'Oil Curse’: Nigeria Has No viable Future As A Petrostate

 By Olu Fasan

The latest foreign trade data show that Nigeria recorded a trade balance of N6.52 trillion in the first quarter of this year, according to the National Bureau of Statistics, NBS. Expectedly, President Bola Tinubu seized on the figure as evidence that his economic reform is working. Given that the positive trade balance significantly reversed the negative balance of minus N1.4 trillion recorded in the fourth quarter of last year, one should cut Tinubu a slack. After all, a trade surplus, any trade surplus, is better than a trade deficit! 

However, dig deeper, there’s little to gloat about: for nothing has changed in the structure of Nigeria’s export trade. Crude oil exports, at N15.5 trillion, account for 80.8 per cent of the total exports. If you add other petroleum oil products, including natural gas, at N1.9 trillion or 9.92 per cent, oil and gas represent 91 per cent of Nigeria’s total exports. Thus, non-oil exports, at N1.8 trillion, account for a minuscule nine per cent of Nigeria’s total exports. Surely, then, Tinubu’s economic reform has done nothing to change the structure of Nigeria’s export trade, which remains almost totally dominated by crude oil and natural gas. 

That said, there’s one significant way in which Tinubu’s economic reform contributed to the admittedly huge trade surplus: the massive devaluation of the naira. One effect of naira’s devaluation is that the foreign exchange, usually in dollars, that Nigeria earns from exports translates into large amounts in naira. Another effect of a devalued currency is that it makes a country’s export products cheaper, which means foreigners could buy more of them. 

Take those two effects together, it is thus not surprising that as the value of the naira crashed from N460/$1 in March 2023 to N907/$1 in December 2023 and then to N1,309/$1 in March 2024, the value of Nigeria’s exports rose correspondingly. For instance, the total exports of N19.1 trillion in Quarter 1 of 2024 reflected a 51 per cent increase over the total exports of N12.7 trillion in Quarter 4 of 2023 and a 195.5 per cent rise over the total exports of N6.5 trillion in Quarter 1 of 2023. Put simply, the steep devaluation of the naira has significantly increased the value of Nigerian exports in naira terms. 

But here’s the critical question: Given the negative effects of currency devaluation, such as imported inflation, is increased exports of crude produce and raw materials, with associated increase in naira earnings, a good trade-off for a weak currency? The answer is no. 

Adam Smith famously said in The Wealth of Nations: “No nation is ever rich by the exploitation of the crude produce of the soil but the exportation of manufactures and services.”  And he is right. Because crude produce and raw materials are notoriously cheap. By contrast, finished products are far more expensive because of value addition, and therefore earn a country a lot more foreign exchange than raw materials. Thus, as Adam Smith rightly said, no nation can ever be rich by exporting predominantly crude produce and raw materials.

Unfortunately, Nigeria is stuck in the rut as an exporter of predominantly crude oil and raw materials. As noted earlier, crude oil and natural gas accounted for 91 per cent of Nigeria’s total exports in Quarter 1 of this year. And out of the remaining nine per cent accounted for by non-oil exports, only 1.4 per cent or N269bn were manufactured goods. The rest was dominated by unprocessed agricultural goods at 5.4 per cent or N1 trillion and raw materials goods at 1.84 per cent or N352.8bn. So, Nigeria is not turning its natural resources into finished products before trading them onwards. That can never ever make it a rich nation! 

But, let’s face it, being a petrostate poses particular monumental risks for Nigeria. Two stand out. First, Nigeria faces an utterly bleak economic future if it remains solely dependent on crude oil exports. Second, by entrenching itself as a hydrocarbon economy, Nigeria is turning its back on the next energy transition, with dire consequences. The latter is a subject for another column. The focus here is the economic catastrophe of Nigeria’s oil dependency.

Recently, the Financial Times produced a film titled: “Can Nigeria end the ‘oil curse’?” Interviewed in the film, former President Obasanjo said: “We now live on oil, sleep on oil, eat on oil, which is unfortunate”. Yet, that was not always the case. Before and up to the first decade of Nigeria’s independence, the country had a diversified export base. But that changed since 1974 when oil dominated Nigeria’s exports, accounting for over 90 per cent. Three factors have been blamed for the seismic shift in the structure of Nigeria’s export trade.

The first is called “Dutch Disease”, which arose because as oil money flowed into Nigeria, the naira became artificially overvalued, making producing and exporting goods unattractive as exports were extremely expensive. At the same time, naira’s overvaluation made imports cheaper and, thus, shifted the country’s focus away from producing and exporting goods to simply importing them. The second is called “resource curse”, meaning that oil wealth bred massive corruption instead of being used to develop Nigeria’s industrial capacity. 

Oxfam, the international NGO, estimates that, between 1960 and 2005, about $20 trillion was stolen from the Nigerian treasury by public officials. The third factor is that an oil-based economy has created a huge population of rent-seekers and arbitragers, who are simply buying and selling crude and refined products, with few people engaging in productive activities that will grow the economy, create jobs and generate tax revenues for the country.

But the chickens have come home to roost. First, Nigeria cannot even produce enough crude to meet its OPEC quota, thanks to infrastructural decay, pipeline vandalism and massive oil theft, with over 80 per cent of crude production being stolen. With about 1.5 million barrels of oil a day, Nigeria is the 15th top oil producers in the world. Compare Nigeria’s 1.5mb/d with United States’ 29.9 mb/d and Saudi Arabia’s 11.1mb/d. As David Pilling, FT’s Africa Editor, said in the film, “2 million barrels of oil is not enough to make 200m people rich.” Think about it: can even 3 mb/d enrich a country with such an ever-growing population?

Yet, a far more existential threat is global peak oil demand as the world turns to renewables and electrification. Indeed, according to BP in 2023, demand for crude oil may have peaked, while Goldman Sachs believes the peak is still a decade away. Whatever the accurate timing of the global peak oil demand, truth is, unless Nigeria diversifies its export base away from crude-oil dependency, it faces a dire economic future!

*Dr. Fasan is a commentator on public issues