Dedicated to Nigeria's socio-political issues
October 3, 2007 - December 2, 2007
Nigeria and Its Membership of OPEC
Mobolaji E. Aluko,
Monday, January 26, 2004
For the first time in just under a year, the international price of crude oil hit $36.20 per barrel late last week, rising by $1.13 or 3.2 percent above the $35.07 per barrel price at the close of trading the week before last. Interestingly enough, the current price represents about 57 percent increase above the $23 a barrel official selling price adopted for Nigeria's oil for the 2004 budget now under consideration by our National Assembly.
That should be good news for an oil producing country such as Nigeria.
But should Nigeria be in favor of ever-rising oil prices? As a related question, should Nigeria continue to be a signatory to the 11-member oil cartel OPEC (Organization of Petroleum Exporting Countries http://www.opec.org ) or not?
These are serious questions ALWAYS begging for answers periodically. Nigeria being both a major consumer and a major producer nation of oil, as well as a member of OPEC, makes the situation fairly COMPLEX , thereby not lending itself to easy, facile analysis. Just as a human life not examined is not worth living, if Nigeria's situation and membership of various international bodies are not periodically examined to see whether they continue to serve our national interest or not, that would amount to an undermining of our very national sovereignty.
Our analysis below is based on inspection of Tables 1 and 2 below, which give relevant data for all the eleven OPEC countries. . As a historical note, OPEC was founded in September 1960 by Venezuela, Saudi Arabia, Iran, Iraq and Kuwait. Of the additional six countries in OPEC [Qatar (1961), Libya (1962), Indonesia (1962), United Arab Emirate (1967), Algeria (1969) and Nigeria (1971)], Nigeria was the last to join in July 1971 during the Gowon military regime. Ecuador and Gabon joined afterwards in 1973 and 1975 respectively, but pulled out in 1992 and 1995 respectively.
MEMBERSHIP OF OPEC – FAIR DEAL OR NOT?
Let us first deal with our membership of OPEC, and the relationship of quotas to the POPULATION and OIL RESERVES of the various countries.
If we were to do a correlation (or factor) analysis among all the OPEC countries with QUOTA as dependent variable and current POPULATION and OIL RESERVES as independent factors, we will find that the current quotas of Nigeria and those of the other OPEC countries need considerable tweaking. In particular, why Saudi Arabia with a population 22 million has a quota of 7.093 million barrels per day, while Nigeria with a population of 133 million (that is according to OPEC data!) has a quota of 2.018 million barrels per day remains to be explained. UAE with a population of just over 3 million people has a higher quota (2.138 million) than Nigeria!
If keeping the price down is the important issue for OPEC, then that depends mostly on the TOTAL PRODUCTION of oil put out by that group. The present quota sets that at a total of 24.5 million barrels per day (see Table 1). Certainly, a more EQUITABLE re-distribution (while keeping the total output quota fixed) based on some rational metrics can be done AMONG the nations without dis-equilibrating the international oil market. The quotas would be subject to the ability of countries to produce their assigned amounts. If they cannot, then they can assign their own QUOTAS to other OPEC (and even non-OPEC) nations as they see fit.
Here is what I mean by using Table 1: assuming a total quota of 24.5 million barrels per day, then based on population alone, Nigeria should have a quota of 6.2 barrels per day (three times its current quota) and Saudi Arabia 1.02 barrels per day (one-seventh its current quota). Based on proven reserves, Nigeria should have 910,000 barrels per day (under half of its current quota) and Saudi Arabia should have 7.6 barrels per day (just a little over its current quota). Similar calculations can be done for each of the other nine countries. If these two variables are the most important – Table 2 shows that proven reserves ranking correlate much better with the current quota than population - then the true quota should lie somewhere in between the figures given. Countries that cannot or do not wish to produce as calculated can then horse-trade their unfulfillable quotas away to more able countries.
There would also be a time limit: the agreed re-negotiated quotas would be in effect for 5 years at a time, and would not be adjusted up or down by more than 10% at any given time.
Finally, there is another issue not much talked about with respect to OPEC: the existence of another parallel organization called OAPEC (Organization of Arab Petroleum Exporting Countries. http://www.oapecorg.org ). Formed by Kuwait, Libya and Saudi Arabia on January 9, 1968, it now also has a total of ten members: Algeria (1970), Bahrain (1970), Qatar (1970), United Arab Emirates (1970], Iraq (1972), Syria (1972), and Egypt (1973) in addition to the three founding nations. Tunisia joined in 1982 but pulled out in 1986. So eight of the eleven members of OPEC are also members of OAPEC, and one wonders whether the agenda of the Vienna,Austria-based OPEC is actually set or not in the Safat, Kuwait-based OAPEC.
