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The Dummy's Guide to falling Oil prices in 2014 Part 2.
by Olugbenga AjiboyeHello buds.... So I did mention I was going to write a second part, yea? Well, here it goes...
A little recap, we're looking at the effects of the recent crude oil price downturn, and its effects on the Real sector (Industries, Firms, Production) and the Financial sector (the CBN, the Banks, and other financial institutions).
The Real sector, this is the part of the economy that consists of industrial production, the service sector e.g telecoms, the vocational sector e.g tailors, traders etc. So how does this affect them?
Well, the lower oil prices, will cause oil producers in the Niger Delta to cut costs, since their revenues are dropping, they are most likely to act in ways to reduce the fall... one way, is to cut back on contracts and renegotiate terms to oil servicing companies, these companies may in turn reduce their staff capacity in order to cope with the fall in revenues and future cash flows.
Another way the oil producers may act, is to layoff staff, and exploit capital intensive means of production. Although oil producers that were already selling stakes in that sector, are unlikely to make new capital purchases, given that prices are still yet unsteady and they are selling off anyways. (hmmm....a fire sale possibility!)
So, all (Tailors, traders, Bakers, providers of luxury goods) who service staff of oil companies, and oil servicing companies, will experience a dip in demand, and some delay getting payments, as layed-off staff attempt to consolidate finances. There might also be a rise in the price of middle-class housing, as people make moves to relocate to cheaper housing.
Now, all who supply all the above, Tailors, Traders, Bakers, and providers of luxury goods like perfumes and all, are as a result of the fall in demand and delay in payment, adjust their inventory, and hence... a general shrinking of production in the Niger Delta Region, and a fall in consumer confidence.
I spoke with a friend of mine that works, in an oil servicing company in Port Harcourt, and she did confirm a number of lay-offs in her industry of work.
At this point I should probably mention that oil is a major source of revenue for many Nigerian Banks... which leads to my next point.
Sigh.... these explanations get longer each time... Okay, Let's do Financial Sector in one paragraph, I'll do my best to be concise.
Banks lend money to oil companies, but with the uncertainty in the oil markets, banks are faced with a lot of lending risk and as such are bound to act risk-averse. They hold money. The Nigerian stock market, is strongly upheld by oil companies, falling oil prices has been shrinking the Capital market, and Investors, have been losing confidence (the stock market lost 4000 points over the last 10 weeks) and running to bonds, causing the yields of bonds to drop; investors are also inclined to liquidate stocks and hold money in banks. So a lot of money is heading in the direction of banks... A reasonable banker might be more inclined to invest now in a sector that is not positively correlated with the oil market. So, it might be possible to negotiate and get relatively lower interest rates at this time...
The only thing that might shoot the access to capital in the foot, is the dollar-happy behavior of politicians to spend excessively in the coming elections.
So, when you do engage in argument with someone about the economy this Christmas, please do not hold back to freely quote what u have just read, I am sure the author wouldn't mind so much... If you do know any explanations that might affect employment, do share or email me at gbenga.aj66@gmail.com
P.S Will Petrol be cheaper next year? I'll write on it next week, but it should already be obvious.
Image source: www.newscientist.com
NEXT ARTICLE: SOMETHING ON TECHNOLOGY OR LIFESTYLE, LATER THIS WEEK TOO!
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