By Adefolarin A. Olamilekan
The global economy in recent times has demonstrated huge shock across continents and regions, with debilitating effects on humanity. Interestingly, the discovery of crude oil and related elements that replaced coal and other forms of energy change brought lots of innovative technology. Nevertheless, with the benefits from this reverend energy source. The possible causes and consequences of higher oil prices on the overall economy of nations, even from the 1950s continues as frightening episodes. With the benefit of hindsight, several factors are attributed to why oil prices go up immediately at intervals some economists and energy experts regard as “increases in demand and fears of supply disruptions exerted upward pressure on oil prices”.
Fundamentally, the rate at which some countries are becoming more and more industrialized as well opening to urbanization contributed largely to oil demands. The likes of China and India readily come to mind in this regard. Further to this is the atrocity that happens owing to exploration and supply disruptions. With OPEC producing member countries Nigeria, Venezuela, Iraq, and Iran. All having to suffer from domestic and international conspired turmoil. Radically, the existence of tension like we are currently witnessing between Russia and Ukraine cannot be ruled out.
For instance, energy crises history has it that, a long period of oil price stability was interrupted in 1973. This comes as a result of the Yom Kippur War in 1973.Another was the Iranian Revolution in 1979.Sadly, this twin incidence kick-started the eventual regularly surging price of oil volatility that was also witnessed in 1990s,2000s and partly in the 2010s upwards. Although there is an angle that is very sensitive, which is the recent technology innovation that goes with oil explorations as well as the proclivity of Oil Corporation to maximize and stabilize profits cannot be ruled out.
Having established a background that links this discussion to what is obtainable at world scale. Let us now dissect the foregoing as it concerns Nigeria’ economy. Conversely, Nigeria is one of the leading oil producers with capacity to explore close to 2million bpd. Regrettably, there is a huge gap when it comes to what the nations have earned from oil and development. That is why many see oil as a curse rather than a blessing. This in particular is the expression of the majority of the country’s citizens.
Nonetheless, we are confronted with the following questions; how do high oil prices affect Nigeria’s economy on a microeconomic and macroeconomic level? What effects do oil prices have on inflation? What are the roles of monetary policy makers in rising oil prices?
Instructively, households and businesses that made up the microeconomic and macroeconomic aspects in Nigeria are not far fetched from the repercussions of high oil prices. Majorly, the first thing that comes to our minds is the consumption of Petroleum Motor Spirit (PMS) popularly called fuel. And when oil prices increase at the international market, even though government subsidy has been the mechanism used to reverse the adverse shock. However, the current scarcity of its and black-market induces price hike of pump prices. This is devouring a larger share of households’ incomes leaving them with less money to spend on foods, clothing and medicals.
In addition to the above, are the macroeconomic aspects that oil prices shock and uncertainties directly affect agriculture, transportation, manufacturing, telecommunication, construction and real estate. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers pass production costs on to consumers.
From the technicality of economics maintaining the status quo, higher oil prices can “shift up the supply curve for the goods and services for which oil is an input”. However, the level of PMS consumption in Nigeria is without an accurate official figure. Despondently, in our case the entire economy is connected to it and depends on every aspect of macroeconomics popularly regarded as the real economy given type of good and service due.
This equally goes for businesses whose goods must be transported from place to place or that use fuel to power plants and production machines and equipment.
Moreover, it is to the effect of inflation hampering the price of commodities that are not oil, thereby reducing wealth and deepening poverty, as well as induce uncertainty about the future. Meanwhile, citizens pay tax, especially in our case as we import refined petroleum products into the country such as PMS, Diesel and kerosene.
This now takes us to the question of monetary policy makers in rising oil prices. The Central Bank of Nigeria (CBN) is in charge of the country’s monetary policy. In this regard, how does CBN manage the economic shocks caused by surging oil prices. Specifically, the CBN role management of the country’s stability from the angle of economic growth and inflation rate comes handy here. One greater challenge, this may bring on the economy substantially is disarticulate the stability of the naira, deepen unemployment, heightened inflationary tendencies, stifled saving and money in circulation. What is expected of the CBN is the monetary authority is to fashion a policy response that looks beyond the headline inflations.. As it is, oil prices are indeed very close to the policy output of monetary authority. This is grippingly seen in naira abysmal performance and purchasing power.
What is to be done, modest way forward: first, is to acknowledge the impact on the people and provide amelioration for it. Secondly, it is high time, the plan for construction of a modular refinery be taken seriously across the six geopolitical zones. Lastly, monetary policy must adequately focus on the direct effects of oil prices shock on commodity shocks and containing core inflation.
