In the nineteenth century, Napoleon Bonaparte of France described Britain as “a nation of shopkeepers.” Such characterisation might also be applicable to Nigeria today. In every street-corner of our major cities are people selling all kinds of goods. Some display these in the middle of the road. As a matter of fact, you can get to buy many of the things normally found in a supermarket while driving through a traffic jam.
However, there are fundamental differences between nineteenth century Britain and twenty-first century Nigeria. While the British shop-keeper of the nineteenth century was busy marketing locally-made products; the Nigerian street-trader of the twenty-first century is busy selling foreign goods. Thanks to the proceeds from Nigeria’s extractive oil industry, Nigerians are now primarily engaged in the buying and selling of goods we do not produce.
For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More
Even in our so-called manufacturing sector, industries which are highly dependent upon imports have grown without control. With the result that the sector now depends on foreign sources for a high percentage of its raw material needs, technical and managerial manpower, technology and maintenance of equipment.
Oil (which accounts for 95% of Nigeria’s export earnings and for 65% of total government revenue) constitutes an enclave sector. While in 1960, Nigerians had produced cocoa, then the mainstay of the economy, it is arguable if we produce oil today, despite Nigeria’s categorisation as an oil-producing country. In a labour force currently estimated by the World Bank at over 52 million, barely 200,000 can be accounted for by the oil industry. In short, Nigeria’s oil wealth has been essentially a fortuitous and externally-generated windfall, largely dependent upon external expertise, external direction and external markets.
In oil boom years, increases in Nigeria’s GDP are almost entirely a function of increases in government expenditure as a result of income from oil. When increases in government expenditure diminish, real economic growth likewise diminishes. This indicates that growth in the non-oil sector is dismal even in oil boom years. But it is the GDP excluding oil production which best measures the productivity of Nigerians. While the oil sector grew between 2011 and 2012 by about 8%, according to the African Economic Digest, the non-oil sector had a negative growth of -0.35%. This has been the longstanding tendency. For this reason, Sayre Schatz maintained several years ago that, thanks to oil, Nigeria made a transition from an economy of “nurtured capitalism” to that of “pirate capitalism.”
There are two basic reasons for Nigeria’s limited growth response to the oil bonanza. The one related to the high marginal propensity to spend or transfer the country’s oil proceeds abroad, thereby limiting the magnitude of domestic demand generated by oil revenues. The other relates to the inelasticity of domestic supply in the Nigerian economy. Productive responses to the increases that have occurred in domestic demand have been extremely sluggish and, as a result, most of the rise in demand has been dissipated by inflation.
Moreover, a considerable amount of Nigeria’s oil revenue was expended on wasteful prestige projects which did not yield productive returns in the medium-to-long-term. The Festival of Black Arts and Culture (FESTAC) goes down in Nigerian history as a project whereby N1.5 billion was poured down the drain, just in order to announce to the world that Nigeria was a nouveau-riche country in the mid 1970’s, and to lay claim to being the world’s foremost black nation.
Correspondingly, the building of a new capital in Abuja has entailed considerable budget outlays, thereby providing major avenues for massive administrative graft and illicit profit-making by the contractor-class. Other white-elephant projects inspired by the oil-boom include uneconomic steel plants, as well as cost-inefficient river-basin development authorities. Many of these projects embarked upon even as far back as Nigeria’s procurement of the first Euro-dollar loans in the late 1970’s remain uncompleted as a result of corruption, economic mismanagement and bureaucratic inertia. And those productive investments which could have generated self-financing returns (such as in the agro-allied industries, petrochemicals and liquefied natural gas) tended to be ignored.
Because the oil industry is characterised by enclavity, the central feature of the Nigerian in the nation’s oil economy has been allocative, concerned with the sharing out of the proceeds of oil. In an environment where the nation’s oil wealth belonged to everybody but derived from few, competition for public office and, thereby, access to petro-naira, became a matter of life and death. The resultant free-for-all reached its apogee during the Second Republic when it was concluded that, in the interest of peace and security, the looting of the treasury should conform strictly to the principles of federal character.
The temporary collapse of the oil market in the 1980’s effectively dislocated the Nigerian economy. High oil revenues had induced Nigeria to become a high-wage “Udoji” economy in the 1970’s, in the absence of corresponding increases in productivity. It also encouraged imports as substitutes for domestic production and stimulated inflationary pricing. But with the new dawn of relatively low oil prices in the 1980’s and 1990’s, there emerged a basic incongruity, not only between productivity and income, but equally devastating; between legitimate income and prices.
