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Why has the price of crude oil been in free-fall mode recently? Why does the world catch a cold when the price of crude oil sneezes? Why are different countries having opposite but equally intense reactions to the recent crude oil price level change?

If these are questions that you have been pondering lately, hopefully you’ll have some answers by the end of this post.

Farid is extremely rich – the source of his wealth is the smurl he extracts in his backyard. Smurl is a fundamentally essential product for two reasons: (1) multiple essential products can be extracted from it; (2) these smurl products provide the basic ingredients for the energy that drives most of the manufacturing, mechanical, and electrical processes in the entire world! Smurl is the result of natural activities in the ground, and like similar naturally-produced items like gem stones, the locations where it can be found is independent of human manipulation, making it a precious resource. This is why Farid is rich – everyone needs at least one of smurl‘s outputs in their every day activities, and his backyard is one of the few places in the world where it can be extracted. What further works in Farid’s favour is that the cost of extracting smurl is low.

There are a handful of other individuals like Farid who have since discovered smurl in their backyards and have earned quite a bit of money from the sale of the extracted product, with more money in their future as there still remains smurl in decent quantities below their houses. Farid and some of these other people, realising how important their smurl is to the world, came together and decided to form the Smurl Cartel (“SC”). Among SC’s objectives is to manipulate their production levels to influence the price of smurl in the global market: when they think it is getting too cheap, the reduce the amount they produce to create a scarcity situation, which eventually causes the price to rise.

Thomas also has smurl in his backyard. Thomas has a very large family that consumes a very large quantity of the various smurl outputs on a daily basis. Thomas has not been able to extract enough smurl to meet the needs of his family, so he needs to buy from Farid and the rest of his friends in the SC to make up the shortfall. Thomas is not happy about this as his pockets are subject to the whims of the SC. In fact, he is very cautious about being the cause of Farid’s unhappiness in whatever form, as that could result in him and his family not being able to cook their meals or heat their home as a result of Farid limiting his access to smurl.

Over the last ten years, a number of SC members have experienced various levels of family drama that thoroughly impacted their respective abilities to extract and sell their smurl. This resulted in a rather limited quantity of this product available for the world to buy and use for an extended period of time. At the same time, some families’ economic activities grew considerably, increasing their need for smurl products. Consequently, the price of smurl went to an all-time high, almost 1.5x the highest price it had been before this period. Everyone else felt the pinch in their pockets, except for Farid and his SC friends who were extremely happy with the development and their bulging pockets.

Due to his disadvantaged position, Thomas has been on a quest to figure out a way to become independent of the SC cartel for his basic energy needs. He got some members of his family to focus on achieving this goal: Some of them investigated alternative sources like the sun and nuclear power. Others investigated how to obtain smurl from non-traditional sources. After painstaking research, one of the groups stumbled on an amazing discovery – the rocks in their compound contained some properties which, with the right equipment and process, could yield a liquid with properties very very similar to smurl! They named it rock smurl, and set about testing and fine-tuning the necessary equipment and processes to extract and refine to the smurl outputs. Shortly after, Thomas was able to produce enough rock smurl, which when combined with the smurl he produced, to cater for almost all his family’s energy requirements. Finally! He no longer had to rely on smurl from Farid and his SC friends! In fact, he could potentially extract more than his family can consume and become a seller like them :-). Sweet!

Thomas’ excitement was not shared by the SC. Not only had one of their biggest buyers disappeared from the buying side of the market, some of the individuals with family drama had since resolved some of their issues to the point that allowed them to resume their former smurl extraction levels. All of a sudden, there was too much smurl in the market! There were still a lot of families that did not have any smurl in their backyards and still needed to buy, but not enough to fill the gap Thomas created. The over-supply of smurl in the market caused the price to dive south, losing 50% of its value in less than 6 months. At the next SC meeting, unlike their usual move when smurl price is not moving in their favour, Farid and his friends decided not to reduce the amount of smurl they were supplying the market. They decided to leave the market to decide who will survive. Their reasoning is that Thomas’ family spends a lot more to produce their rock smurl, and if the smurl price drops too low, Thomas will be extracting the rock smurl at a loss as rock smurl and smurl are priced the same. Therefore, the price of smurl can only fall so low, and may in fact eventually rise again.

While the SC waits to see whether their bet will pay off, the members are adjusting their respective purses just in case it does not. Some members did a better job of “making hay while the sun shone,” while others did not do so well. Those who did are breathing easy, while those who did not are in panic mode.

In the story above, our respective real life players are:

Farid = Saudi Arabia

smurl = crude oil

Smurl Cartel (SC) = Organization of the Petroleum Exporting Countries (OPEC)

Thomas = United States of America

rock smurl = shale oil

Still got questions? Please ask in the comment box below, or send an email to comments@finomics101.com – look forward to hearing from you!

