The Oil Benchmark Conundrum
The National Assembly and the Executive have been at loggerheads about the question of the oil price to be used as the benchmark for the national 2013 budget. The executive lead by the Minister of Finance, Dr Ngozi Okonjo-Iweala, proposed a benchmark of $75 per barrel but the National Assembly have bluntly refused to accept it saying that it should be raised to $78 - $80 per barrel. Oil makes up about 80% of Nigerian revenues.
By the way, the benchmark is the price at which any excess above it would be transferred to the Excess Crude Account and/or the Sovereign Wealth Fund, if it eventually sees the light of day.
The question of what benchmark to use is quite simple but there is nothing scientific about political decisions such as the budget benchmark. Sentiments and interest pressure groups are going to determine what the equilibrium benchmark would eventually be. While the Executive is trying really hard not to rock the boat and be as conservative as possible, taking cognizant of the volatile oil prices, the National Assembly has argued that its desire is to reduce the budget deficit further. The budget deficit for 2012 was 2.85% and the deficit embedded into the 2013 budget is 2.17%. Reference link here.
Most European countries would give an arm to have the kind of budget deficit that Nigeria had in 2012, not to talk of the lower one estimated for 2013 in the proposed budget. The reduction of this budget deficit pushed forward as an excuse for raising the budget benchmark is just a charade by the National Assembly.
I believe that the budget benchmark for 2013 should be dropped to $63.99 per barrel. Yes, $63.99. The Bonny Light crude oil has traded within a range of $90.50 to $128.47 per barrel over the past one year with a weekly standard deviation of 3.1%. It has, however, gained only 2.1% year to date from $110.18 to $112.47 per barrel. In a worst case scenario, given the current trend, the Bonny Light should not lose more than 43.1% of its current value, which is $63.99. I have 95% confidence that oil will trade between $63.99 and $160.94.
Nigerians should be very concerned that the US that buys almost 40% of oil that is produced in Nigeria has started ramping up capacity in the production of oil. The fact that oil futures show backwardation should be enough warning for Nigeria not to throw caution into the wind when determining the benchmark.
Both parties who hold the destiny of Nigerian economy in their hands should use scientific means to determine the budget benchmark. It is time to throw sentiments through the window. Unfortunately, I do not expect that to happen and the oil benchmark will end up somewhere between $75 - $80 per barrel.
I guess I am on my own.
