Nigeria’s oil curse could turn into an opportunity for renewable energies

Fishermen throw their nets into oil-polluted waters in Goi, Nigeria.

Photographer: George Osodi / Bloomberg

Photographer: George Osodi / Bloomberg

Third in a four-part series on oil-dependent economies and their transition to a carbon-free future. Read the first part about Saudi Arabia here and the second part about Russia. Part four about Canada will be released tomorrow.

Oil can be both a blessing and a curse. In Nigeria it was mostly the latter.

A story of four countries

Every unhappy oil exporter is unhappy in his own way

Sources: World Bank; International Trade Center; IMF; BP Statistical Review; Statistics Canada

Just a decade after the discovery of crude oil in 1957, it tore the young country apart in the civil war. Production never far exceeded the 2.3 million barrels per day of 1979 and will not do so for the foreseeable future. At the time, Nigerian oil production was insufficient to trigger a Middle Eastern-style economic miracle. Now that the population is three times the size, it is absolutely inadequate.

Imagine a Nigeria where oil had never been discovered and whose economic picture would now be no worse. Ghana and Côte d’Ivoire, neighbors less oil-rich, have made strides in GDP per capita in recent years. Adjusted for inflation, this income measure has not increased in Nigeria since 2014. China, India and Vietnam were still poorer than Nigeria in the 1990s. You are now considerably richer.

The toxic legacy of 60 years of abundant oil

Abandoned fishing boats sit on the ground as oil pollution covers the coast of an estuary in B-Dere, Ogoni, Nigeria.

Photographer: George Osodi / Bloomberg

More of

Oil has held the country back in several ways. Overseas purchases of Nigerian crude oil overseas, underpinned by a quasi-currency peg, add the value of the naira to a level where other industries are competing. The currency was devalued three times in the past year and was still about 18% overvalued, the International Monetary Fund said in February before the last cut.

Private companies find it difficult to hire skilled workers. More than half of the wage jobs are in the public sector, which traditionally generates up to 80% of its income from crude oil. Educated Nigerians would often prefer to be unemployed and get a secure government job instead of working in the private sector, according to a 2015 World Bank report. Many more seek education and work abroad, contributing to an emigration of Skilled workers who created a diaspora of 17 million people, roughly one twelfth of the country’s population.

Nigeria’s gasoline problem

Oil production in Nigeria is less than it was in the 1970s, although the population has almost tripled

Sources: BP Statistical Review; World bank

The torrent of oil money is also fueling the corruption and unrest that has long plagued the country. According to a 2006 estimate by the country’s former head of the country’s anti-corruption agency, around $ 380 billion has been stolen or wasted since independence. About 15% of oil production is stolen in so-called “bunker” operations, creating an illegal industry so large and tolerated that it is a more or less accepted feature of the landscape. There has been a minor uprising in the oil production region of the Niger Delta since the mid-2000s. In Transparency International’s Corruption Perception Index, Nigeria ranks 149 out of 180 countries.

All of this has held back parts of the economy.

Manufacturing, which added $ 39 billion in added value in 1981, rose to just $ 43 billion in the four decades to 2019, according to the World Bank. South Korea’s grew 16-fold from $ 24 billion to $ 397 billion over the same period. Agriculture still accounts for almost a quarter of the economy, well above most of the other major emerging economies.

Manufacturing value creation

Nigeria had a larger manufacturing sector than South Korea in the early 1980s; The picture is now conspicuously reversed

Source: World Bank

Despite a burgeoning workforce that will add up to one in three new working-age people worldwide by the middle of this century, jobs are scarce and unemployment is high. The share of the working-age population in work fell from 58% to 51% between 2000 and 2019, one of the sharpest decreases ever. The informal sector accounts for around 93% of employment and non-oil GDP growth consistently follows the oil industry.

Still, the oil itself will struggle as demand begins to decline in the years to come. Nigeria’s production costs of around $ 30 a barrel are significantly higher than the Middle East, caused by the same corruption and overvaluation that affects the rest of the economy. Traditionally attractive due to its high gasoline yields, its crude oil could be particularly difficult to live with in the decades to come, as electric cars are causing this barrel segment to decline the fastest.

That all sounds gloomy – but there are reasons for hope.

Imagine yet another large, populous tropical oil exporter that was plagued by corruption and regional tensions five decades ago. Oil rents, which made up part of the Nigerian economy in the 1970s, have since fallen to almost negligible levels, turning the country into a net importer of crude oil.

Extreme poverty

The percentage of the population living under $ 1.90 a day has fallen much faster in Indonesia

Source: World Bank

That doesn’t seem to have done any harm. On the contrary: GDP per capita growth was higher and far more stable and is now twice as high as in Nigeria. Thanks in part to the much higher proportion of the population in jobs, extreme poverty has also fallen to just 3.6% of the population, compared to 39% in Nigeria.

How could the largest economy in sub-Saharan Africa take a similar path?

One solution is likely to be imposed on him by default: reduce reliance on oil. Indonesian production has dropped roughly in half since the 1990s – but thanks to the headless population growth in Nigeria, even fewer barrels per person are now popping up than in Asia. The government’s reliance on Abuja’s oil revenues has collapsed since crude oil prices plummeted in 2014, with the bulk of government revenues coming from non-oil sources in 2015 for the first time since 1971.

Oil production

While production in Indonesia has declined faster relative to population, it has declined faster in Nigeria (blue)

Source: World Bank

Demographics should bring more wind to Nigeria’s back. One in eight people who joins the world’s working-age population in the next 30 years will be in Nigeria. This gives the country the potential for a labor-intensive boom along the lines of the Chinese model, if only it can create jobs. Nigeria is home to the fourth largest English-speaking population in the world and has strong ties to an often wealthy diaspora in the US and UK. Literacy is still far too low, but the Nigerian Education Index – a measure of average school age – is now higher than it was in China in 2001.

Manufacturing, a sector that is essential for economic development and which shrank to just 6.6% of the economy in 2010, has also shown surprising potential recently. The Dangote Group, founded by Aliko Dangote, the richest man in Africa, has built one of the largest cement plants in the world southwest of the capital Abuja and one of the largest sugar refineries in Lagos. The planned oil refinery on the other side of Lagos, which is also one of the largest in the world, is due to open this year.

Africa's richest man is building Nigeria's $ 15 billion oil refinery

Workers stroll through Dangote Industries Ltd.’s oil refining and fertilizer plant under construction. in the Ibeju Lekki district outside Lagos, Nigeria.

Photographer: Tom Saater / Bloomberg

Renewable energies can even turn energy from a handicap into an advantage. Nigeria’s utility power is notoriously poor as most of the industrial, commercial, and residential sectors rely on expensive diesel generators to keep the light at five to seven times the cost of utility power. Solar modules secured with batteries and small dams already offer cheaper, off-grid generation.

As the cost of renewable energy falls, the government has promised to connect 25 million people to photovoltaics by adding 5 million more households. According to the World Bank, Nigeria’s solar energy potential is similar to that of India, which has the fifth largest photovoltaic fleet in the world.

Making the most of these benefits in a country that has been linked to oil since its inception will not be easy. Oil has supported and undermined Nigeria at the same time since independence. Breaking that will be tough, especially as the current high prices ease the pressure on the kind of tough economic reforms that have been under way since the 2014 price drop. However, if it does, ending oil addiction in Nigeria could be the first step in realizing its potential.

This column does not necessarily reflect the views of the editors or of Bloomberg LP or its owners.

How to contact the author of this story:
David Fickling at [email protected]

To contact the editor responsible for this story:
Rachel Rosenthal at [email protected]

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