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Friday, October 08, 2004

NIGERIA'S DOUBLE-WHAMMY

The Nigerian Labor Congress, the Nigerian union overseeing the nation's oil workers, announced late today that its talks with the government had broken down and that oil workers would commence striking on Monday. Given the tightness -and indeed anxiety- in the oil markets these days, any diminution of Nigeria's 2.6 million bbl/d crude could cause substantial upward pressure.

The issue behind the strike is a peculiar one. The oil workers, somewhat ironically, are striking against increased gasoline prices. Although the light sweet crude that Nigeria produces is just the type needed for refining into gasoline, Nigerian refineries are in such shambles that the country is forced to import refined oil and gasoline products from abroad. However, in order for this not to seem quite the embarrassment that it is, the government -as is often the case in underdeveloped oil-producing states- subsidizes gasoline prices in order to bring down the price at the pump. These subsidies cost the state billions of dollars in the best of times. With the price of imported refined products at record highs -and despite the extra oil revenues accruing from higher price sales of Nigerian crude- the gasoline subsidies threaten to break the Nigerian bank. And hence the government imposed gasoline price increase behind the strike.

Previous strike-threats on this issue have been quite successful, causing the government to reverse the gasoline price increases, even though the market conditions during those instances were even more favorable to the government. In the past a decrease in Nigerian exports did not portend a strong upward effect on world prices; if Nigerian oil stopped flowing, other countries would quickly and happily have taken up the production slack, keeping supply and thus prices stable. Rather the only that would have been taken was to the oil export earnings of the Nigerian government and foreign companies cooperating in production. This time not so. With the present dearth of excess capacity in the oil market, a Nigerian work stoppage would certainly put upward pressure on prices, not only hurting oil export revenues, but also exacerbating the subsidies problem. The increased price of oil would also increase the price of imported gasoline products.

This is a double-whammy for the government. It stands to lose in both export earnings and import payments, canceling out the intended effect of the price increase at the heart of the issue and leaving it in the same fiscal place that it was before the decrease in gasoline subsidies.

It is not clear how long the oil workers would be willing or able to strike. But it is clear that relative to times past a strike would cause the government to bleed at twice the rate that it would have when it capitulated to strikers' demands before. One might expect therefore to see short if any strike and lower gasoline prices for the people of Nigeria.

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