Oil in Nigeria: Why It Becomes a Curse

In modern world, many ways to obtain energy have been developed. Since the invention of the internal combustion engine, oil as energy resource has been widely used by people. Any worthy substitute for this resource has not been invented to this day. In such conditions, the states that possess this resource in abundance should be at the head of the world community and economy. However, in reality, this is not always the case. Some of such countries do not use a possibility to occupy a leading position in the world. In the process of oil production, these countries encounter similar problems that unite them at the management level, as the process of management determines the solution to various related issues. Nigeria is one of such countries with rich oil reserves; nevertheless, this fact alone does not lead this state to prosperity. This country faces many issues, and oil is more of a curse than a blessing for Nigeria’s domestic development because of the poor control and management of the results of its extraction.

Oil in Nigeria: Current Situation

Nigeria is the key to the African continent. In other words, it is Africa in miniature, with various tribes, hundreds of languages, religious differences, AIDS, gas and oil reserves, and so on. The country possesses almost half of all gas reserves on the continent. According to the estimates, 5 trillion cubic meters of gas have been found on its territory (Abah, 2009). However, Nigeria is an oil republic since this resource brings 95% of the value of export for this African state (Adamu, 2015). The country produces the highest volumes of oil in Africa, ranking eighth in the world list of oil producers and seventh in the world among oil exporters (Abah, 2009). Revenues from the sale of oil have amounted to 340 billion dollars over the past 40 years (Kaznacheev, 2017). Therefore, one can see that the country has a sufficient level of resources to provide the prosperity of its population.

However, despite the fact that Nigeria’s nature is quite rich, this country becomes a typical example of a paradox. The essence of it as follows. Sometimes, as the result of poor management and the control of the results of extraction, countries with significant natural resources become less economically developed than those that possess significantly less natural resources (Kaznacheev, 2017). Thus, Nigerian oil revenues were squandered and plundered by a series of ruling regimes (Gaffey, 2017). During the five years of his rule, General Sani Abacha, Nigeria's military dictator of the 1990s, stole about $4 billion from oil sales (Gaffey, 2017). This example shows that in fact, the natural wealth of Nigeria has not led to the development of the national economy.

The same situation remains in Nigeria today. The country tries to increase its oil production, but there is a tendency for its drop. Thus, oil production in Nigeria in 2015 amounted to 1,733 million barrels per day (Matfess, 2015). The extraction of liquid hydrocarbons in the country was 1,4-1,53 million barrels per day at the beginning of 2016, and it decreased even more by the end of 2016 and 2017 (Matfess, 2015). The authorities of the country attributed that to the fact that they had not been able to restore quickly all facilities of the oil infrastructure that had been attacked by rebels (Matfess, 2015). However, in July 2016, new attacks forced Nigeria to reduce oil production significantly. Thus, these attacks damaged the infrastructure, including the country's largest export terminal, and 4 months were spent on its restoration (Gaffey, 2017). According to the forecasts of Nigeria’s rulers, in 2016, the country should increase oil production to 2,3-2,5 million barrels/day, simultaneously significantly reducing the prime cost (Gaffey, 2017). This forecast of the management has not been realized, which, in the combination with other facts, shows the inadequacy of assessment of the situation by the country’s authorities.

Nowadays, the problem of natural resources’ extraction is one of the main problems for each country that need additional investment. Thus, Nigeria searches for the ways to attract investment in oil projects, totaling $40-50 billion (Matfess, 2015). Although the country is a member of OPEC, it is forced to import electricity (Matfess, 2015). Nigeria has become a symbol of corruption as Nigerian banks send worldwide proposals-scams and they have deceived many trusting people, stealing several billion dollars (Gaffey, 2017). During the management of President Obasang's predecessor, who had stolen $5 billion from the treasury, murders of political opponents were committed, drug cartels were defended, and Nigeria became the poorest of all oil-producing countries (Gaffey, 2017). Meanwhile, the revenues from oil exports absolutely do not contribute to the improvement of the situation of the local population in this large African country (Bamiduro, 2012). Most of this money settles on the bank accounts, owned by military dictators who rule Nigeria for many years. The last of the dictators, Sani Abacha, stole a part from the treasury (Gaffey, 2017). For 40 years since the beginning of oil extraction to nowadays, the percentage of people who spent less than $1 per day had increased from 27 to 66% (Gaffey, 2017). Thus, the presence of oil is more a curse than a blessing for the country. The reasons of such a situation should be investigated.

Conflicts

The modern world economy could not develop without the use of fossil resources. At the same time, their availability and extraction are closely linked to politics and management. Therefore, in addition to advantages, fossil fuels also bring significant drawbacks for the nations where they are found. Thus, the poorly managed states that have large reserves of minerals in demand on the world market tend to have a high level of concentration of power and property, weak civil society, and a low level of development (Gaffey, 2017). Nigeria can serve an example of such countries due to several reasons such as the conflicts of interests,  poor management, and total oil dependence.

