Olushola Omogbehin
As increasing military tensions in the Middle East has raised fresh fears of disruptions to crude production and international oil shipments, Global crude oil prices have increased beyond $100 per barrel.
Reaching their highest level since July, Brent crude, the global benchmark against which Nigeria’s crude is priced, moved from 2.8 per cent on Wednesday to break above the $100 per barrel mark, while US West Texas Intermediate (WTI) gained 2.9 per cent to $95.70 per barrel.
According to Daily Sun, the latest rally has pushed both benchmarks more than 60 per cent higher than their levels at the beginning of the year.
This has increased the concerns that a prolonged energy rise could drive up the cost of petrol, diesel, aviation fuel, electricity generation, transportation and manufactured goods across the world.
The surge was caused by reports of strikes involving Iranian oil tankers in the Gulf of Oman and another vessel near Kharg Island, one of Iran’s major oil export centres.
This development emanated amid reports of attempted missile attacks on a US Navy warship, raising concerns that the conflict could widen and threaten key oil-producing and shipping areas.
The tensions which have also heightened following reported attacks by Iran-backed Houthi forces on Saudi Arabian oil and energy infrastructure, have put the global oil market on high alert because of the strategic importance of the Middle East to world energy supplies.
At the centre of the latest concerns is the Strait of Hormuz, a narrow waterway between Iran and Oman through which a significant share of the world’s seaborne oil trade passes.
Any prolonged disruption to shipping through the strait could have a major impact on global crude supplies because oil producers in the Persian Gulf depend heavily on the waterway to reach international markets.
The strait is particularly important to major producers such as Saudi Arabia, Iraq, the United Arab Emirates, Kuwait and Qatar. Any threat to tanker movements could therefore quickly translate into higher crude prices, freight rates and insurance costs.
Market participants are already monitoring tanker movements in the region closely, amid growing uncertainty over the safety and cost of transporting crude and petroleum products.
The concern is not only about an actual halt in oil production. Even the threat of disruption can push prices higher as traders factor in the possibility of shortages and begin paying more for available barrels.
Crude oil remains one of the most important inputs into the global economy. It is used directly to produce petrol, diesel, jet fuel and other petroleum products, while its derivatives and related energy costs affect manufacturing, agriculture, transportation and logistics.
For motorists, the immediate impact is usually seen at petrol and diesel stations. Higher diesel prices are particularly important because trucks, factories, construction equipment and generators depend heavily on the fuel. Higher jet fuel prices can also raise airline operating costs and ultimately push up airfares.
Manufacturers face increased energy and transportation expenses, while farmers may have to contend with higher costs of mechanised farming, transportation and distribution.
The effect can eventually feed into food prices as producers and distributors pass higher operating costs to consumers. In the United States, the pressure is already becoming visible.
Report by Daily Sun revealed that average petrol prices rose by 7.3 cents per gallon on Wednesday to $4.22, according to AAA data, representing the biggest single-day increase since May. Average diesel prices also climbed to a record $5.94 per gallon.
Ole Hansen, head of commodity strategy at Saxo Bank, warned that the combination of high energy costs was becoming increasingly painful for consumers.
“The combination of expensive diesel, jet fuel, bunker fuel and natural gas is particularly uncomfortable for consumers around the world, who see their disposable income shrinking,” he said.
The latest oil price surge presents a mixed picture for Nigeria, an oil-producing country that depends heavily on crude exports for foreign exchange earnings and government revenue.
Higher crude prices could increase Nigeria’s export earnings and strengthen government revenue, provided the country is able to maintain or increase crude production and benefit from the higher international prices.
The development could also provide additional support for Nigeria’s external reserves and the naira by increasing the value of foreign exchange generated from crude exports.
Nigeria’s ability to take full advantage of higher oil prices depends largely on crude production volumes, export levels, international oil market conditions and the amount of crude available for sale after accounting for operational constraints and other obligations.
Nigeria has spent years struggling with oil production losses caused by crude theft, pipeline vandalism, ageing infrastructure, technical challenges and disruptions in some producing areas.
Higher global prices can cushion the impact of lower production, but they cannot completely compensate for a significant decline in the volume of crude exported.
Nigeria is now operating in a market where petrol supply and pricing are increasingly influenced by international crude prices, refined-product prices, exchange rates, logistics and local market conditions.
A sustained rise in international energy prices could therefore increase the cost of imported petroleum products and put pressure on domestic fuel prices where local supply is insufficient.
At the same time, higher crude prices could improve the economics of domestic refining, particularly for large-scale refineries capable of supplying significant volumes of petrol, diesel and aviation fuel.
For the Nigerian government, the ideal scenario would be to combine higher crude earnings with increased domestic production and refining capacity, allowing the country to earn more from exports while reducing dependence on imported petroleum products.
The renewed oil rally is also creating concerns for the global fight against inflation.
Central banks have spent the past few years trying to bring inflation down through higher interest rates and other monetary policy measures.
When crude oil becomes more expensive, the effect is transmitted through fuel, transportation, electricity, manufacturing and other costs. Businesses may then increase prices to protect their profit margins, potentially slowing the decline in inflation.
This creates a difficult situation for central banks. If inflation rises again, monetary authorities may be forced to keep interest rates higher for longer or delay planned rate cuts.
The S&P 500 fell 0.3 per cent on Wednesday as investors assessed the potential economic consequences of a prolonged energy shock, while US government bond yields moved higher amid concerns that sustained increases in energy prices could reignite inflation.
Oil traders are now closely watching developments around the Strait of Hormuz and other strategic energy facilities in the Middle East.
The direction of crude prices in the coming days will depend heavily on whether the conflict escalates or shipping activity remains largely uninterrupted.
A significant disruption to oil production or tanker traffic could send prices sharply higher because markets would have to price in the possibility of a physical shortage.
On the other hand, a reduction in military tensions, restoration of normal shipping activity or credible measures to protect oil infrastructure could ease some of the risk premium currently built into crude prices.
The latest rally nevertheless demonstrates the vulnerability of the global economy to developments in major oil-producing regions.
With Brent now above $100 per barrel, governments, businesses, central banks and consumers face renewed uncertainty over the cost of energy.
For oil-producing countries such as Nigeria, the immediate challenge is to maximise the benefits of stronger crude prices while increasing production, protecting export infrastructure and expanding domestic refining.