Money Basics: Money Equations

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$hate-math-love-counting-money$

Remember your basic mathematics? Equals, addition and subtraction? I knew you would :-). Great! Because that is all you need to understand the basic money equations on today’s edition of MBWBB :-). Ok, you also need to understand the concepts of “less than”, “greater than”, and “%”, but I am 100% confident that you have this covered :-D.

We all hear about saving being the key to having more money; it is true! Which brings us to our first equation:

(1) saving = not spending

It is only money that is not spent that can be saved… logical abi? Glad that you are still with me :-).

We spend on things that we consider to be necessary and things that we like; each person’s list of necessary things and “I like” things would vary considerably, as it should be. So, in order for a person to be able to save / not spend their money, our second equation must hold true:

(2) money made > money spent

This means that you have to receive more money than you spend; same thing flipped around means that you have to spend less money than you receive. So, in order to save money, you would need to either make enough money to cover all that you would like to spend and save, or adjust your spending to fit within the amount of money you receive and have enough leftover to spend. This leads to our third equation:

(3) money received = money spent + money saved

Are you still with me? Great 🙂 !

We would all love to be able to receive enough money to cover all that we would like to spend and still save; if only wishes were horses :-). In the real world, that is one wish that very rarely comes true, sigh. So, for most of us, we are usually working with the constraint that is the amount of money we receive, and we have to somehow find a way to fit in our spend and save requirements and still be happy! We can work hard and increase the amount of money we receive by getting a promotion or working a side gig, but the percentage of people who have so much money that they do not know what to do with it would likely remain at the low end.

So what should we the majority do? Accept this and work with it :-). It is usually useful if a conscious effort is made to save, and our fourth and fifth equations should help:

(4) money spent = 70% of money received

(5) money saved = 30% of money received

This means that we should strive to spend at most 70% of whatever money we receive, whether it is N1,000 or N1,000,000, and the rest should be saved. Did you say this will require making choices? Absolutely! There would be choices about whether to buy that aso-ebi or continue that expensive gym membership. This is what being frugal is all about, and – as you must have observed – most of the genuinely financially successful people are also the most frugal.

I believe in the power of helping others and giving back. The holy books encourage us to give of ourselves and our belongings to those who are in need and could benefit. Consequently, I usually recommend adjusting equations (4) and (5) above to:

Source: freeimages.com

(6) money spent = 65% of money received

(7) money saved = 25% of money received

(8) money used for charity = 10% of money received

You still here with me? Yay!!! 😀

That’s enough equations for today 🙂

How do you go about implementing the recommended equations you ask? Those will be covered in future posts – the next set of which would cover basic money concepts that would help put the commonly used terms in perspective.

I am looking forward to your comments and questions :-).

Introducing Money Basics

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Most of the news channels, beer parlours, and pepper soup joints in Nigeria are abuzz with gist about falling crude oil prices and the recent formal devaluation of the Naira. The real questions on the minds of most people, however, revolve around their specific individual scenarios and how to save themselves from financial destruction. In order to be able to answer these questions, and generally calm down the heart palpitations some of us experience when we start thinking about our personal financial situations, we need to properly understand the following about money:

what it actually is;
how to track it;
how it can be made;
how it can be saved;
how it can be made to work;
how to avoid being a slave to it;
how to avoid losing it;
etc.

This is where Money Basics with Bash B, acronym MBwBB :-), comes in. There will not be information on how to double money overnight – if I knew that secret, I would have since bought an island :-D; what would be availed is information that will facilitate optimal money-related decisions, i.e. would maximise how much money comes into your pocket and minimise how much money leaves your pocket – this is what we all want, no :-)? There would be links to useful established resources. MBwBB would also attempt to respond to specific enquiries that would increase everyone’s knowledge base, and you know what they say about knowledge? KNOWLEDGE IS POWER!

So, I look forward to reading from you as we learn and share. If you would prefer to send a private message to keep things confidential, you can send an email to comments@finomics101.com.

CBN and The Nigerian Economy: A Short Story

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A very detailed and easy-to-understand breakdown of recent economic happenings.

Agùntáṣǫólò

If you have an M.Sc in Finance or a degree in economics, you can skip this piece. The point of it is to try to explain what the CBN did today at the MPC meeting and how it all relates to the wider Nigerian economy.

The communique they released is here

Larry Summers, I think it was, who once said that it is not so easy to understand how the economy works. And Summers has more than one brain. Everything below is a simplification to get the basic points (as I understand them) across.

Increase the MPR by 100bps from 12% to 13%

First thing to know – 100 basis points equals 1%. It really is as simple as that – the CBN increased the Monetary Policy Rate (MPR) by 1%. But what is MPR anyway?

Every Central Bank in the world has a broad goal that it seeks to…

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Nigeria’s Economy Largest in Africa : What is GDP Rebasing?

