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Coping with Oil Depletion in Nigeria (Research Paper Sample)

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Coping with Oil Depletion in Nigeria

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COPING WITH OIL DEPLETION IN NIGERIA: A PROPOSED STRATEGY
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Introduction
The discovery of crude oil in Pennsylvania in 1859 served as the basis for the growth and establishment of the oil industry. Although heralding an unprecedented rate of industrialization, the commercial extraction of petroleum reserves in developing countries has come with what has now come to be known as the "resource curse”. Nowhere is this highlighted more gravely than in the case of Nigeria.
The largest oil producer in Africa and twelfth largest globally, Nigeria has proven oil reserves of 36. 2 billion reserves as of January 2007 against a Jan 1, 2009 global estimate of 10 billion barrels [1]. The vast majority of these reserves are in the Niger River Delta region, of which the Niger Delta Basin is the arguably the most productive, accounting for 49% of all of Nigeria’s oil fields as of 1999 [2].
The oil sector has traditionally accounted for a large part of Nigeria’s economy. Indeed, since the multi-decade oil price increases that begun in the 1970s, the oil and gas industry has contributed substantial export revenues that have been used to propel economic growth in Nigeria. As a matter of fact, Nigeria has enjoyed multiple years of fast GDP growth that has been fueled by a commodity price boom. However, this resource abundance has led to the emergence of a mono-economy, a risky scenario that recently played havoc with the economy following the exceptional drop in crude oil prices in 2014-2015. This price volatility and the impending depletion of oil reserves demands an urgent re-think of the Nigerian economy with the goal of achieving equitable, stable and viable GDP growth.
While the state has implemented a raft of policies to engineer economic diversification, hydrocarbon revenues still constitute a large share of government revenues and overall economic activity. In the pre-oil years when up to 70% of the economy was agriculture based, Nigeria’s economy was viewed to be emergent and robust. In the years that followed, however, the hydrocarbon dependence entrenched the Dutch disease phenomenon, leading to rent seeking, inequitable economic growth, deterioration of other economic sectors such as agriculture and manufacturing and mass unemployment. This is in line with the international observation that a hydrocarbon-based economy has on the nation: economic volatility, corrosion of good governance and an overvaluation of real exchange rates.
While this paper concedes that economic and export diversification remains a difficult task, it also provides for a variety of strategies to achieve the aforementioned. These strategies include the need to diligently implement policies that spur creation of a robust private sector that engages in high value-addition and diversification into non-oil tradebales such as mineral ores. Presently, the Nigerian employment market has begun the shift to sectors requiring low value-addition such as construction and is often characterized by low labor productivity.
Nigeria: A Brief Country Overview
Image 1. Map of Nigeria
Nigeria is a federal republic located along coastal West Africa and is home to 182 million inhabitants, the seventh most populous in the world [1]. Demographically, Nigeria is a young and rapidly expanding nation: almost 50% of the country’s population is ≤14 years old and is home to one of the explosive fertility rates globally. With over 500 ethnic groups, it is a diverse nation. However, it scores poorly in Transparency International’s annual Corruption Index and is plagued with state-sponsored human rights violations and sectarian strife, most noticeably in the form of Boko Haram. Nonetheless, Nigeria is a rapidly developing economy and has been credibly identified as an emerging global power [1].
The Context
The 1956 discovery of crude oil reserves in Nigeria led to massive export earnings over the years, but inadvertently also led to the emergence of an oil economy. Modern-day Nigeria is defined by the narrative following this discovery and the majority of its political, social and economic history has been shaped by the petroleum industry. Indeed, Nigeria’s primary commodity dependence has long been decried, but was especially highlighted in the unprecedented 2014-2015 commodity prices rout [3]. Despite a five year price stability, sweeping oil prices depreciated by over 40% in the months after June 2014 [3], leading to massive economic shocks in oil-dependent economies like Nigeria. Price drops severely impacted sweet oil, for which Nigeria is OPEC’s largest producer [4].
Prior to the discovery of crude oil, Nigeria’s economy was agrarian-based, but in the time period following the beginning of commercial extraction, agricultural production plummeted and the nation is now a net food importer. So drastic was this fall in production of staple and commercial food crops that by the 1980s, barely two decades after commercial oil extraction, Nigeria’s government begun the importation of basic food items. Between 1990-2011, Nigeria imported about US$ 9.28 million worth of basic food items per day, exceeding total commodity exports by five times [5].
Table 1. Top 5 Major Food Imports, 2006-10 [5]
Commodity

