How Nigeria can leverage global disruptions to revitalize its economy
By Zion Rufus
Recent conflicts in the Middle East and Russia’s invasion of Ukraine have created a delicate situation in the global commodities landscape. While the impact on commodity markets has been restrained so far, a potential escalation could have severe consequences, as outlined in a World Bank report based on historical experiences since the 1970s.
In different disruption scenarios, the report predicts varying degrees of oil price increases. With the world facing these challenges, Nigeria, as a major oil producer, must explore opportunities to reposition its economy amidst the turmoil.
Since the onset of the COVID-19 pandemic, global uncertainties have surged, ranging from geopolitical tensions to full-blown wars. The Russia-Ukraine conflict, now in its second year, has disrupted the global supply chain, particularly in commodities and energy. Amid geopolitical tensions and evolving economic landscapes, there is a looming potential for a ‘dual shock’ to the world’s commodity markets.
Dr. Sola Adeduntan, Group Managing Director of FirstBank of Nigeria Limited, emphasizes that Nigeria, as a leading oil producer, has the opportunity to fill the vacuums created by strained relationships among established trading partners. This includes the Russia-Europe gas supply deals. However, he notes that for this to happen, Nigeria must enhance its infrastructure and significantly increase daily crude oil outputs.
“As a leading oil producer, one way Nigeria can take advantage of the disruptions caused by the wars is by positioning herself to fill the vacuums created by the breakdown in relationships among established trading partners and regions,” says Dr. Adeduntan.
“To do this, the right infrastructural enablers must be in place, as well as a significant rise in volumes of daily crude oil outputs beyond current levels. Nigeria must position itself as a more reliable source of gas supply to Europe in the short to medium term,” he adds.
While the global economy has weathered recent geopolitical events relatively well, challenges persist. In a scenario where the global oil supply decreases by 500,000 to 2 million barrels per day, oil prices could rise by 3% to 13%, reaching $93 to $102 per barrel. Should the disruption escalate to 3 million to 5 million barrels per day, akin to the Iraq war in 2003, initial oil price hikes could range from 21% to 35%, reaching $109 to $121 per barrel. A large disruption, reminiscent of the Arab oil embargo in 1973, with a 6 million to 8 million barrel per day reduction, could lead to a surge of 56% to 75%, pushing oil prices to $140 to $157 per barrel.
The World Bank’s preliminary assessment of the Middle East conflict suggests limited near-term impacts on commodity prices, provided the conflict doesn’t escalate further. The projected average oil price is $90 per barrel in 2023, gradually declining to $81 per barrel in 2024. Overall, commodity prices are expected to decrease by 4.1% in 2024, primarily driven by rising supplies of agricultural commodities.
Dr. Adeduntan points out that the modest impacts on commodity prices so far indicate the global economy’s improved resilience to oil price shocks. Since the 1970s energy crisis, countries have diversified their oil exporters, reduced dependence on oil, and expanded energy resources, including renewables.
Speaking further, he suggested that strengthening local manufacturing capabilities and improving agricultural production to reduce import dependency, acknowledging the growing difficulty for any nation to shield its economy fully from global volatility.
“Nonetheless, this period calls for a heightened sense of awareness among Nigerian policymakers to ensure minimal distortions to the Nation’s economic conditions,” Adeduntan advised.
In the event of further escalation, policymakers in developing countries are urged to manage potential increases in headline inflation cautiously. Avoiding trade restrictions like food and fertilizer export bans is essential to prevent exacerbating price volatility and food insecurity. Instead, the focus should be on improving social safety nets, diversifying food sources, and enhancing efficiency in food production and trade.
As Nigeria navigates these challenges, strategic decisions and swift actions can position the nation not just to weather the storm but to emerge stronger in the evolving global economic landscape.
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