The Impact of Declining Oil Prices on Oil and Gas Companies in Nigeria


February 2015

Introduction
In January 2015, the price of Brent crude oil, the international benchmark, dropped to nearly a six-year low of $45 per barrel. This is the lowest since April 2009. This price decline has both positive and negative ramifications on the global economy. In general, there is high volatility of prices in commodity markets but oil prices have historically displayed more volatility than other commodities. In addition to oil prices being generally volatile, they oftentimes have crises points.

Oil Price Trends
Following the 1973 embargo, placed by the Organization of Arab Petroleum Exporting Countries (OAPEC) prohibiting nations that supported Israel in its “Yom Kippur War” from buying oil that they sell, the nature of oil prices changed. In the U.S. for instance, prior to 1973, oil prices were generally stable over broad periods due to the distinct regulatory structure. After 1973, oil prices began to see nonlinearity and unprecedented levels of volatility marked by increased prices in times of disrupted supply, which is typical of the market today. Figure 1 shows historical crude oil prices from 1861 while Figure 2 shows Brent crude oil prices from 1986. Oil prices reached a historical high of $147 per barrel mid-2008 but then dropped to below $40 by year end. Such sharp changes in oil price lead to economic uncertainties and have exposed the global economy to crises.

Figure 1: Historical Crude Oil Prices (1861-Present) Sources: BP historical data, U.S. Energy Information Administration

Figure 1: Historical Crude Oil Prices (1861-Present)
Sources: BP historical data, U.S. Energy Information Administration

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