By Michael Lynch | –
It now appears as if Goodluck Jonathan will lose the presidency in Nigeria, and many are quick to call him a casualty of low oil prices. The last time oil prices dropped sharply (ignoring the 2008 anomaly) was in 1998, when Chavez was brought to power and quickly turned the oil market around by cooperating with other producers. Could political change in Nigeria have the same result?
The two cases are not remotely comparable, but there could be some similarity in the results. For one thing, prices are not seriously depressed as in 1998. For another, in 1998, Venezuela’s egregious cheating on quotas was a factor in the failure of OPEC members to agree to new quotas. A new Nigerian government will be almost completely incapable to take any steps that would lead to a cut in OPEC production.
And yet, it is quite possible that the election could see the kind of problems that Venezuela experienced a few years after Chavez came to power, such as the strike by national oil company employees in late 2002 that led to a cessation of production. There are numerous scenarios for either reconciliation or conflict within Nigeria, given political differences between North and South, that could lead to disruptions in production, whether from a labour action, unrest in the Delta, or even oil sale contract cancellations. Post-election violence, a breakdown in bargaining over allocation of ministries, or simmering, unresolved tensions could mean problems arise within days or not for years.
Alternatively, political reform could see better governance, including in the oil industry, such that longer term, there will be less need for product imports and higher production and exports. After all, while foreigners are obsessed with oil prices and revenues, the current government has been a poster child for incompetence and it can be hoped that the next government will make some serious changes.
At present, the huge inventory overhang means that the impact of supply disruptions likely in Nigeria, short of a lengthy shutdown of production, will have minimum effect on prices. But given that Nigerian crude, like Libyan, is high-quality, the loss of large quantities of supply would ultimately bolster prices. Replacement with new Iranian supplies would help, but not entirely offset the loss. Although, if the US crude oil export ban were lifted, light US crude could be sent to Nigerian customers and the US could import heavier crudes instead.
Michael Lynch analyze petroleum economics and energy policy. Michael spent nearly 30 years at MIT as a student and then researcher at the Energy Laboratory and Centre for International Studies. He then spent several years at what is now IHS Global Insight and was chief energy economist. Currently, Michael Lynch is the president of Strategic Energy and Economic Research, Inc., and lectures MBA students at Vienna University. He has been president of the US Association for Energy Economics, and serves on the editorial boards of three publications.