Forget Global Headwinds, The Devil Is In Our Backyard

Forget Global Headwinds, The Devil Is In Our Backyard
Forget Global Headwinds, The Devil Is In Our Backyard

For weeks now, global headlines have unwillingly hosted an unwelcomed war in Eastern Europe, hence, creating an understandable excuse for the possible economic hardship the war would force upon consumers across the globe.


The U.S. government and other select allied nations have instituted sanctions aimed at stifling the importation of crude oil and other refined products from Russia, consequently exacerbating the global oil supply shortage and causing the price of gasoline at the pump to hit a record high of US$4.17 a gallon.


To make this more relatable, a gallon of fuel at US$4.17 equals N456.61 per litre of petrol (using a generous exchange rate of N415/1$). Elsewhere, the impact of anticipated and ongoing disruptions to Russia’s wheat and palladium exports has started to nudge on the already fragile global supply chain.

To provide some context, Russia accounts for about 8 percent of the global oil supply, contributes roughly 20 percent to global wheat exports, while palladium, which is a material used in creating semiconductor chips that serve as the electronic brains for modern smart devices like our phones, computers, automobiles and home appliances, have Russia to thank for about 40% of its global production in 2021. Note that we only cherry-picked some of the impacted commodities that would have a far-reaching impact on the global market, as detailing all affected areas will make for an unending write-up. Now, to the big question – where does Nigeria stand in all of this?

A curate’s egg – soaring oil prices

Typically, skyrocketing crude oil prices, which is partly a byproduct of the crisis in Eastern Europe, should bode well for the Nigerian economy. However, like almost every Nollywood movie, there is an unnecessary twist.

Historically, over 85 percent of Nigeria’s total export revenue has been derived from crude oil exports, but economic jubilations, regarding crude oil prices that currently flirt with their 14-year highs of over US$100 a barrel, have been understandably hushed due to the following structural hiccups that are tightly woven into the fabric of our economic reality:

1. Our export proceeds from crude oil is a function of the price of the product and the quantity produced. So, while prices are doing well, we have been unable to produce oil at desirable levels. While the Government prefers to blame the production shortfalls on OPEC’s output restrictions, we have however fallen short of our permissible output quota in the last few months, leaving the likely culprits behind our abysmal oil production level to be the debilitated state of infrastructure in the oil and gas space, lack of adequate oil investments, and the disruptive impact of vandalism and theft. Essentially, we are like that one boxer, Deontay Wilder, who relies heavily on his power punch, but is unable to land it effectively. (if you don’t watch boxing, just ignore the reference).

Forget Global Headwinds, The Devil Is In Our Backyard - Brand Spur

2. Crude oil in its raw form is not very useful. You can’t exactly put unrefined crude in your automobile without damaging your engine. However, while we produce and export crude oil, albeit at insufficient levels, we also simultaneously import refined products like Premium Motor Spirit (PMS), popularly known as Petrol in Nigeria, or gasoline in the U.S., given Nigeria’s limited capacity to internally refine crude oil. Hence, what this means is that our “actual” earnings from crude oil is the difference between what we produce and export, and the refined products we import, both of which are impacted by currently elevated oil prices. Presently, we have a swap arrangement in place, where the government exchanges crude oil for refined products like petrol with international refiners, and it has been rumored that we are not even producing enough crude oil to exchange for adequate refined products, let alone to export for dollar inflows, hence, contributing to the prevailing petrol scarcity.

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3. The very contentious issue of subsidy remains a problem for Nigeria, as the government sells petrol (which is the major imported refined crude product) to local consumers at a significantly lower price. Recall that the Americans currently pay a Naira equivalent of over N450 per litre, while Nigerians pay less than N165 per litre, leaving the government to fund the difference through subsidy provisions. Also, regardless of your view on retaining or removing petrol subsidy, we are all equally agitated by the actions of vested interests who smuggle a sizable portion of subsidized petrol to neighboring countries and sell at a significantly higher price, hence, pocketing the subsidy intended for the local consumers.

The threat to wheat-based food items

In terms of popular local foods consumed, the staple food “rice” is closely trailed by a variety of wheat-based products like bread, pasta, and noodles. Hence, disruptions to global wheat supply from Russia and Ukraine, who both are major exporters, would have a telling effect on our local economy which produces too little to cater for local consumption. According to the CBN, Nigeria consumes about 5-6 million metric tons of wheat annually, but only produces an estimated 63,000 metric tons, leaving the nation heavily dependent on imported wheat.

So, by failing to ramp up on our local wheat production, we are heavily exposed to the disruptions in global wheat supply, which would place an unfair burden on Nigerians as they attempt to enjoy some of their preferred wheat-based food products.

Higher inflation is knocking

While petrol is subsidized by the government, recall that the price of diesel remains unregulated, and has surged alongside the price of crude in the international oil market. There have been reports of gas stations selling diesel for over N620 per litre, reflecting a yearly increase of over 150 percent. Note that several businesses, as well as commercial vehicles, depend on diesel for their operations, hence, there could be a pass-through effect of soaring diesel price on production cost, part of which would be passed down to consumers. Similarly, the economy remains susceptible to the disruptions in global wheat supply, leaving the food basket exposed to fresh inflationary pressures.

Overall, we may see the impact of soaring energy and food prices turn inflation northwards, should tensions in Eastern Europe remain unabated.

Forget Global Headwinds, The Devil Is In Our Backyard - Brand Spur

The paucity of FPIs echo an unbothered market

While global markets have been rattled by the crisis in Eastern Europe, the local bourse has been cool as a cucumber, with attention skewed towards earnings updates and corporate actions. The reason for the unflustered local market atmosphere is the scanty presence of foreign portfolio investors (FPIs) who typically react dramatically to such global headwinds. As at the last NGX Domestic and Foreign Portfolio Investment Report for January 2022, foreign participation on our local bouse was as low as 12.77 percent.

However, this doesn’t mean that the local equity market is insulated for the ongoing global worries, as soaring inflation could bite into profit margins. Particularly, Consumer names in the brewery and flour mill industries face the threat of increased cost margins, given their dependency on imported grains like wheat and barley, both of which have their supply threatened by the ongoing war in Eastern Europe.