsidy era we are moving into, swinging crude oil prices could now mean higher petrol prices for Nigeria even when the petrol is produced locally and the raw crude even sold in Naira. Before now, the federal government through the Nigeria National Petroleum Company (NNPC) Limited pays a fraction of petrol cost of petrol to keep it low and fixed. This enabled Nigerians to not just enjoy low PMS prices but keep petrol prices immune from the vagaries of the international oil market.
However, in the past years, the cost of this subsidy has become unbearable for the federal government. Attempts have been made by different administrations in the past to end petrol subsidies but was met with stiff resistance by civil society groups with the greatest being the Occupy Nigeria protest in 2012 after President Jonathan removed petrol subsidy. This pushed the then President to reintroduce the subsidy where it remained until President Tinubu announced the removal on his first speech as President.
What Does Projected Rise In Oil Prices Mean For Petrol Price
In simple terms, Nigerians are going to pay higher PMS prices at the pump if the Iran-Israel conflicts escalates and pushes petrol prices above the current $80 per barrel. This is irrespective of where the crude oil is sourced and where or who refines it either locally or abroad. For example, the NNPC has declared it would supply 17.6 million barrels of crude oil to the Dangote refinery in Naira.
However, it will be dependent on the price of crude oil in the international market. If the price increase, Dangote and other local refineries would have to cough more Naira to settle the NNPC and this cost will be passed on to consumers. This is because crude oil as an international commodity is priced in U.S dollars.
Rising Oil Prices and Exchange Rate
In the face of rising oil prices, it is expected that the Naira strengthens against the dollar but that is dependent on the decisions of the United States Federal Reserve Bank and Central Bank of Nigeria (CBN).
The Naira has witnessed the worst volatility in history this year becoming at one time the best performing currency before a 180 degrees reversal of fortunes to become the worst performing currency. The strengthening of the Naira in March stems from the action of the CBN selling forex to BDCs at rates below the official market rate but there is a problem with such is that it is not sustainable- there is a limit to how much forex the apex bank can burn.
The Naira currently trades in the region of N1,550/$ to N1,660/$ in the official NAFEM window. This represents a depreciation of over 100% compared to the rates before the unification of all segments of the FX market by the CBN.
Rising oil prices could help shore up the country’s foreign reserve which has been seen rising in the past few months. In September 2023, the country’s foreign reserve stood at $33.23 billion- this has increase to $38 billion by the end of September 2024.
The CBN is presented with two choices with potential increase in foreign reserves- either to sell FX to BDCs like it did earlier in the year when the Naira became the best performing currency in the world or to allow the forces of demand and supply determine the value of the Naira as it currently does with the exchange rate reaching N1,600/$.
Hence, the value of the Naira with the potential increase in oil prices would be dependent on the decision of the CBN.
Most Ideal Scenario For Nigeria
From the foregoing, it seems the potential war between Israel and Iran and the ripple effects on crude oil prices means Nigeria would likely face another round of petrol price increase in the event the NNPC continues on its post-subsidy policy.
There is also uncertainty on the decision of the apex bank on either backing the Naira or allowing market forces determine the exchange rate.
Furthermore, Nigeria has been unable to since the beginning of the year to significantly increase oil prices. According to OPEC’s records, Nigeria has not met its crude oil production quota of 1.5 million barrels daily since January, despite calls to ramp up production.
For Nigerians, the best case scenario in the wake of potential increase in oil prices would be for low crude oil prices to keep petrol prices low and high crude oil production to increase forex supply to the CBN’s foreign reserves.