U.S., Iran Conflict Pushes Oil Price Above 2020 Budget


Iran may be raising red flag and vowing to revenge the killing of its Revolutionary Guards’ (Overseas Forces) Commander, Qasem Soleimani, in a Thursday United States airstrike, but the effect of the strike is already disrupting prices of oil, leaving a volatile development for world economy.

Even though crude oil prices were heading higher following reports by Energy Information Administration, which revealed that crude oil inventory declined in the last week of 2019, the price soared to almost $70 per barrel almost immediately after the attack at Baghdad airport.  

While analysts maybe concerned about the implications of the development for the global market, the prevailing situation could, in a short term, benefit oil dependent economies like Nigeria.

In the 2020 budget, the Federal Government estimated oil sales to stand at 2.18 million barrels per day (bpd) at a price of $57 per barrel, while the exchange rate is expected to remain at N305 per dollar. The current development could therefore improve budget implementation, according to Stakeholders.

With Iran’s Supreme Leader, Ayatollah Ali Khamenei, promising to retaliate, while the U.S. is reportedly sending more troops as much as 3, 500 to the Middle East, there are indications that the development could continue to keep oil price high. President Donald Trump had said that the airstrike was ordered, “to stop a war,” as well as prevent attacks on Americans.

As of last Friday, the price of a barrel of Brent crude stood at  $69.16, a level last seen in September last year, after attacks on processing facilities owned by Saudi Arabia’s state-controlled oil giant, Saudi Aramco.The tension between U.S. and Iran started in 2018, when the U.S. threatened the country’s nuclear programme, and prevented its capacity in nuclear weapons development, while re-imposing sanctions, which affected the country’s oil exports and affected its economy.

Iran produces about four million barrel of oil per day, but OPEC said Iran’s oil production went down by a whopping 1.65 million bpd since U.S. sanctions.Last year, the attack on Saudi Aramco temporarily forced the Kingdom to close down almost half of its oil production, as the situation pushed oil price to the current level of increase. 

While the Kingdom of Saudi Arabia was able to swiftly respond to the development, most analysts are pessimistic that the current dispute between Iran and the U.S. would fade away quickly, considering that Iran had vowed to retaliate the killing.
While Oil Workers in Iran and neighbouring countries are reportedly leaving oil fields as the U.S. Embassy has ordered its citizens to leave Iran, there are indications that oil supply would suffer from any attack on Gulf oil vessels or facilities. 

Managing Director, Oildata Energy Group, Emeka Ene stressed the need for Nigeria to be neutral in the current Geo-political face-off, while describing the development as a double-edged sword.

“The international oil market has always been sensitive to Middle Eastern politics. Unfortunately, this tends to create uncertainty and instability and may drive prices up too fast for the already fragile global economy to catch up,” Ene stated. The Director, Centre for Petroleum, Energy Economics and Law, CPEEL, University of Ibadan, Prof. Adeola Adenikinju, noted that the country must be wary of the current tension, adding that it remains a temporary fluctuation.

“While, this is a bit of a relief to oil dependent countries, they should rather plan on the basis of long-term price, which would be driven by fundamental factors of demand and supply,” Adenikinju, who is a member of the Central Bank of Nigeria’s, CBN, Monetary Policy Committee, MPC, said. 

The former Chairman of Council, Chartered Institute of Bankers of Nigeria, and Dean, College of Postgraduate Studies, Caleb University, Segun Ajibola, maintained that Nigeria and other OPEC and non-OPEC countries have benefitted from Middle East crises in the past through high crude prices and increased revenue.

“Experience has shown, however, that the crises are often stemmed quickly, even though America often triggers these for political and economic reasons. The current crisis has pushed price to close to $70/barrel,” he said.

The Economist believes that the prevailing development is a plus for Nigeria with budgeted price of $56 for 2020.
“However, due to the sophistry of international diplomacy in this age, I don’t see the crisis lasting for long. It is hoped that Nigeria will make the best use of the “honeymoon” while it lasts,” Ajibola stressed.

While the market remained soft currently, a former President of the Nigerian Association for Energy Economics, Prof. Wumi Iledare, expects price impact to remain similar to the 1991 short-lived Gulf war after the invasion of Kuwait by Iraq.

Iledare noted: “The Impact on Nigeria is perhaps having to have more market outlets for its crude in the short run. I don’t see much beyond that in the long run unless we deal with the amorphous governance structure of the oil sector. According to him, the country needs to separate regulatory responsibility from policy and commercial institutions to benefit from oil market shocks in the long run.


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