The principal argument of this article is that although the new Nigerian strongman has given positive signs that he will remain in OPEC and pursue an austerity plan put forth by the IMF, lenders and oil exporters remain fearful that he might instigate a price war to raise funds.

The article begins by explaining that upon assuming power Nigeria’s new military strongman, Major General Mohammed Buhari has tried to reassure his allies and creditors by declaring that Nigeria will remain in OPEC and honor its $14.5 billion debt. In order to raise funds for this debt repayment and other national expenses, Nigeria may feel it is necessary to start an oil price war that could destabilize an already weak market and threaten the debt-restructuring plans. The fear of the latter occurring was heightened by the fact that the coup which brought Buhari to power immediately followed the then President Shagari’s announcement of a strict austerity plan coordinated by the IMF.

The positive signals of Buhari’s commitment are varied. Friends and acquaintances describe him as being a strict disciplinarian, a conservative Moslem, and one who honors obligations. With regard to policy, he has already launched an anti-corruption campaign, retained the widely respected Finance Minister’s permanent secretary and the three investment banks that had been handling the previous government’s debt negotiations, and declared that Nigeria would try not to upset OPEC prices or production quotas.

Although these signs appear encouraging, many remain worried that if Buhari believes the terms of the austerity measure are too harsh and if external financing is not made available he may resort to oil for cash. Nigeria’s economy is in a terrible condition: oil revenues have plummeted 60% in three years, Nigeria annually spends $2 billion on food, and banking sources estimate its past-due trade debt at $5 billion. The banking community argue that an austerity plan is severely needed, one which must begin with a significant currency devaluation (i.e. which would double the price of food and hopefully encourage domestic production). Oil remains a crucial component, as it provides Nigeria with 95% of its export earnings and 80% of government revenue. The current level of exports of 1.1 million bbl. a day (i.e. down from the capacity level of 2.3 million bbl. a day reached in 1979/80) has led to greatly diminished revenues (i.e. less than half of the capacity level). In order to return to capacity production and to maintain that level, Nigeria would have to generate buyer interest by slashing prices (i.e. which would destabilize an already shaky world market).

Even if Nigeria agrees to work within the official parameters of OPEC, it could bargain hard to increase its daily quota. This in turn would anger Venezuela and other OPEC members that had been long begging for higher quotas themselves.

Summary by David A. Ritchie