Introduction
Nigeria became part of the league of oil producing nations in August 1956 when oil was discovered in commercial quantities. Today Nigeria ranks as Africa’s led oil and gas producer, and lies 6th in the world large oil exporters. Oil is a commodity with exceptional characteristics; these characteristics include its common natural heritage to a country as well as the motor to global industrialization, its constant depletion, price volatility, and the consequent boom cycles.
Oil’s further uniqueness is held by its high capital intensity and technological sophistication, its enclave nature, and its ability to generate exceptional levels of profits accruing to the state and private actors. Thus, oil has had huge impacts on the world civilization than any other natural resource in history. Without a doubt, this has made oil to be a decisive commodity in the definition of politics, rhetoric, and diplomacy of states.
Since the struck of oil in commercial quantities in Nigeria, it signaled the beginning of a profound transformation of Nigeria’s political and economical landscape. Since the 1970s, oil has accounted for 80% of the Nigerian government’s revenue and 95% of the country’s export earnings.
Thus, the petroleum sector in Nigeria has become the mainstay of the nation’s economy pivoting other sectors deriving about 20% of the gross domestic product. Therefore, the industry has become important to the development of the country, however, waste products, and pollutions are some of the negative externalities that hum oil exploration. The country’s economy slid into oil dependence bring with it various political, social, economical, environmental effects both positive and negative as the study will show (Dr. Goodluck, 2004).
Oil Dependence
According to Karl (2007), oil-led development means that the country is overwhelmingly dependent on revenues generated from the export of petroleum. The dependence is measured by the ratio of oil and gas exports to gross domestic product in a country sustained by oil rents. Dependence is also reflected in export profiles with oil in dependant countries generally taking up 60-95% of the country’s total export, as is the case in Nigeria. Any oil producing country can fall into oil dependence, and the country can be from any part of the world.
Oil dependent countries such as Nigeria suffer from what economists refer to as “resource curse,” which is simply a reverse association between growth and natural resources abundance especially for minerals and oil (Watts, 2004). With the variation in population size and composition, income level, different types government that have been power in Nigeria, the resource curse caused by oil dependence has been constant to the extent of being referred to as a constant motif of economic history.
A research on economic growth and development showed that country that were resource poor without oil experienced growth that was for times more rapid than those developing countries with oil such as Nigeria between 1970 to 1993. In addition, Nigeria’s dependence on oil export not only made it made perform worse than the resource poor counterparts; but also performed below expected standards considering its revenue earnings from oil.
Oil in Nigeria has affected the economy positively and negatively. On the negative side, oil windfalls have hurt other sectors of the economy by pushing up the real exchange rate of the country’s currency, and thus, making the other sectors covering exports noncompetitive, an event referred to as the Dutch disease (Karl, 2007).
The reduced competitiveness in manufacturing and agricultural sectors’ exports crowded out other productive sectors of the economy, making economical diversification rather difficult. Consequently, this has strengthened the dependency of oil, leading to an almost complete loss of competitiveness in the country’s economy (Watts, 2004).
Another down side brought about by oil dependency in Nigeria is long-term price deflation and price volatility on the international commodities, which in turn hinders economic development. Nigeria has experienced the price volatility getting worse since the 1970, with the oil prices getting twice as much as variable compared to other commodities.
Thus, the oil economy has faced more economic shocks, with attendant problems, and they are especially susceptible to acute boom-bust cycles (Karl, 2007). The volatile prices have exerted strong negative influences on the country’s budgetary discipline and the control of public finances plus state planning. This translates to a deviating economic plan from the set targets buy as much as 30%, likewise, volatility exerts a negative influence on the country’s investment, income distribution, and poverty alleviation.
The nature of the oil industry combined with the capital intensity fosters weak linkages to the broader economy and puts little effort in the creation of employment. Since the oil industry makes the world most capital-intensive industry, the industry creates few jobs per unit of capital invested, and the skills demanded in these jobs do not fit the profile of the unemployed. In addition, the oil sector presents limited opportunities for technology diffusion and infrastructure development. Thus, the country has not seen an emergency of downstream processing industries, and for the few instances they have developed, it has been at a competitive disadvantage (Karl, 2007).
