Will Chaos In Lagos Send Oil Prices Spurting?

As the confrontation between striking oil workers and the military government enters its seventh week, Lagos is on the verge of collapse. The banks have been shut down for a week. Drivers spend as much as four nights waiting in line to buy fuel for $12 a gallon from profiteering soldiers.

The effects of the strike are being felt far beyond the steamy Nigerian capital. The loss of 25% of Nigeria's usual output of 2 million barrels per day has helped fuel the recent runup in oil prices. The price of a barrel of light, sweet crude for September delivery has risen from below $14 in March to more than $20 a barrel in early August. "It's keeping the momentum alive, keeping the bullish psychology going," says Lawrence J. Goldstein, president of Petroleum Industry Research Foundation Inc. in New York.

TREASON? Goldstein estimates that the situation in Nigeria is adding $1 a barrel to oil prices. The market is now very sensitive to news from Nigeria. With world demand rising and supplies tight, prices could surge if output tanks. Yet a labor settlement could lead to a plunge in prices. "The bad news is factored in, so the trader had better watch his back," says Fareed Mohamedi, an analyst at Washington-based Petroleum Finance Co.

Traders are closely monitoring the travails of Moshood Abiola. The multimillionaire businessman from the southwest was elected President in June, 1993, but the military barred him from taking office. His jailing this June on charges of treason sparked the strike.

The oil workers demand Abiola's unconditional release, but they see a chance to accomplish something much bigger. Joining with pro-democracy activists, they are out to topple the military rulers, who are widely viewed as having grossly mismanaged Nigeria's economy. The unions want to get the oil industry out of corrupt hands. They also insist that the government pay the $800 million in arrears it owes Royal Dutch/Shell Group and other international companies for costs of joint ventures. These arrears, they say, are souring the international majors' view of Nigeria, discouraging investment, and threatening jobs. "We demand the exit of the military so that confidence and economic progress will return to our country," says a workers' statement.

SHELLED. To date, the strike has hit Shell--by far the largest producer in Nigeria--hardest. The company says it's losing at least a third of its usual production of 920,000 barrels per day. Other companies, including Agip, Mobil, and Chevron, are also suffering cuts.

The military has tried to split the pro-democracy forces by offering Abiola bail and trying to cut a deal to oil workers. So far, nothing has worked. Even if a short-term solution is found, the situation is likely to stay explosive. There are deep and growing cleavages between the northern military elite and the south, where oil is produced. What's likely is a long power struggle that will give the oil markets a lot to think about.

Before it's here, it's on the Bloomberg Terminal.