Even though we have had a return to high oil prices in the new millennium, the question remains: if Nigeria was unable to manage its oil wealth, how can it manage a future of oil poverty? If the country was unable to finance a positive structural adjustment of the economy on the proceeds of fat oil wealth, how will it do so on the proceeds of inevitable lean oil income? This is a nagging question that keeps coming up. If a drastic drop in Nigeria’s oil export earning can be as catastrophic as it was in the 1980s and 1990s, what is going to happen when the oil taps finally run dry, and when the world finds alternative sources of energy to oil?
This question is usually addressed with classical complacency by Nigerian officialdom. Experts are quick to point out that, at current rates of production, Nigeria has enough oil to last another 40 years. But this cushion of a 40-year reserve base is misleading, in light of realistic projections of Nigeria’s future oil export proceeds, domestic consumption of oil and sustainability of the oil market.
According to the U.S. Energy Information Administration, out of its 2.3 million barrels daily OPEC quota, Nigeria consumed barely 286,000 barrels domestically in 2011, leaving 2 million barrels for exports. That means only 12.4% of its daily production is consumed locally. Indeed, in the under-developed Nigerian economy of today, the primary source of energy is not oil but wood. However, in the foreseeable future, virtually all of Nigeria’s oil output would be needed domestically as a result of increased economic activity. At that juncture, Nigeria’s income from oil may be zero or, at best, negligible.
This raises the need for a productive investment and diversification programme which would provide a fall-back position for Nigeria when the growth in local oil consumption catches up with, or even exceeds, the country’s oil production capacity. Even in the short-term, it is now conventional wisdom that Nigeria needs a second stream of foreign-exchange earnings apart from oil. Oil remains a wasting and depleting asset, vital to Nigeria’s future growth and development. The problematic here is that, in spite of Nigeria’s inevitable future need for oil as an engine of its own domestic industrial activity, it continues to sell it off to foreigners.
The contradictions inherent in the Nigerian position are magnified when one takes in the larger picture of the international energy market. This reveals that the energy-abundant countries are the developed countries; the very countries which are the major consumers of Nigerian oil. The largest concentration of energy in the world is in Europe and North America, where it exists primarily in the form of hydrocarbons. In effect, the energy-abundant rich countries have been buying up Nigeria’s finite oil resources in the furtherance of their economic development. After it is depleted, they would then have their own domestic energy resources to fall back on. In exchange, Nigeria receives foreign currencies which are then used to purchase the fruits of economic development from the same rich countries.
When Nigeria finally acquires the capacity to exploit fully its oil resources domestically in the promotion of its own development, it would have depleted those resources to a considerable extent. It cannot even be ruled out that Nigeria may end up by having to import energy from the very countries to which it is now selling its precious oil. Even now, Nigeria is an oil producing country that imports its refined oil products from the same countries to which it sells its oil because of inadequate oil-refining capacity.
The imperative then is that, in spite of the political pressure for increased oil sales and earnings, Nigeria needs to evolve a policy which caters to the requirements of oil conservation as an insurance policy for the day when it will need to use its oil fully as an engine of its own development. There needs to be a transformation of the NNPC from a company which is in the business of selling oil, to one which is also in the business of conserving it.
Oil conservation has created the need to periodically phase out the domestic petroleum subsidy, whereby oil is sold domestically at prices far below those prevailing on the international market. This has been done severally in the past. However, the petroleum subsidy has re-emerged in the wake of the progressive devaluation of the naira on the foreign-exchange market. There is also considerable domestic resistance to the removal of the petroleum subsidy. Nigerians are prepared to accommodate any price increases except that of oil, given the fact that the country is a major oil-producer. There is lack of public trust that the subsidy will be equitably used for the benefit of all Nigerians if removed, while it is recognised that the subsidy itself is enjoyed right across the spectrum of the Nigerian economy.
However, there is need for sustained public enlightenment as to why there is need for not only the removal of subsidy, but also the imposition of a petroleum tax in order to conserve this valuable and depleting commodity. The current situation whereby a considerable amount of Nigerian oil is smuggled to neighbouring countries as a result of the differentials in domestic petroleum prices relative to those in neighbouring countries is wasteful. In the medium-term, Nigerians cannot afford to allow the situation to remain as it is.
Nigeria also needs to take the difficult step of artificially downgrading its reliance on income from crude oil sales. The current depletion of Nigeria’s oil assets to satisfy the demands of foreign oil consumers cannot be justified on the grounds of investing for the future. Most of Nigeria’s expenditure goes on paying salaries and for importing goods and services. Nigeria needs to orchestrate a phased reduction in its oil output, in order to provoke the re-socialisation to a coming world of reduced oil revenues, encourage the search for alternative sources of income, and conserve what is, after all, a finite and depleting resource.
“The Future of Nigeria’s Oil Economy is republished with permission of Stratfor.”