The Nigerian serious scenario has shown petroleum to be one of the hardest resources to utilize well, as the country has been susceptible to policy failure. These has been blamed on the weakness of preexisting instructions in the areas oil for export lies, their frequently authoritarian characters, and an easy by which they can be transformed by an overwhelmingly powerful export sector.
Oil rents produce a rentier state, which lives from the profit of love rather than from the extractions of surpluses from its population. As characteristic of rentier states, Nigeria economic influence and political power are especially concentrated, and the line between public and private are very blurred, and rent seeking a strategy to creation of wealth extensive. All of these factors discussed impact negatively on the economy slowing growth, raises power barriers to the diversification away from oil dependence, and leads to unwanted developments described in line with the resource curse.
Poverty and Social Welfare of Oil-Led Developments
Nigeria just like other oil producing nations experiencing the resource curse has portrayed high levels of poverty rates, poor health care, high rates of child mortality, and poor educational performance. Given the revenues from oil productions, these results contradict the belief on what should happen within oil exporting countries.
Research has shown countries dependent on agricultural commodities tend to perform better in line with poverty alienation, on the other hand, countries with mineral dependence are generally associated to high levels of poverty, with oil dependency especially linked with low life expectancy and high rates of malnutrition (Karl, 2007).
Oil dependence carries an ambiguous relationship with poverty alleviation. This is related to the boom-bust cycle that comes along with dependence on the resource. That is, when the country begins oil exploitation for export, per capita income shots up during the ecstatic or the boom period, this is especially so in the initial stages in the production for export purpose. The oil revenue will initially transform a society, usually suddenly and dramatically.
There is a rise in employment, infrastructural developments, and a rapid growth in per capita income. For example, the Nigerian per capita oil export rocketed from $270 in 1970 to $2042 in 1980, consequently triggering an increase in economic activities. However, the country’s failure to diversify from oil dependence to other self-sustaining economical activities such as agriculture and labor intensive industry became a significant hindrance to pro-poor development (Eifert, 2003).
Over time as the oil boom pass out and the exporters are plagued by sudden declines in the per capita income. In Nigeria for example, the per capita oil exports fell from the 1980 high of $2042 to $407 by 1992, making drops in oil prices and increased populations. Surprisingly, though still oil being in plenty, majority of the people Nigeria and other oil exporting countries seemed to remain poor, or suffered from dramatic shifts in their welfares and ultimately living them in poverty.
Therefore, despite significant rises in per capita income, Nigeria and other like oil dependent countries have seen the living standards of their populations drop, and sometimes experiencing dramatic drops. Notably these boom-bust cycles in the oil industry affects even the world greatest and richest oil producers such as Saudi Arabia whose per capita income plunged from a high of $28,600 in 1981 to a low of $6,800 in 2001 (Eifert, 2003).
According to Eifert (2003), the per capita plunge in Nigeria was of catastrophic effect registering high levels of poverty with the per capita plunging to the 1960 levels. The effect were so severe that it looked as if 40 years of development had not taken place, with the disparity between oil wealth and poverty being notable.
Despite the over $300 billion in profit realized over 25 years, the number of households living under the United Nation’s absolute poverty line of $1 dollar a day grew from 27% to 66% which translated to catastrophic levels of poverty in the country. Income disparities were shocking with the rich compost of 10% controlling 40% of the country’s wealth while the poorest constituting 20% of the country shared just 4.4%.
However, oil dependency is associated with more than drastic shifts in levels of poverty and exceptionally low living standards for the populations in oil producing states. As is the case in Nigeria, oil dependency is also associated with high and unusual rates of child mortality, child malnutrition, low life expectancy, low life expectancy, poor health care, and reduced levels of expenditure in education.
Research has shown mortality and life expectancy rates are worse in countries that are mineral and oil dependant than is in non-oil and non-mineral countries, which are at the same income levels. The research simply phrased it that, the greater the dependency of a country on oil, the greater the likely hood of death at birth for the children born, they will likely experience poor health care, nutrition, and education, in comparison with their resource poor counterparts, and for those who survive at birth are likely to die sooner(Karl, 2007).
