The discovery of crude oil in Nigeria in the 1960s, seemed to open a huge door for earning significant foreign revenue for the nation. But alas – every other national resource was largely ignored. Beyond oil, it was noted that agriculture and other non-oil sectors received less attention than they deserved for years – until recently. This lack of foresight markedly affected the Nigerian economy over the decades. Even the crude oil mining and exploration has been poorly managed. It a known fact that the host communities suffer from massive pollution and underdevelopment. And beyond oil exploration and exports, the Nigerian government has long stopped refining its own crude. In effect, more losses are incurred from importation of refined petroleum products, than the nation ever gains from exporting crude oil.
Unfortunately, crude oil prices continue to rise globally. And much to the anger of Nigerians, the government choose to concentrate on the dwindling proceeds of oil exports for way too long. For that reason, many critics see this unhappy circumstance as a curse, and tag it the ‘Dutch disease’.
Contributions of Crude Oil and Gas to Nigeria’s Economy
Nigeria is currently the 12th largest producer of crude oil worldwide, and the largest producer in Africa. The country also has the largest natural gas reserves on the African continent. Nigeria obtains at least 65 percent of government revenue, and over 85 percent of total exports, from the oil and gas sector. Nigeria also produces high-value, low-sulphur crude oil.
How Much Does Nigeria Depend on Crude Oil?
At the moment, both the federal and state governments still depend heavily on crude oil revenue. The Nigerian government relies on crude oil dollars to service public infrastructure, run its governance, service its debts, and as a common foreign exchange.
The heavy dependence on crude oil almost crippled the economy in 2020 – at the federal level, Nigeria recorded a negative GDP growth of 1.8 percent. Worse still, the Covid-19 pandemic hit the nation so badly that it could not meet its 2020 revenue projections (for the same reason). The benchmark price for crude oil was reduced from 57 US dollars to 30 US dollars per barrel. While anticipated production volumes were cut down from 2.2 million bpd (barrels per day) to 1.7 million mpd.
Fast forward to 2022, the federal government budget still reflected an expected revenue of 31 percent from crude oil exports. And crude oil exports continued to supply 90 percent of Nigeria’s foreign exchange, and over half of federal government revenues. The global rise in crude oil prices, and the local scarcity of the US dollar, has also affected Nigeria’s local currency. The value of the Nigerian Naira against the US dollar has fallen to an all-time low in 2023.
Again, almost all the state governments (except Lagos and Ogun) derive more than 50 percent of their budgetary allocations from the federation account. These are still mostly from federal oil revenues. Curiously, it is observed that the oil-producing states are the most dependent on oil revenues. Bayelsa and Akwa Ibom states receive an average of 85 percent of their fiscal budget spending from federal oil revenues.
That suggests that without crude oil earnings, such states are not economically viable. This alone is clear proof that such states need to find alternative sources of revenue, beyond oil proceeds from the federation account. They must diversify their states’ revenues to other internal sources beyond oil. Otherwise, they risk failed economies when the crude oil market no longer favors Nigeria.
Heavy Dependence on Crude Oil: Its Effect on Nigeria
Critics point out that past and current events surrounding the mining and export of crude oil, have set the nation on a tipsy balance. The petrodollar industry is heavily ridden with corruption. The Nigerian economy has become volatile. Local (and global) prices of petroleum products have continued to rise sharply. This has contributed to the rising cost of goods and services in an alarming way.
This oil dependence is also threatening the security of the nation, and social cohesion in the country. About 80 percent of the Nigerian populace live below the poverty line. Statistics on unemployment look gloomy, as thousands of job-seekers are stranded; and businesses suffer from both dollar scarcity and high exchange rates. Criminal activities (notably kidnapping, organized fraud and terrorist activities) have also sharply increased.
These are barely-disguised evidence of a poorly managed economy that critically needs diversification into other sectors.
Beyond Oil: Nigeria Must Prepare Ahead
According to the International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC), the world will soon peak its demand for oil. Furthermore, several nations have been working towards clean energy alternatives to fossil fuels, in order to reduce their environmental impact.
Like it or not, Nigeria critically needs to plan ahead, and provide alternative sources of government revenue and foreign exchange earnings beyond oil. Because crude oil is gradually losing its value. Even the government’s ongoing plans to invest in natural gas as ‘transition fuel’ currently faces serious competition from global investors in clean, greener fuels. That is not forgetting that natural gas projects are capital-intensive, and take a long time to build profits.
Additionally, Nigeria’s trade partners in crude oil are turning towards greener alternatives. The five largest importers of Nigeria’s crude oil have been India, Spain, Netherlands, United States and China. Now these countries have embarked on a committed journey to achieving carbon neutrality between 2030 and 2050
It is noteworthy that big oil prospectors such as Exxonmobil, Shell, Chevron and Total are now rebranding as ‘green energy’ suppliers. Such preparations are being made towards meeting the global demand for clean energy. These companies are also selling off their Nigerian assets. Coupled with the downtrodden environmental conditions they have left their host communities for decades, the oil-producing states are on the losing end.
Beyond Oil: What are the Alternatives for Nigeria?
The non-oil sectors of Nigeria’s economy have increasingly contributed to the economic growth of the nation over the years. Additionally, they provide more employment opportunities for the Nigerian citizens than the oil sector. This presents a strong case to look beyond oil in order to sustain national development.
In 2020 alone, the non-oil export sector was found to have contributed approximately 93 percent to the nation’s Gross Domestic Product (GDP). Furthermore, the Nigerian Export Promotion Council (NEPC) revealed that Nigeria’s non-oil export sector recorded a significant growth of 4.820 billion dollars in 2022. That represented an increase of 39.91 percent over 2021.
It is important for the Nigerian government to offer increased support for other sources of foreign exchange. The manufacturing sector, agriculture, tourism, technology, and solid minerals extraction, are critical areas that need attention. Local manufacturers and businesses need tax rebates, trade incentives, and more affordable, cleaner energy sources to encourage more exports. The active support of the federal and state governments of Nigeria to drive these sectors cannot be underestimated.
Additionally, boosting of regional trade through the African Continental Free Trade Agreement (AfCFTA)is highly essential. This can can further help to improve domestic production, diversify sources of export earnings, provide jobs, and drive economic growth.
Green energy sources are highly sought after for reducing carbon emissions and environmental damage; as well as ensuring energy efficiency. Our world is gradually turning to solar, wind, thermal, biomass, and other sustainable energy sources beyond oil.
Electric and hybrid vehicles, as well as machines powered through green energy, are on the increase. Many homes, schools, commercial, recreation and corporate centers worldwide are now powered by solar, wind, water, and biomass energy.
More and more countries now seek to standardize the use of green energy sources over and above crude oil. They are safer, environmentally-friendly, and progressively becoming cheaper to obtain. It will be dangerous and visionless for Nigeria to ignore this trend.
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