Thus, lack of control and the presence of large oil reserves provoke conflicts in society. In such conflicts of interests, various groups and factions struggle for the possibility of using natural resources (Gaffey, 2017). In general, a typical country, whose share of primary resources exports is about 25% of GDP, has the likelihood of a conflict of 33% (Abah, 2009). The country with a share of exports of 5% of GDP reduces this likelihood to 6%, whereas Nigeria’s ratio of oil exports to the country’s GDP is 14% (Kaznacheev, 2017). Moreover, this useful fossil is the basis of the country's external income. The effects of the curse of resources undermine the quality of public administration, thereby increasing the vulnerability of the state to the conflicts caused by other factors (Abah, 2009). Conflicts also arise directly around the control and the use of resources as well as the distribution of proceeds from their extraction (Ploeg, 2010). Even more, access to the income from the resources of one of the parties to the conflict contributes to its continuation. Sometimes, all conflicts manifest openly such as separatist conflicts in the regions of oil production (Ploeg, 2010). However, more often, they take hidden forms such as the struggle between ministries or departments for the access to budgetary funds, thus leading to a decrease in the effectiveness of public administration in general. As it can be seen, conflicts significantly influence the situation with oil production in Nigeria.

Poor Management

Poor management also makes oil a curse for Nigeria. Thus, when society is not resource-dependent, the government imposes taxes on citizens who require an effective and responsible management. This interaction illustrates the social contract between the government and citizens (Matfess, 2015). In the countries with the economy based on natural resources, and Nigeria is one of them, the government does not need to impose taxes on its citizens since it has a guaranteed source of income from the extraction of natural resources. In Nigeria, the taxation of oil sales brings 80% of the state budget revenues (Matfess, 2015). In these conditions, the social contract is violated as the government does not feel bound by the obligations to manage the state effectively. Moreover, a part of society receiving income from oil production considers effective state institutions and civil society as threats to its well-being (Bamiduro, 2012). Therefore, it deliberately undermines their formation. Consequently, drawing on the revenues from natural resources, the management of Nigeria performs its direct responsibilities quite poorly, thus impeding the formation of civil societies (Matfess, 2015). In Nigeria, often, the easiest way to retain power is to redistribute wealth in favor of certain privileged sectors rather than pursuing a growth-oriented, balanced economic policy and formulating clear rules of the game. Huge oil revenues fuel this political corruption. In this situation, the government lacks the need to establish an institutional structure regulating the economy of the country outside the extractive sector. As the result of which, the remaining sectors are significantly behind in development. Consequently, Nigeria, as a country, whose economy depends on natural resources, tends to be more and more poorly managed.

Lack of Control and Oil Dependence

The third reason includes the dependence of the country on impermanent oil production and the impact of this dependence on other sectors of the economy. The large revenues from the export of natural resources increase the nominal and real exchange rates of the national currency as well as wages in extractive industries. Scientifically, this phenomenon has the name of the Dutch Disease (Otaha, 2012). The increase in the exchange rate and wages leads to the decrease in the competitiveness in the world markets of other industries, working for export, primarily agricultural and manufacturing (Oyesanmi, 2011). In addition, the increase in budget revenues, associated with the export of resources, often entails an increase in the public spending on health, defense, and so on, which leads to a further increase in the real exchange rate and wages. The decline in manufacturing sectors and, as a result, even greater dependence on natural resources make the Nigerian economy extremely vulnerable to adverse changes on the oil market.

Thus, the prices of the world market for natural resources are subject to significant fluctuations. For example, the price of a barrel of crude oil rose from $10 in 1998-1999  to more than $140 in 2008, while in 2009, it fell to $50 (Ogochukwu, 2016). The income of the state budget of Nigeria is formed mainly from the export of oil, so these fluctuations introduce chaos into the government spending (Adamu, 2015). The dramatic changes in the economic climate in the country, associated with this issue, lead to the massive violations of contracts, undermining the stability of the economy (Ogochukwu, 2016). This demonstrates the mechanism of total dependence of the country’s welfare on oil. Moreover, the development of economic diversification can be slowed down or suspended due to the dependence on the temporary high profitability of oil production. In this case, the attempts to diversify often represent global public projects that can be improperly planned and managed poorly, again reducing to the redistribution of resources (Matfess, 2015). Despite the fact that the oil sector generates large revenues, it creates relatively few jobs and often functions as an isolated enclave, with minor links to the rest of the economy.

As the result of the emergence of market fluctuations and unfavorable dynamics in the formation of budget revenues, the situation in the country is subject to even greater risks. The government depends on oil and expects significant revenues in the future; thus, it begins to accumulate arrears even if there are revenues from natural resources (Abah, 2009). Such a behavior is encouraged since the strengthening of the real exchange rate, associated with capital inflows into the country, or the Dutch Disease, results in lower interest payments (Oyesanmi, 2011). The country's natural resources are used as collateral, increasing the size of a possible loan. However, with a decline in resource prices on the world markets and the fall in the real exchange rate, the government has less money to cover more expensive debt (Matfess, 2015). Therefore, due to such oil dependence, the country had to experience a series of crises and a nationwide unrest.

Conclusion

Nigeria is a country with significant natural oil resources. Currently the country ranks one of the top places among both oil producers and oil exporters. Nigeria’s oil revenue is sufficient for the development of its economy. However, the country faces many issues, including the impoverishment of the significant part of population, the high level of corruption, and serious economic problems. Many of them can be explained by three main reason such as the conflicts of interests and inner conflicts in general, the poor management of the country by its rulers, and the oil dependence of the state due to lack of control. These factors worsen the situation in the country. In this regard, the level of income of the common people demonstrates an unfair distribution of natural wealth. A poor planning of the state budget expenditures due to the dependence of the state on oil prices on the world market, the growth of corruption, lack of investment in other sectors of the economy, and poor financing indicate that the presence of significant oil reserves is rather a curse than a blessing at today's level of management development and control in the state.