The high child mortality rate in Nigeria is may be associated with the fact that oil dependence has a negative correlation with health care expenditure. That is, the more a country is dependent on oil, the less they input on health care as a percentage of their gross domestic product (GDP).
For instance, in Nigeria the central government spends an average of about $2 per person per year on health care, which is way blow the recommended $34 per year for developing countries by the World Health Organization (WHO). Nevertheless, poor child welfare performance is due to high levels of malnutrition existing in the country. Taking into account the effects of the per capita income, for every 5-point rise in oil dependence, there matches a corresponding 1% rise in children percentage under the age of 5 years who are malnourished (Eifert, 2003).
Considering the available resources in the country, education performs worse than expected, and in turn affects any future prospects of growth. According to Karl (2007), countries that are dependent on natural resources, either inadvertently or deliberately, neglect the developing of their human capital, through the devotion of inadequate attention and expenditure to education.
Therefore, school enrollments tend to be lower than is the case in the non-resource-rich counterparts. Statistics taken from OPEC show only 57% of all children go to secondary school compared to 64% from the rest of the world as a whole. OPEC countries spend less than 4% of their GNP on education compared with 5% for the world as whole. The reason for poor educational investment in the oil dependant country is probably that the highly skilled labor can be imported or bought. Since the government is flooded with easy money, it tends to perceive more urgent needs than long-term investments in education that would result to long-term development benefits.
Oil Impacts on the Social Structure
Oil dependence distorts the social structure of a country due to the enormous capital and technological resources necessary in the exploitation of these resources. Foreign oil companies dominate the local scene affecting the development of the domestic entrepreneurial class. Although some of the foreign companies did form partnership with domestic elites, their hugely overwhelming economic presences and capital technological advantage means the domestic entrepreneurs have less opportunities of developing on their own. To be successful, domestic business are forced to forge close ties either to the state or to foreign capital, else they are marginalized (Karl, 2007).
These patterns are exaggerated in the oil-exporting countries because domestic economic groups focus on monopolies or oligopolies, dependent on oil rents and political powers arrangements that choose their arrangements through benefactions. Thus, the capital classes, which are splendidly rich, owe their success to a result of windfall and privileged links to the state. Since this may be largely due to independent of merit-based efforts made by citizens, the pattern of wealth creation encourages rent seeking as well as a tendency for people to live beyond their means (Eifert, 2003).
The middle and professional class in the country is shaped by a dependence on oil exports as the controller of the economy. The labor market in Nigeria tends to offer only three major types of jobs, that is, oil related, public sector jobs, and private services. This trend retards the growth of a large middle and professional class.
These groups when the crop up, they tend to differ from other middle and professional classes, since their job prospects and standards of living are directly linked to the fortunes of the major export industry, that is oil, hence, they are exceptionally vulnerable. Over the boom periods, jobs and wealth are readily available for the educated; however, during the bust cycles, the middle, and professional classes may have the education, but have fewer job opportunities and little prospects for wealth. These results to intense social and generational tension, especially in urban areas, as population and the number of the educated grow and employment dwindles (Karl, 2007).
The formation of broad based urban working class is compromised. The oil industry relatively employs few workers and they are required to have extremely high skill levels. With the rest of the labor market distorted, dependency on oil fosters a type of labor aristocracy separate from most of the workforce. This desperation is notable in Nigeria especially due to the high rates of rural urban migration, which is among the fastest in the world.
The poor in the country not only experience the normal economical pulls to the cities, but also oil rents build embroidered expectations of new opportunities. The property owners in the rural areas are experiencing labor shortages due to the huge number of migrations to the cities; on the other hand, cities are filled with relatively small middle and professional class compared to a vast majority of under skilled and underemployed workers (Watts, 2004).
