2017 budget: How feasible is $42.5pb oil benchmark?

No model can readily project what the price of crude oil will be. Over the years, the price of oil has hovered between $43 and $45pb on the average. In my view, $42.5 is suitable given some recoveries that are expected to take place in some of the energy consuming countries. Attempts to put OPEC and non-oil producing countries together to regulate the supply of oil could also make the oil price to be above $42 in 2017. With the predictions from the International Energy Agency and other international organisations, I think there are expectations that the price of oil will hover over $42. But the government has to be very proactive. If there is any need for the price of oil to dip below that price, government should have a standby arrangement that will allow it to prioritise its budget so that those ones that are very important can be implemented. And as the price also rises above the benchmark, there should be some savings that will enable them to cushion the short time volatility of the oil price.

• Mr. Bisi Sanda, Head, Transaction Advisory Services, West Africa, Ernst & Young

The predictability of the future price of oil is very difficult because of the volatility. Before 2014, United States was buying half of our crude oil but today, it hardly buys five per cent. A lot of things have changed in the global oil market. The US that used to be a major importer of crude has got to a stage where it can export crude and is going to remain like that into the future. Industrialised nations are making efforts on the climate change challenge by trying to move away as much as possible from fossil fuel energy and this may affect the demand for crude negatively.

However, considering that OPEC is coming round to agreeing on production cut, and if they are able to see it through, it is going to contribute to the stability in the price of crude. So, the benchmark for the budget appears reasonable. But it is not only the oil benchmark that will determine a good budget. Other things like the fiscal, monetary and commercial polices must work together as well as the savvy of the ministers and civil service that will implement the budget. People continue to lose sight on the fact that running a government is running a business and unless global best practices are applied in running the government affairs, we will stay very long in the present economic recession.

• Bala Zakka, Technical Director, Template Design Limited

Considering the main factors that determine the global oil prices today, it will be too optimistic to use a benchmark that is above $35pb to plan 2017 budget. It will be good for Nigeria to be conscious of the projection that made us to panic in 2016. Any projection that will throw us into confusion and affect the ability to meet up with the budgetary plans should be avoided. Last year, a benchmark was set, and because of the shock we experienced within the oil and gas industry globally, there were serious upsets within the Nigerian general economy.

Naturally whenever things like these happen, you are supposed to learn your lesson and use it to plan the future. Based on that, it is better for us to have a surplus budget than to have a budget deficit, and throw the country into a state of economic confusion. At the end of the day, if we have a surplus budget and it is properly managed, it will be in our own interest. In the previous years, we had surplus budget which led to the creation of excess crude oil account.

It is always advisable that when we make economic forecast, we don’t make one that will put the country in a very tight economic confusion and panic situation. It’s also worthy of note that there are so many factors that can determine the prices of global crude oil today, and any of these factors can bring the projected price to the lowest level within a short time. That is what we describe as shocks because they are not expected. And before you know, everything about your analysis and projection will get rubbished. So, I will suggest $35pb, maximum.

• Johnson Chukwu, Chief Executive Officer, Cowry Asset

Given the current price of crude at $50 and the average price remaining at the neighbourhood of $46 to $48 in the last one year, I think the benchmark of $42.5 is appropriate. If there is a variation, it shouldn’t be materially below that. We should expect that the price will be above $42.5 in the next fiscal year.

The challenge we have today is not necessarily the price, it is more of production volume. There is a budget of 2.2bn barrels per day. We really need a full hang on the issue of militancy in the Niger Delta to be able to achieve the daily target. I don’t have any problem with the $42.5pb benchmark for 2017 budget; the production volume is my major concern.

• Mr. Jimi Ogbobine, Senior Analyst, Augusto & Co

Earlier in the year when the government came up with $40 benchmark, oil went as low as $35 and many people started making a noise that the benchmark was wrong. But the truth is that the benchmark is an average price over the year. So, it is possible the price will fall to $35 during the year and rise to $55 again, and the average at the end of the day, will be $40/$42. So I think $42.5 is a feasible benchmark.  But I will advise the government to run scenarios on lower prices as well. For instance, if the price falls to $35, what will happen to capital expenditure? $42.5 is fair but I will recommend scenario analysis as well.

• Prof. Sheriffdeen Tella, Economics Department, Olabisi Onabanjo University, Ogun State

The $42.5 benchmark is realistic looking at the trend of the current price. Most times, the price is between $40 and $45. There are also no indications that new oil fields can be explored in the world that will make the price to go down. If the OPEC is considering to reduce the output by November this year, it means the price will likely go up because of the scarcity. And before non-OPEC group can fill that gap, it will take time. So for most part of 2017, I think the price will range between $40 and $50. $42.5 benchmark is okay.

• Prof. Simon Irtwange, National President, Institute of Chartered Economists of Nigeria

We shouldn’t be overly optimistic because even when oil prices are relatively stable, we need to plan for eventual disruption. In most cases, if war or any catastrophic event happens in any oil-producing country, it can trigger price fluctuation. So, we need to plan for such event. It is better we put the benchmark between $35 and $40, so that if there is a windfall, we can always be better for it. If we are not able to meet up with the $42.5 benchmark, it means we will have a deficit budget and will have to borrow to fund it.

Besides, we are gradually moving away from oil. The trend suggests that with the new advances in technology in terms of cleaner energy, nations are gradually moving away from fossil fuel. Even though oil will not just disappear, in many years to come, it will become a second energy source in comparison with the clean energy initiatives that we have today. It is better we start planning away from oil than depend on it as a major export earner.