It would be hard to overstate the role of oil in Nigeria’s 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 almost $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, however, these rents have failed to increase Nigeria’s income 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 evidence that they have declined over 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 generated only 5 percent real interest, at the end of 1999 the fund would be worth $454 billion. If divided among the general population, each man, woman and child would receive about $3,750, equivalent to about 15 years’ salary.
Oil has also had a profound influence on the Nigerian government. Since the early 1970s, the Nigerian government has annually received more than half of its revenue, sometimes as much as 85 percent, directly from the oil sector. Not only are these oil revenues large, they are also highly volatile, meaning they can fluctuate dramatically in size from year to year, causing the size of government and funding of 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 capable of coping with this kind of volatility, and it is not surprising, in retrospect, that the Nigerian government was unable to adhere to sound fiscal policies during the 1970s and 1980s, when oil prices fluctuated widely. The decentralization of the Nigerian government has made sound revenue management even more difficult, as much of the oil revenue has automatically passed 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 civil wars from 1967 to 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, unrest among the Ogoni and Ijaw peoples in the Niger Delta can be attributed in part 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 is every reason to believe 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; is rapidly increasing its capacity to liquefy and export this gas, which will further increase oil revenues.
International demand for Nigerian energy supplies is almost certain to remain strong. Global energy demand is projected to increase by more than 50 percent over the next two decades; Natural gas demand is expected to grow especially fast [CSIS 2000]. The high quality of Nigerian oil and Nigeria’s location outside of 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.