Yemisi Izuora
There are fears that the escalating tension in the Middle East could drive up energy costs in Nigeria as crude oil prices continue to surge.
Sharing his thoughts on the latest developments between Israel and Iran, Dr Muda Yusuf, Director/Chief Executive Officer of the Centre for the Promotion of Private Enterprise [CPPE], said with the outbreak of hostilities between the to countries, crude oil prices had surged to $75 per barrel from $65 per barrel a week before.
This is a 15 per cent jump within days and has obvious implications for petroleum product prices globally.
According to Yusuf, Economies around the world, Nigeria inclusive would witness a surge in the price of petrol, diesel, jet fuel, gas and related products in the near term. This would have far reaching implications for many economies and businesses.
He noted that energy cost is a major factor in the Nigerian inflation equation, and this impacts production cost, logistics cost, transportation costs, and the cost of power generation.
This he pointed out presents an inflationary scenario as these additional costs would be passed on to final consumers, depending on the degree of consumer resistance.
“There is also a global inflation dimension. Energy prices have global inflationary implication. Therefore, there is also an expectation of imported inflation in the unfolding geopolitical scenario.” he warned.
He added that high inflation drives interest rates as monetary authorities respond to the inflation outcomes of current geopolitical headwinds.
“A tighter monetary policy regime is expected in Nigeria and other monetary jurisdictions. The expectation is that economies around the world may experience renewed pressures on interest rate. Higher global interests could adversely impact portfolio flows with implications for foreign reserves.
Profit Margins.
“High energy cost, elevated inflationary pressures and a spike in interest rates are all headwinds that could undermine the profitability of businesses in the economy. Investors in the non-oil sector are likely to be more vulnerable in the present situation.” he said.
He further noted that Nigerian firms with strong business links in the Middle East and those with strong supply chain linkages in the region would be vulnerable at this time because of the current instability in the region.
Yusuf, also pointed that there is a risk of high monetary growth with an increase in revenue from the oil sector, adding, “Money supply increases in the Nigerian economy as oil revenue increases because of the monetization of oil receipts. This could pose additional inflation risk and exchange rate depreciation risk. This may provoke a tighter monetary policy stance, which could result in difficult credit conditions for businesses in the economy. “
On a GlobalData scale he said, already floundering global economy would be adversely impacted by this new geopolitical crisis.
Global stock markets are reflecting this ominous outlook the Dow Jones, S & P, and Nasdaq are trending downwards.
“There is a flight by investors towards ‘safe haven assets’ as global uncertainty heightens. However, in Nigeria, there is historically a positive correlation between crude oil prices, GDP growth, and stock market performance. The outlook for the Nigerian stock market is therefore likely to be positive in the current context.” he said.
He warned that if the current conflict persists and escalates, the Nigerian economy may record upsides in a number of areas as the surge in crude oil price would impact on foreign exchange earnings, oil being the biggest forex earner for the country.
According to him, “This would even be more impactful if output performance improves. Crude oil price has surged to $75 per which is about 15% higher than before the outbreak of the Israeli–Iran conflict. This development would also positively impact the country’s foreign reserves, ensure better forex liquidity and ultimately the stability of the naira exchange rate.”
The oil sector currently accounts for about 50 per cent of government revenue. An improvement in crude oil price would therefore have a significant impact on government revenue.
An improvement in revenue would positively impact fiscal consolidation and hopefully moderate the growth of the fiscal deficit, he said.
On the other hand investments in the oil and gas sector would post better returns if the conflict persists as high oil price is good news for upstream oil and gas investors.