In any case, a look at Figure 1 (showing price trends mapped against some major events in the Middle East and the world such as the Yom Kippur War, the Iranian Revolution, the Gulf War, 9/11 ) show that the laws of supply and demand have dictated the cost of crude oil more than any concerted effort by OPEC. Even the most recent jump to over $36 per barrel was a result of a serious explosion at a refinery in Skikda, Algeria on January 19, 2004, killing at least 20 people.
Whatever be the case, I believe that Nigeria should be in the forefront of demanding a more imaginative re-negotiation of OPEC terms, or else it re-consider its membership. I am for membership of OPEC, but not at any price. OPEC’s present price band mechanism which stipulates that a 10-consecutive-trading-days sustenance of oil basket price above $28 per barrel will trigger a 500,000 barrels per day increase in OPEC total quota, and a reduction by 500,000 barrels per day if the basket price falls below $22 for 10 days is rather anemic. At a total quota of 24.5 million barrels per day, that is an adjustment of 2% for 11 countries – or an average of 0.18% per country.
All nations require energy (for heating and cooling, transportation, running of machinery etc.) and petrochemical products (refined products such as kerosene, gasoline diesel; petrochemicals such as plastics, fertilizers, etc.). Crude oil is an essential input raw material for both needs, with natural gas as alternative or supplementary.
With respect to the problem of being both a producer nation (of a raw material: crude oil) and a consumer nation (of refined products), we in Nigeria have ONLY OURSELVES to blame for that. It is simple logic to understand that no matter the international price of our own crude oil, provided we depend to a large extent on imported refined oil, we will continue to pay a higher price for that than if the needed crude had been refined within our country. Unfortunately, our refineries have not been working as they should due to technical incompetence, sabotage or both.
The solution is simple: Table 1 shows that Nigeria has enough crude oil to be refined to serve our refined products needs. Therefore we should get those refineries that we have to work by hook or by crook, and streamline and speed up the licensing process for those new ones that might wish to join the refining fray: no ands, ifs or buts. That is the true deregulation, as different from the hackneyed mantra of privatization that we read from government in which investors are literally being begged to kindly buy the refineries off government hands.
OIL AS NIGERIA’S MONOCULTURE
Looking at Tables 1 and 2, Nigeria ranks highest in contribution of petroleum products to country exports, and third highest in terms of its contribution to the GDP. Despite loud government commitments to reduce this dependence on oil, its annual budgets, inscrutably always denominated in the foreign currency of dollars rather than in the local currency of Naira, with oil as the major “financier”, have reflected an increasing dependence on oil, not less. In fact, oil has reduced Nigeria to a trading company - Nigeria Oil & Gas, PLC - with the state governors as members of the board of directors,
This should not be. A return to agriculture, a comprehensive energy policy, with stable electricity as a critical factor, a viable iron-and-steel industry, the promotion of small- and medium scale enterprises, and a more-than-nodding acknowledgement of information technology (including re-training of personnel and the use of free/open source software) are absolutely essential to our rapid national development .
There is no arena more glaring in disclosing the lack-luster performance and sometimes downright fraudulence of our Nigeria’s leadership over the years than in the management of our country’s oil wealth. A wealth that should have been parlayed into substantial economic development has instead resulted in very costly internecine strife (for example in the Niger-Delta) and in many instances a culture of official corruption within a distorted economy. Without a successful policy of adding value to our crude oil, and rapid weaning away from its monoculture, we will continue to face the paradox of “oil, oil everywhere, but occasionally no single drop of petrol to put in our gas tanks!”
That is absolutely untenable, and the skeptical cynic would be excused if he or she asked what assurance there was that the additional money that might be obtained from an upward revision of our quota for oil by OPEC would be wisely spent..
Nevertheless, imaginative and strategic re-thinking in this crucial sector is absolutely necessary – and OPEC might just be the first forum for us to begin to demonstrate that new paradigm.
I rest my case.
TABLE 1: Data on Petroleum Products of OPEC Countries(1)
(2) Ecuador, which became a Full Member in 1973, had its membership suspended at its own request, with effect from 31 December 1992. Gabon, which became a Full Member in 1975, terminated its membership with effect from 1 January 1995
(3) Effective November 2003
(4) Post-Saddam Iraq has continuing United States’ “military take-over” issues
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