From the Nigerian case study, one can deduct oil creates an illusion since more people become more wealth without effort, which simply translates to undermined work ethics and negative attitudes towards certain forms of work, especially manual labor, prevail in oil exporting countries. This has resulted into lower levels of productivity than those found in comparable resource-poor states.
People that have experienced sudden influx in income they did not have to work hard to get, tend to lack a fiscal and financial discipline to work and keep such windfalls. Such nationalities tend to be accustomed to high salaries and little work; hence, employers in many of the oil exporting countries have reported to prefer foreign workers who would work harder and for less money.
According to Eifert (2003), since the West dominates the oil, industry consumption, and production, then they tend to transmit a western form of modernity based on the market rather than on the indigenous cultures. Thus, compared to her non-oil producing neighbors, Nigeria experienced the most accelerated westernization and the countries is more exposed to western influences compared to non-oil producing countries.
As a positive effect, part of the country is linked together various forms of modernization such as technocrats, public sector employees, and education elites. However, inequalities arising from oil led development appear to be of the same level as those in the non-oil producing states of a similar income, people in Nigeria and other oil exporting states experience the inequalities rather differently since they already perceive their nations to be wealth.
The Rent State
Since in Nigeria the revenue base of the state is the state, oil rents affects capacities of the state. Dependency on oil distorts the institutional development of the state because oil rents tend to weaken agencies of restraints. In Nigeria for instance the intense population pressure on scarce resources, reduce the tolerance for inefficiency and predation, while on the other hand, the economy cannot support extensive protection or an over expenditure bureaucracy. Dependency on oil encourages the state to expand into new arenas while doing so weakens opportunities to strengthen administrative capacities, especially for non-oil based tax systems, merit based civil services, and weakens the rule of law’s fundamental elements for creating an effective state (Karl, 2007).
Oil rents have had a pernicious effect on the quality of administrative institution affecting the quality of governance in the process. As an oil state, Nigeria does not have to extract majority of its resources from its own population, it did not build an institutional capacity that would be required of such an extraction. Thus, the country is denied the information generated by the robust tax bureaucracy, and as well denied incentives for innovation within the civil service that stems from scarcity.
Oil rents tend to be undermining even where previously state capacities were embedded in tax authorities. Most of the tax authorities were disbanded with the discovery of oil since they appeared to be no longer necessary. In addition, windfall gains arising from oil encourage rent-seeking behavior, turning the state into some kind of ‘horny pot’, from which competing interests try to capture a significant portion of resource rents by capturing portions of the state (Eifert, 2003).
Oil rent create vicious cycle results whereby all actors try to gain parts of the bureaucracy while the government in turn rewards its supporters through channeling favors their way. However, this is translated to mean the public sector lacks corporate coherence and the necessary authority to excise effective public policy.
In addition, the state is weak and the target of capture is overloaded, oil revenues are used as catalysts for a chronic tendency of the state to being over overextended, over-centralized, and captured by special interests. This is evident in the accelerated and the large growth of the public sector; an over extended public expenditure, and extended periods of protection for import competing sectors. Notably, without the institutional and administrative capacity to cope with the enhanced state roles, the overextension turns to be a formula for ineffectiveness.
Pollution, Social and Environmental Impacts
Under the Nigerian law section 41 of the Federal Environmental Protection Agency Act Cap.F10 Laws of the Federation (2002), defines pollution as a “Man-made or man aided alterations of chemical, physical or biological quality of the environment to the extent that is detrimental to that environment or beyond acceptable limits.”
Thus, in reference to oil pollution, it can be said oil pollution occurs when the above mentioned happens as a result or in the course of extraction, storage or during transportation of petroleum oil. It can be seen as the release of contaminants or pollutants associated with the extraction of crude oil in the environment.
The main sources of pollution in the Ogoni area Nigeria have been identified to be oil spills, gas flares, and effluent and waste discharges. In Ogoni between 1993 and mid 2007, there has been recorded 35 incidences of oil spills, this cases do not include the unnoticed slicks and unreported cases of oil spills. The flaring of natural or associated gases is done as a byproduct of drilling of crude oil from reservoirs in which gas and oil are mixed.
