It would be difficult to overstate the role of oil in the Nigerian economy. Since the first oil price shock in 1974, oil has annually produced more than 90 percent of Nigeria’s export earnings. In 2000, Nigeria received 99.6 percent of its revenue from oil exports, making it the most oil-dependent country in the world.
Oil production has also had a profound effect on Nigeria’s domestic sector. One way to characterize its impact is to look at oil rents, that is, returns in excess of production costs, in the Nigerian economy. From 1970 to 1999, oil generated nearly $231 billion in revenues for the Nigerian economy, in constant 1999 dollars. Since 1974, these revenues have constituted between 21 and 48 percent of GDP.
Surprisingly though, these rentals have failed to raise Nigerian incomes and have done little to reduce poverty. Since 1970, Nigeria’s per capita income has fallen by about four percent, in constant dollars. Although Nigeria’s poverty rates have never been well measured, there is little indication that they have declined in the past three decades.
This lack of improvement is surprising given the size of Nigeria’s oil windfall. If each year’s oil revenues had been invested in a fund that earned only 5 percent real interest, by the end of 1999 the fund would be worth $454 billion. If divided by the general population, each man, woman, and child would receive about $3,750, equivalent to about 15 years of wages.
Oil has also had a profound influence on the Nigerian government. Since the early 1970s, the Nigerian government has annually received more than half its revenue, sometimes as much as 85 percent, directly from the oil sector. These oil revenues are not only large, but they are also highly volatile, meaning they can fluctuate dramatically in size from year to year, causing the size of government and funding for government programs to fluctuate accordingly. For example, from 1972 to 1975, public spending increased from 8.4 percent to 22.6 percent of GDP; in 1978, it fell again 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 sensible fiscal policies during the 1970s and 1980s, when oil prices fluctuated widely. The decentralization of the Nigerian government has made good revenue management even more difficult, as much of the oil revenue has automatically shifted from the federal government to 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 sparked social and political unrest, particularly in the Niger Delta. The Igbo effort to secede from Nigeria, which led to the civil wars of 1967-1970, was deeply rooted in ethnic tensions and Nigeria’s colonial past; but the rebellion was encouraged by the presence of oil and thus the belief that independence would be economically beneficial to the Igbo people. Similarly, the unrest between the Ogoni and Ijaw peoples in the Niger Delta can be partly attributed to their desire to gain a greater share of the region’s economic wealth.
If Nigeria’s oil were to run out soon, these problems could eventually be in the past. But there are many reasons to think that for decades to come, Nigeria’s dependence on oil exports will remain exceptionally high; it can 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 per 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 increase oil revenues.
International demand for Nigerian power supplies will almost certainly remain strong. Global energy demand is projected to increase by 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 Nigerian oil and Nigeria’s location outside the volatile Persian Gulf suggest that global demand for Nigerian oil and gas will remain high for decades to come. While this is good for Nigeria’s oil sector, it poses significant problems for the economy and the government.