Total Import Bill (₦bil)

Average Import p.a. (₦bil)

Ranking

Wheat

823.84

164.77

1

Fish

568.17

113.63

2

Milk/Dairy

312.57

62.51

3

Rice

271.19

54.24

4

Sugar

193.07

38.61

5

This import dependency on the global food markets despite Nigeria’s capacity for local production is rising at an annual 11% and compounds the challenges of a commodity dependent economy. These challenges include fiscal difficulty in controlling domestic inflation, the displacement of local farmers, diversion of investment dollars, increasing unemployment and recurrence of food crises due to depletion of food reserves [5]. The effect of the petroleum industry on the agricultural sector represents just one of the scenarios that elaborately detail the challenge of commodity dependence and establish the case for diversification.
The imperative for diversification of the economy has never been higher now that Nigeria has experienced the shock of commodity price depreciation and this paper will attempt to propose a strategy for coping with price volatility and oil resource depletion.
Oil Depletion: Lessons from History and Current Practice
The Texas Oil Boom that begun in 1901 provides sufficient precedent in proving the case for economic diversification. The boom ushered an unparalleled rate of regional development that, at the time, seemed unending [6]. Just as in Nigeria, by 1940, the oil industry made up half of all of Texas’ state taxes and the value of oil and natural gas production exceeded the state’s entire agricultural production [6]. When oil prices stabilized in the 1940s, the three-digit rate of urbanization that some towns had witnessed in the decade after the turn of the century disappeared and Texas rapidly begun its transition to industrialization to replace lost petroleum revenue. The resulted urban sprawl has come with an assortment of problems including the residential segregation, environmental degradation, and rise of organized crime,
These early boom years informed the geological study of oil depletion. The modern-day example of Yemen is worth mentioning. The smallest crude oil producer in the Middle East, Yemen is estimated to deplete its oil reserves in 2020 at current extraction rates and in the absence of any new discoveries [7, 8]. The major oil blocks, Marib and Masila, are past peak production and are quickly approaching depletion.
Nevertheless, 90% of Yemeni’s exports, 75% of state revenues and 33% of GDP is dependent on the oil industry. As a result, the government is the dominant economic force, distributing its oil revenues, primarily, through petroleum consumption subsidies. By the turn of the century, these subsidies were among the highest in the world. With dwindling oil revenues due to the double effect of commodity price volatility and reserve depletion, the country assumes an impaired growth model. Lower economic growth, as has historically been the case in Yemen, eventually leads to political instability.
Venezuela is another prime example of a commodity-dependent economy. Despite its massive oil reserves, the largest in the world, Venezuela has been vulnerable to the boom-bust cycle of global commodity prices [9]. Commodity volatility impairs the ability of the state to make effective fiscal and economic policies. Boom years are followed by transitory government overspending while prolonged price drops occasion deep spending cuts that have an enduring impact on the economy. Indeed, the 70% drop on oil prices in 2008-09 led to a negative 3.2% GDP growth rate.
This scenario parallels the peculiar case of Nigeria: following the 2014-15 oil price declines, the Naira has become one of the worst performing currencies globally, requiring dramatic Central Bank support that has reduced the bank’s forex reserves by as much as 20%. Furthermore, Nigeria’s sovereign wealth fund savings have reduced from $21 billion to $3 billion following the 2008-09 sub-prime mortgage financial and the 2014-15 commodity price crises.
This precarious dependence on a unitary commodity plays a significant role in the development of structural problems that lead to the Dutch disease, resource rents, authoritarianism and cronyism and democratic and economic instability. This comp...
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