The Role of Oil In Nigerian Economy

It would be difficult to exaggerate the role of oil in the Nigerian economy. Since the first oil price shock in 1974, oil has annually produced over 90 percent of Nigeria’s export income. In 2000 Nigeria received 99.6 percent of its export income from oil, making it the world’s most oil-dependent country.

Oil production has also had a profound effect on Nigeria’s domestic sector. One way to characterize its impact is by looking at the rents produced by oil – that is, the returns in excess of production costs – in the Nigerian economy. From 1970 to 1999, oil generated almost $231 billion in rents for the Nigerian economy, in constant 1999 dollars. Since 1974, these rents have constituted between 21 and 48 percent of GDP.

Yet remarkably, these rents have failed to raise Nigerian incomes and done little to reduce poverty. Since 1970, Nigeria’s per capital income has fallen by about four percent, in constant dollars. Although Nigerian poverty rates have never been well-measured, there is little indication that they have declined over the last three decades.

This lack of improvement is striking, given the size of Nigeria’s oil windfall. Had each year’s oil rents been invested in a fund that yielded just five percent real interests, at the end of 1999 the fund would be worth $454 billion. If divided among the general population, every man, woman, and child would receive about $3,750, equivalent to about 15 years of wages.

Oil has also had a deep influence on the Nigerian government. Since the early 1970s, the Nigerian government has annually received over half of its revenues – sometimes as much as 85 percent – directly from the oil sector. These oil revenues are not only large, they are also highly volatile – that is, they can fluctuate drastically in size from year to year, causing the size of government, and the funding of government programs, to fluctuate accordingly. For example, from 1972 to 1975, government spending rose from 8.4 percent to 22.6 percent of GDP; by 1978, it dropped back to 14.2 percent of the economy.

Few governments are able to cope with this kind of volatility, and it is not surprising – in retrospect – that the Nigerian government was unable to adhere to wise fiscal policies during the 1970s and 1980s, when oil prices fluctuated sharply. The decentralization of the Nigerian government made sound revenue management even more difficult, since much of the oil revenue has been automatically passed on from the federal government to the state and local governments. The ability of these governments to spend their funds wisely, and limit corruption, has been low.

Nigeria’s oil wealth has also led to social and political unrest, particularly in the Niger Delta. The Igbo effort to secede from Nigeria, which led to the 1967-70 civil wars, was deeply rooted in ethnic tensions and Nigeria’s colonial past; but the rebellion was encouraged by the presence of oil, and hence the belief that independence would be economically beneficial for the Igbo people. Similarly, the unrest among the Ogoni and Ijaw peoples in the Niger Delta can in part be traced to their desire to win a larger share of the region’s economic wealth.

If Nigeria’s petroleum were soon depleted, these problems might eventually recede into the past. But there is every reason to think that over the next several decades, Nigeria’s dependence on petroleum exports will remain exceptionally high; it may even grow. Estimates of Nigeria’s proven oil reserves range from 24 billion to 31.5 billion barrels [EIA 2003]; at the current production rate of 2 million barrels a day, these reserves alone would last between 32 and 43 years. Nigeria also has an estimated 124 trillion cubic feet of proven natural gas reserves, the ninth largest such reserve in the world; it is rapidly increasing its capacity to liquefy and export this gas, which will further raise petroleum revenues.

International demand for Nigeria’s energy supplies will almost certainly remain strong. World energy demand is projected to rise more than 50 percent over the next two decades; demand for natural gas is expected to rise especially fast [CSIS 2000]. The high quality of Nigeria’s oil, and Nigeria’s location outside the volatile Persian Gulf, suggest that global demand for Nigerian oil and gas will remain high over the next several decades. While this is good for the Nigerian petroleum sector, it poses major problems for the economy and the government.


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