Oil price crashes – 1980, 2008 and 2014

Nigeria became a major oil producing nation after the 1967-1970 civil war and by 1973 when oil prices spiked following the Arab-Israeli War and the formation of the Organisation of Petroleum Exporting Countries (OPEC), we enjoyed what came to be described as an oil boom. Oil prices rose from averages below $10 per barrel and eventually peaked at around $40 per barrel until 1980 when a phenomenon then described as “oil glut” occurred.

A glut of course describes a situation of over-supply or excess and in this case, an excess of supply of crude oil on global markets that caused a collapse in oil prices and plunged nations like Nigeria, which in the period of the boom, had become dependent on oil proceeds for funding their economies, into economic calamity.

In Nigeria’s case, we had quickly become a profligate nation and as our then military leader, General Yakubu Gowon correctly, if tragically remarked, our problem was no longer money, but how to spend it! I have always believed that the combination of an extractive resource (which we did not work to create or produce-indeed we merely called on the international oil majors to help us get the damned oil out of the ground, while permitting them to flare away the rich associated gas!); military rule by inexperienced soldiers in their twenties and thirties, whose entire worldview before taking up high offices of state had been formed in the barracks; and civil servants and contractors, both wealth and power-hungry and unaccountable to no one, could only produce waste and corruption.

It is not a surprise, though it remains a huge tragedy that Nigeria quickly embraced large “white elephant” projects; a state-controlled economy in which civil servants demanded that government must hold the “commanding heights” of the economy; and bribes and “kickbacks” became standard operating procedure.

In technical terms, our major undoing however was our new found oil wealth enabled us to fix any exchange rate we desired irrespective of economic productivity and in our case we determined that a dollar was worth only N0.66k! Not surprisingly anyone who had a nose for dollars immediately understood that Nigeria was the place to be-the country was giving away dollars, literarily and smart people from everywhere in the world came for the party – Indian, Ghanaian and Filipino teachers, Indian textile merchants, Lebanese and Greek traders, Ghanaian sex workers, etc.

The Indian textile “industrialists” for instance quickly grabbed the learning that all they needed was a legitimate excuse to ask the Central Bank of Nigeria (CBN) for dollars, and they would be very rich.

So a modus operandi developed – buy scrap textile equipment from companies back in India and ship them to Nigeria; employ some workers and start a new XYZ Textiles Nigeria Ltd; work into a Nigerian Bank and ask for a loan of N500,000.00 and CBN would hand over $750,000.00 to them! There was no easier means or place to make money anywhere in the world, and Nigeria probably produced more millionaires (especially of the Indian, Lebanese and Greek equivalent!) than anywhere else in the world! And when the textile scrap became completely unusable, set it on fire and collect a final dividend from your insurers! Ironically when the dollars were almost exhausted and some Nigerian businessmen finally caught up to the game, we put them in jail for foreign exchange trafficking!

Our over-valued exchange rate had other unintended consequences – it became more sensible to import whatever you required rather than to produce it domestically and naturally, being eminently sensible people, our people embraced imported consumption; farming became an unprofitable venture-being the most significant domestic activity of a productive nature (the exchange rate penalized domestic production and exports and rewarded importation, you see) and everyone immediately understood that the best position to be in economically was to become a government employee in order to partake in the “Udoji Awards”, a celebration of the windfall Almighty God had bestowed upon our nation which was reserved only for those in government employment; industries were structured such that they depended on imported equipment, raw materials and even personnel and many of them would become unsustainable immediately  the foreign exchange subsidy disappeared! It of course became very cheap and affordable to take “summer” vacations in London or New York; to wear clothes manufactured overseas and to go to school in the UK and the US. Once those practices became “culture” they would be difficult to change, even if living in that manner was no longer quite so cheap!

Anyway as illustrated in the Biblical times of Joseph and the Pharaohs, seven years of plenty may often be followed by seven years of famine, especially if the sources of the riches are commodities!

In Joseph’s case, the commodities were agricultural; in Nigeria circa 1980, it was crude oil, but whatever commodity it is may actually be irrelevant-a principle that appears to operate in all commodity markets (and in much of human experience!) is that what goes up, must come down-eventually!

The only unknown variable may be when, but commodity prices have tended to behave true to this principle throughout human existence. I indeed argue that it is not just an economic but also a spiritual principle – “To everything there is as season, a time for every purpose under heaven: A time to be born, And a time to die; A time to plant, And a time to pluck what is planted…A time to gain, And a time to lose…” (Ecclesiastes 3: 1-8).

To be continued next week.

Opeyemi Agbaje