This process results in the pollution of the area as the flares involve the release of dangerous hydrocarbon mostly methane and others, which include sulphurous oxides and the oxides of Nitrogen into the atmosphere. The results of this unchecked emissions of gasses is the a release of 35 million tons of carbon dioxide and 12 million of methane, this translate to Nigeria’s oil field contributing more to global warming than the rest of the world together (Watts, 2004).
Localities where oil is actually located, compared to the rest of the country tend to suffer lower economic growth, lower per capita incomes, greater dislocations, higher environmental and health hazards, and higher levels of conflict. Economically, petroleum fails to offer long-term sustainable employment alternatives at the local levels and has tendencies of disrupting preexisting patterns of production. The hope of new jobs resulting from oil exploitation attracted a large number of migrants at the exploitation area; this consequently led to an inflation of local prices of goods and services bring about a significant increase in the cost of living even for those who are not in with the benefits of the oil project (Eifert, 2003).
The discovery of oil in Nigeria triggered massive changes beginning with the influx of workers seeking employment on the construction of roads, pipelines, and other infrastructures necessitated by the discovery of oil. However, these increased employment opportunities did not last; they began to decline dramatically when infrastructural constructions were complete. In addition, the problems are compounded by the expropriation of arable land for resource extraction and by environmental damage; this brings a shift away from subsistence agriculture. What resulted was instability in employment, income, and food instability stressing the local economy (Karl, 2007).
After the construction phase was done, there were the results of an oil boom, which included higher than average local inflation, increased migration, chronic underemployment, and food shortages. Other negative results included increased prostitution, autoimmune diseases syndromes (AIDS), and an increase in crime rate. Native residences that were not able to integrate with the benefits of the oil extraction clashed with the immigrants as they saw their way of life disrupted.
Oil and Civil War
Normally, natural resources and war are linked, however, oil plays a special role in this relationship. Research by economists have shown that high level of primary commodities export dependence is associated with civil war, and oil dependence is even more likely to be associated with conflict compared to any other commodity.
There has been more civil war in countries that are dependent on oil than in their resource-poor counter parts. Oil produces such high rents, that it can be the main impetus for going to war, either directly or indirectly. As well, oil revenues may be the catalysts for a conflict that might not have otherwise have happened (Watts, 2004).
In Nigeria there has been out breaks of civil conflict resulting from long standing grievances over land expropriation, environmental damage, corruption, and the distribution of resources. This is especially so during the bust cycles, as economical opportunities dry up, the longest civil war in Nigeria was between 1980 and 1984.
Secessionist wars have also be a thing in Nigeria as promises of oil wealth appears to make viable a secession that seem possible in poorly endowed area, with majority of the adverse effect affecting the local area. For example, the Nigerian government made a fiscal decision that treated oil to be a centralized rather than a regional asset, made fights over oil revenues to become the reason behind conflicts in the society.
Conclusion
Oil dependant countries have demonstrated huge connections between economic performances, poverty, injustices, bad governance, and conflict. This is a as a result of the structures and incentives created by oil dependency. Among the possible solutions put forward to deal with this paradox of plenty include, demands for revenue transparency by the government and oil companies, creation of transparent management schemes, and provision of stabilization funds to moderate price shocks in the local economy. Addition solutions are reformation of tax and civil services in the country, and a democratization and decentralization of both the industry and exporting countries. If these reforms are not put in place, the consequences of oil dependence will continue to be diverse (Eifert, 2003).
References
Dr.Goodluck, E.Jonathan: 2004: Niger Delta: Challenge of Sustainable Development p28.
Eifert, B., Gelb, A., & Tallroth, N. B. (2003). Managing oil wealth. Finance and Development, 40(1), 40-45.
Karl, T. L. (2007). Oil-led development: social, political, and economic consequences. Encyclopedia of energy, 4, 661-672.
Section 41 of the Federal Environmental Protection Agency Act Cap.F10 Laws of the Federation 2002.
Watts, M. (2004). Resource curse? Governmentality, oil and power in the Niger Delta, Nigeria. Geopolitics, 9(1), 50-80.