Can renewable energy break the curse of oil on the Nigerian economy

David Fickling

Oil can be both a blessing and a curse. In Nigeria, it was mostly different.
Just a decade after crude oil was first discovered in 1957, it had already shattered the young country in a civil war.

Production has never exceeded 2.3 million barrels per day hit in 1979, and will not in the foreseeable future.

Oil production in Nigeria was not enough to trigger an economic miracle in the Middle East style; now, with a population three times larger, it is utterly inadequate.

Imagine Nigeria where oil has never been discovered and it is not clear that its economic picture would be even worse now. Ghana and the Ivory Coast, neighbors less blessed with oil wealth, have made progress in recent years in terms of gross domestic product per capita.

Adjusted for inflation, that income measure has not grown in Nigeria since 2014. China, India and Vietnam have been poorer than oil has held the country in multiple ways.

The purchase of Nigerian crude oil abroad, backed by a quasi-currency wedge, raises the value of naira to a level at which other industries are struggling to compete.

The currency has devalued three times over the past year and was still overvalued by about 18%, the International Monetary Fund said in February ahead of the latest cut.

Private companies are struggling to hire skilled workers. More than half of the wage-paying jobs are done in the public sector, which traditionally generates as much as 80% of its revenue from crude oil. According to a 2015 World Bank report, educated Nigerians would often prefer to be unemployed and “wait” for a secure government job rather than work in the private sector. Many are still looking for education and jobs abroad, contributing to the brain drain that has created a diaspora of 17 million people, which is roughly one-twelfth of the country’s population.
The oil spill is also fueling corruption and unrest that have plagued the country for a long time. About $ 380 billion has been stolen or spent since independence, according to a 2006 estimate by the former head of the anti-corruption agency. Approximately 15% of oil production is stolen in so-called “bunkering” operations, creating such a large illegal industry that is tolerated to be a more or less accepted feature of the landscape. The low-level insurgency in the region of oil production from the Niger Delta has been going on since the mid-2000s. According to Transparency International’s Corruption Perceptions Index, Nigeria ranks 149 out of 180 countries.
It all stunted in the economy.
According to the World Bank, the manufacturing sector, which added $ 39 billion in 1981, reached only $ 43 billion in the four decades to 2019. South Korea increased 16 times in the same period, from 24 to 397 billion dollars. Agriculture still makes up almost a quarter of the economy, well above most other large emerging markets.
Despite a growing workforce that will contribute one in three new able-bodied people worldwide by the middle of this century, there are no jobs and unemployment is high. The share of the working-age population in labor actually fell between 2000 and 2019 to 51% from 58%, one of the sharpest declines anywhere. About 93% of employment is in the informal sector, and non-oil GDP growth consistently follows the oil industry.
Still, oil itself will struggle as demand begins to decline in the years to come. Nigeria’s production costs of about $ 30 per barrel are significantly higher than in the Middle East, fueled by the same corruption and overvalued values ​​plaguing the rest of the economy. Its crude oil, traditionally attractive due to high gasoline yields, may find life particularly difficult to take over in the coming decades as electric cars cause that pipe segment to decline the fastest.
It all sounds dark – but there are reasons for hope.
Consider another large, populous tropical oil exporter, ravaged by corruption and regional tensions – Indonesia, five decades ago. Oil rents, which made up Nigeria’s part of the economy in the 1970s, have fallen to almost negligible levels, turning the country into a net importer of crude oil.
It didn’t seem to hurt. Quite the opposite: GDP growth per capita was higher and far more stable, and is now moving at double the level in Nigeria. Partly thanks to a far higher share of the population in the workplace, extreme poverty has also fallen to just 3.6% of the population, compared to 39% in Nigeria.
How could sub-Saharan Africa’s largest economy follow a similar path?
One solution is likely to be imposed by default: Reduce oil dependence. Indonesia’s production has fallen by about half of the 1990s – but thanks to Nigeria’s steep population growth there, even fewer barrels are now leaving the country than in Asian counterparts. The Abuja government’s dependence on oil revenues has collapsed since crude oil prices fell in 2014, and most government revenue comes from non-oil sources in 2015 for the first time since 1971.
Demographics should provide more wind in the back of Nigeria. One in eight people who will join the global working age population in the next 30 years will be in Nigeria. This gives the country the potential to thrive on labor-intensive Chinese-style work, if only it can create jobs. Nigeria is home to the fourth largest population of the English-speaking area and has strong ties to the often rich diaspora in the US and the UK. Literacy is still too low, but Nigeria’s education index – a measure of average time spent in school – is now higher than China’s 2001.
The manufacturing industry, a sector essential for economic development that shrank to just 6.6% of the economy in 2010, has also shown surprising potential recently. The Dangote Group, founded by Africa’s richest man Aliko Dangote, 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. Its planned oil refinery on the other side of Lagos, also among the largest in the world, is scheduled to open this year.
Renewable energy can even turn energy into a disability advantage. Nigeria’s grid power is notorious because most of the industrial, commercial and residential sectors depend on expensive diesel generators to keep the lights five to seven times the price of electricity from the grid. Solar panels backed by batteries and small hydropower plants already provide cheaper off-grid production.
As the cost of renewables falls, the government has promised to connect 25 million people by adding photovoltaic energy to another 5 million homes. According to the World Bank, Nigeria’s solar potential is similar to the potential of India, which houses the world’s fifth largest fleet of photovoltaic generations.
It will not be easy to take full advantage of these benefits in a country that has been trapped in oil since its inception. At the same time, oil has maintained and undermined Nigeria since independence. Breaking this will be difficult, especially as current rising prices reduce pressure on the types of difficult economic reforms implemented since the fall in 2014 prices. If it succeeds, Nigeria ends
The country includes all “people of Nigerian descent” as part of the diaspora, so many of these people will not be Nigerian citizens.

Source: Bloomberg