Finance
experts have said rising oil prices is good for the nation’s economy,
even though it could have serious implications on the global economy.
Bismarck
Rewane, an economist with Financial Derivative Company, a finance firm,
said “$100 per barrel of oil is ‘good’ for Nigeria but bad for the
global recovery. Oil at over $100pb is bad for the dollar and could
delay the economic recovery.”
The
political turmoil in Egypt has caused a sharp rise in crude oil prices,
with West Texas Intermediate (WTI, a type of crude oil used as a
benchmark in oil pricing) closing up 4.3 per cent on 28 January. While
Egypt’s share of global oil and gas production is fairly small (about 1
per cent and 2 per cent respectively), experts say the consequences for
the markets could be significant.
Oil
price averaged $98.4 per barrel (pb) in January 2011 as against
$93.07pb in December 2010. Current oil price of $100.88pb is above
budgeted price of $67pb, with a peak price of $100.92pb on January 12
(since October 2008).
Mr. Rewane says Egypt is strategically located and geopolitically critical to the stability in the region and oil.
“The
violent clashes and protests against autocracy is threatening serious
economic repercussions not only in the region but across the globe,
pushing oil prices above the psychologically important resistance point
to $101per barrel, the highest level in more than two years, sending
shivers down the spines of traders and investors,” he said.
Similarly,
Ekaterina Gaponenko, an analyst at Renaissance Capital, an investment
bank, said the political chaos in Egypt has caused a jagged rise in
crude oil prices and the resulting consequences for the markets could
be more significant than anticipated, adding that gas prices are likely
to respond even more significantly than crude prices.
“This
could lead to a reduced crude output and send crude prices much higher
in the short term. However, in the long run, such a scenario would be
bearish for oil prices as it could affect further growth of the world
economy and lead to a demand response,” Ms. Gaponenko said.
Foreign reserves concerns
Mr.
Rewane said strong oil prices will drive gross fixed investment and
high oil prices will propel an export-led growth and is also expected
to grow fiscal revenue.
“Kidnappings
and restiveness in the Niger Delta region are quite unlikely,
therefore, oil is expected to trade at an average of above $100pb in
February and production is expected to average 2.14mbpd in 2011,” he
said.
Samir
Gadio, Emerging Markets Strategist, Standard Bank, however, expressed
concerns that the favourable oil prices are yet to be reflected in the
nation’s foreign reserves.
“The
key issue is that the favourable external fundamentals have not
translated into an increase in foreign reserves, however. On the
contrary, forex reserves fell to $34.7 billion in October, from $42.4
billion in early 2010, reflecting the depletion of the excess crude
account, episodic spikes in corporate demand for forex, and strong
speculative demand (especially in August-September) amid weak naira
confidence,” Mr. Gadio said.
“Overall,
the turnaround in output since late last year, coupled with the robust
oil price in 2010, should result in a significantly positive trade
balance (since oil accounts for 95 per cent of total exports) and
current account surplus which we forecast at about 12.6 per cent GDP,”
he said.
