Monday, June 05, 2006

"Nobody is thinking long-term"

Reuters predicts an escalation of violence in the Delta:
President Olusegun Obasanjo, pressured into action by this year's unrest, invited politicians, activists and traditional rulers from the delta to a series of meetings that resulted in pledges of investments in infrastructure for the region.

But these fell well short of the popular demand for "resource control" or greater local power over oil wealth.

"Resource control is a genuine cause for many in the delta, and if you created a mechanism where it could work and where people felt they had a stake, you could create a more stable environment," said Antony Goldman, an independent risk analyst.

"Unfortunately Nigeria has perfected crisis management but nobody is thinking long-term," he said.
What is violence in the Delta going to look like, and how can it be resolved? The biggest problem, no matter what happens, is the vast and intricate web of corruption that surrounds the illegal trade in stolen oil. Getting rid of corruption, and restoring the rule of law, while at the same time working for meaningful solutions of the Delta's problems seem like very tall orders. One might also ask if the forces that act on Nigeria and on its government -- which receives nearly all of its revenue from the petroleum industry -- make the country constitutionally incapable of seeking and finding justice in the Delta.

Nigeria has seen its oil production drop 20% to 25% since the beginning of the year. Yet, over the same period, and in no small part because of the drop in Nigerian production, the price of crude rose from about $62 to around $72.50 per barrel, a 16% increase. So, the increase in price partially ameliorates the effect of the drop in production on the Nigerian economy, but not completely. A naive multiplication of these rates -- without any information as to how revenue is shared between oil companies and the Nigerian Federal Government -- would suggest that the drop in production has led to a 7% to 13% drop in revenue to the Nigerian oil industry and government.

Oil companies, however, would see this differently. The drop in Nigerian production amounts to a 0.5 million barrel per day (mbpd) drop in global oil production out of the 80 mbpd consumed by the world's consumers (~2% drop). Combine this drop with the fact that spare petroleum production capacity is so low (discussed here), and a "risk premium" -- or the additional price oil traders are willing to pay in anticipation of future supply shocks -- emerges that is today on the order of $20 per barrel. Thus, the drop in production has led, in the aggregate, to an increase in global revenue to all oil producers (except for Nigeria).

It is here that a conflict of interest emerges. Of course, the enlightened among Nigeria's political establishment are highly motivated to return production to late-2005 levels. However, to do so meaningfully would require pumping a lot of money into the Niger Delta to build the currently non-existent schools, roads, and hospitals that residents so desperately need; enforcing the $1.5 billion dollar fine levied against Royal Dutch Shell by the Nigerian courts for environmental damage to the Delta; and establishing at least partial local control of oil revenue.

But Royal Dutch Shell, and other companies, will not see the peaceful and long-term restoration of production capacity as a high priority. Why should they pay out $1.5 billion in fines for environmental damage when the very bullish oil market is more than making up for the relatively small drop in Nigerian production? Far easier to follow the now all-too-common practice of bribing high-ranking officials to look the other way while they continue with business as usual.

I had written earlier that the high price of oil would generate an incentive for other world governments to seek out conflict resolution in the Delta. But don't count on the oil companies to be part of that process. As far as I can tell, and despite their claims to the contrary, Shell's behavior is that of a company trying very hard to let Nigerians take responsibility for their own security problems.

Shell has little short-term financial incentive to make the Delta a better place to live. Maybe they'll change their tune in the long-term. But I'm beginning to see major flaws in the nature of large multi-national corporations. By spreading their risk over large numbers of smaller markets, they are in a position to reap the benefits of supply shocks in ways that companies operating at much smaller scales are not.

For more on the Niger Delta from Voice of America, see here. An old anlaysis (March 5) from the Harvard Political Review can be found here.

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