OPEC+ has announced another surprise cut of 1.65 million barrels of daily production. This is not the first cut to production output OPEC+ has made in recent years. They agreed to output cuts of 2 million barrels per day in October 2022, for the months of November and December 2022, as well as in April 2020 for 9.7 million barrels per day, all with the aim of shoring up crude oil prices.
Saudi Arabia has committed to 500,000 bpd, Russia (500,000 bpd), Iraq (211,000 bpd ), UAE (144,000 bpd), Kuwait (128,000 bpd), Kazakhstan (78,000 bpd), Algeria (48,000 bpd) and Oman (40,000 bpd) for a joint total production cut of 1.65 million barrels per day until the end of 2023.
This comes in the context of a massive week of developments geopolitically, where:
1. Saudi Arabia partnered with China to build an oil refinery for $12.2 billion and agreed to acquire 10% of a Chinese oil refinery for $3.6 billion.
2. Saudi Arabia agreed to join the Shanghai Cooperation Council as a “dialogue partner”.
3. China & Brazil have agreed to trade in their own currencies
4. France and China completed their first Yuan-settled LNG trade
These point to concerns about global economic growth and thus oil demand.
The production cuts are expected to increase the price of crude oil as seen in the price hike of about 6 percent in the first week of April 2023. Although this is good news for most oil producers, Nigeria on the other hand that is still heavily dependent on its oil revenues, is struggling to find buyers for its oil, due to strikes at French refineries and seasonal maintenance at plants across Europe.
Nigeria’s oil revenues are the core of the 2023 budget implementation and with growing concerns on the method of fuel subsidy removal, which will undoubtedly result in an increase in the pump price of petrol, diesel and aviation fuel and ultimately transportation and energy costs for businesses, the economic outlook in the coming months does not look bright.
It is no secret that most Nigerian states are largely dependent on FAAC allocations resulting from oil revenues for development. If the production cuts do not result in increased oil revenues for Nigeria that can adequately cater to the huge debt service needs Nigeria is currently facing as well as fund FAAC allocations, then the Nigerian economy will grind to a halt. It is now a matter of critical urgency for local and state governments in Nigeria to invest in human capital development and poverty reduction strategies that will leverage on their unique, God-given resources to improve their local economies.
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