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The Nigerian National Bureau of Statistics completed its GDP-rebasing exercise last weekend, the result of which shows that Nigeria’s 2013 GDP is 89% higher than was previously calculated, and Nigeria has overtaken South Africa as the largest economy on the continent. A number of us are wondering what this all means – let us go through the following story about Hauwa and her business.

Hauwa is a business owner. Seun, her business accountant, has the list of her 5 business bank accounts, as well as the list of the 10 products she sells; these lists were compiled 20 years ago. Every year, Seun checks these bank accounts to collate how much Hauwa’s business received as payments for selling these products between 1 January and 31 December, i.e. her Annual Sales. He also notes the breakdown of how much each product contributed to her Annual Sales. Seun uses this information to communicate with Hauwa’s business stakeholders: lenders, shareholders, and the general business community. In 2013, his calculation of her Annual Sales based on this list of accounts and products was N100.00, with Product A contributing 50% to this amount.

In a recent conversation, it comes to Seun’s knowledge that Hauwa’s business has accounts that are not on the list he has been working with:

Hauwa: “So, you need to go and withdraw some money from Bank A to pay our supplier in Aba.”

Seun: “But madam, we do not have an account with Bank A…”

Hauwa: “We do o, I opened an account with them 3 years ago when we started buying raw materials from Mr. X.”

Seun: “Ehen… Ok. Please send me the details of the account so I can update the records and make the payment as you have requested. How about this outstanding amount from Customer D?”

Hauwa: “Customer D paid last week now, he paid into our account with Bank Q.”

Seun: “Bank Q ke? Madam, did you recently open an account with Bank Q too?”

Hauwa: “You mean you didn’t know? I opened an account with Bank Q 5 years ago when we started collecting payment for the use of advertising space on our delivery trucks.”

Seun: “So, we are now making money from advertising too? Madam, I think it will be a good idea for us to go through the list of bank accounts so you can update me on the new accounts that have been opened, the account managers, and the accounts that are no longer in use. Also, we need to update the list of all revenue sources.”

Hauwa: “In fact, let’s get to it immediately – long overdue!”

After completing the updates, Seun’s lists now show that Hauwa’s business has 8 bank accounts, sells 23 products, and now offers a number of services that it did not offer previously. Based on the updated lists, Seun re-calculated the Annual Sales in each of the last 3 years; the result of this exercise shows that Hauwa’s 2013 Annual Sales was actually N185.00, Product A’s contribution had fallen to 15%, and the largest contribution came from Service B.

Note that:

This does not mean that Hauwa’s business is any wealthier than before; it does not mean that her business has suddenly received an additional N85.00 – it had already been paid.
Since Hauwa’s Annual Sales figure is calculated as the sum of all the deposits into her bank accounts, it does not mean that her bank balance on 31 December 2013 was N185.00. The amount of money remaining in Hauwa’s bank accounts on 31 December 2013 will depend on the withdrawals that Hauwa made to pay her employees’ salaries, buy new equipment and uniforms, fund training for herself and other employees, pay for security, etc. In fact, Hauwa’s balance on 31 December 2013 may actually have been negative, which would have required her to borrow money.
Hauwa’s employees will not experience any change in their welfare packages.

Now that Hauwa has a more accurate picture of her Annual Sales in recent years, as well as each product and service’s contribution, she can plan more effectively:

she now knows which products and services to push more to increase their contribution;
she also knows the products and services that appeal most to her customers;
she can identify new business opportunities;
she can now make a more effective spending plan because she has a better idea of how much she will make in 2014;
her business is now more attractive to investors and creditors, thus increasing the ability of her business to earn more money; and
her bragging rights have increased – she now knows that her business received more in sales than that of Akin, her neighbour down the road, and she can now rub shoulders with those who previously thought she was not in their league.

Hauwa now needs to use this updated information to:

plan how to continue sales growth;
take advantage of opportunities;
spend on increasing productive capacity of herself and her employees;
improve her employees’ welfare packages; and
identify and plug leaks that cause money to “disappear”.

In this analogy,

Hauwa’s business is the Nigerian economy;
her products and accounts are the various industries and sectors;
her Annual Sales represent Nigeria’s Gross Domestic Product (GDP);
Seun is the National Bureau of Statistics, the agency responsible for calculating and reporting the country’s GDP and other economic statistics;
the process of updating Seun’s lists is GDP Rebasing;
Hauwa’s employees and their families are the Nigerian citizens; and
Akin’s business represents the South African economy :-).

If you’re interested in the technical details of what GDP means and how it is calculated, read my note on GDP Calculation.

Got a comment, question? I look forward to reading your note below, or you could send a private message to comments@finomics101.com.

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Money Basics: “You’re making money? How educated are you to keep it”

The Economics of Crude Oil