Drowning in Unsold Oil

By Christopher Byron. Reported by Jack E. White/Lagos

The dangerous collapse of Nigeria's petroleum prosperity

As one of the price hawks in the 13-nation Organization of Petroleum Exporting Countries, Nigeria for years kept the oil-consuming nations of the world over a barrel by forcing world oil prices relentlessly higher. Now that demand for petroleum is slumping on markets everywhere, however, the price of crude has dropped from $40 per bbl. to $28 per bbl. on the unregulated spot market. As a result, the economic outlook for the 90 million inhabitants of Nigeria, black Africa's wealthiest and most populous nation, has suddenly turned bleak.

Nigeria depends on oil exports for 90% of its foreign exchange earnings and 85% of its government revenues. But weakening worldwide demand for crude has forced the country to slash production from 2.1 million bbl. daily to fewer than 900,000 bbl. by last week. In the process, estimated earnings from oil exports have plunged from $ 1.35 billion per month only a few weeks ago to perhaps as little as $700 million at current production levels, and the country has been compelled to dip deep into its foreign reserve holdings. Nigeria is now paying more than $1.8 billion each month for its imports, even though it has reserves of only $3 billion.

In an effort to stem the outflow of funds, the Nigerian central bank two weeks ago ordered all 26 commercial banks in the country temporarily to stop processing or issuing import letters of credit and to cease approving applications for the conversion of Nigerian currency into foreign funds to pay for imports. Nigerian businessmen believe that their country will be forced to adopt still stricter import measures later this spring.

The government of President Shehu Shagari has belatedly taken some steps to curb spending and slow the runaway growth of the corrupt and bloated Nigerian bureaucracy. The Shagari government in December proposed a 12% cutback in government spending from 1981 levels. Additional austerity measures included the restrictions on the use of official cars by ministers and civil servants, a government-wide clampdown on foreign junketing, and a ban on unauthorized international telephone calls.

Far more direct and effective cutbacks will probably be needed if the economy is to avoid careening out of control. But it is uncertain whether the soft-spoken and shy Shagari will be politically able to take the necessary steps. Shagari's free-market oriented National Party of Nigeria came to power in 1979 after elections ended 13 years of military rule. Since then, Shagari has pressed ahead with a program of rapid industrial and social development that cannot now be rolled back without alienating Nigerians.

The government is concentrating on such woefully underdeveloped sectors as agriculture, housing and education. Since 1975 Nigeria has spent $80 billion on economic development, and it now plans to spend $128 billion more by 1985. Housing programs alone call for $3.8 billion in new construction during the period. In addition, the government has been pushing forward with the development of an entirely new federal capital, Abuja, in Nigeria's sparsely populated central region, 300 miles inland from Lagos, the present capital. Spending for the project now runs at $2 billion a year.

Such grandiose development plans, however well intentioned, have been a breeding ground for corruption, known in Nigeria as "dash," which has long been a virtual way of life in the country. A four-way coalition of opposition parties to Shagari's rule is expected to form around Obafemi Awolowo, a leftist firebrand who accuses the ruling party of being little more than a group of rich capitalists. Any cutbacks in social spending would give Awolowo added ammunition in next year's presidential election.

To avoid draconian reductions in its economic program, the government is now counting heavily on the strategy that OPEC worked out three weeks ago to keep up oil prices. The petroleum producers agreed to curb output by a total of 700,000 bbl. per day in order to reduce the current glut on the world market. That modest cut, however, may not be enough to soak up the worldwide surplus, which oilmen now estimate to be 4.8 billion bbl. in inventory, or a 102-day supply.

Nigeria's immediate problems are complicated by price cutting by Britain, whose North Sea crude is equal in quality to Nigeria's. Though Britain is not a member of OPEC, it has traditionally set its prices more or less according to what the cartel charged. But softening demand for North Sea oil has recently forced Britain to slash its prices from $36.50 per bbl. in February to a flat $31, thereby sharply undercutting the $35.50 charged by Nigeria.

Last week Saudi Arabian Oil Minister Sheik Ahmed Zaki Yamani charged that Western oil companies were now trying to take advantage of Nigeria's vulnerability. Saudi Arabia has bluntly warned the firms against reducing their liftings of Nigerian crude in an effort to force the country to begin undercutting official prices. Yamani said in London that OPEC might call a special meeting later this month to decide on specific steps to punish the offending oil companies. The Saudi oil minister also repeated earlier warnings that his country is prepared to take whatever additional production-cutting steps are needed to tighten the market and keep prices up.

If OPEC'S maneuverings fail to pay off, Nigeria's troubles will worsen. The country's foreign indebtedness of $8 billion is relatively small by Third World standards, only about one-sixth as large as Mexico's. Though Reagan Administration officials last week said that they had "very good evidence" that Saudi Arabia already extended Nigeria some $1 bil in credits, substantial additional fi will be difficult to arrange with the sort of economic cutting back that political system can easily weather. Such measures will be particularly diffi for a fragile democracy that is not yet three years old. -- -- By Christopher Byron. Reported by Jack E. White/Lagos

With reporting by Jack E. White/Lagos

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