Oil boom in Nigeria and its consequences for the country s economic development

Term Paper, 2007

27 Pages, Grade: 1,3


Table of Contents

1. Oil wealth in Nigeria: blessing or curse?

2. The oil boom in Nigeria
2.1. Economic profile of Nigeria
2.2. The oil sector characteristics

3. Consequences of the oil boom
3.1. Economic consequences
3.2. Social consequences
3.3. Political consequences
3.4. Enviromental consequences

4. Summary and conclusions

Tables and figures


1. Oil wealth: blessing or curse?

The energy sector plays a vital role in Nigeria’s economy since the country is endowed with abundant energy resources, such as oil, gas, coal and water. Oil was discovered in 1958 and has since the early 1970s dominated the economy. Today, Nigeria is the largest oil producer in sub-Saharan Africa and since 1971 a member of OPEC, with an estimated production volume of 2.413 million barrel/day (2005).[1] This makes it the world's sixth largest producer. Since 1960, Nigeria has reaped an estimated US$600 billion in oil revenue.[2]

At the same time, Nigeria has the third highest number of poor people in the world, after China and India. With a per capita income of about US$ 350, around 70 million Nigerians are living on less than one US Dollar a day.[3] Low human development level, social conflicts and enviromental degradation are just a few problems which chararterize the current state of development in Nigeria. The question to be asked is why a country such as Nigeria which is highly endowded with one of the most valuable resources has faired disproportionally badly in economic and social terms? Why has so little been done in terms of human development? Besides, the Niger Delta region – the main producer of oil in Nigeria - though being the engine of Nigeria’s economy, also presents a paradox, because the vast oil revenues have barely touched the delta’s own pervasive local poverty.

Vast natural resource reserves have many implications. They may affect socio-economic and political developments of the country as well as have considerable enviromental implications. While natural resource reserves (oil and other mineral resources) constitute a potential blessing for the country that owns them, they turn out to be a curse in most cases.

Oil as a “blessing”

It might be assumed that a generous endowment of petroleum would be an unambiguous blessing for a developing country. The sale of this resource would seem to offer attractive opportunities to generate national income and raise living standards. As an internationally traded commodity that attracts foreign exchange, oil is a quick source of capital accumulation. Huge revenues are realized from the wide differential between unit production costs and economic rents, royalties, petroleum taxes, oil exports, etc.

Resource Curse

In practice, it has proven to be extremely difficult to convert natural resource wealth into broadbased improvements in economic performance and human development. In fact, heavy dependence on the export of natural resources has been shown to negatively affect a country's economic, social and political development. The empirical literature on the implications of abundant natural resources points out the following consequences for different spheres of a country’s development:

Economic implications:

- The absence of a downstream sector and consequent dependance on oil multinationals and their infrastructure.
- The agricultural sector is neglected, leading to an impoverishment of the rural population.
- Oil revenues tend to displace more stable and sustainable revenue flows. For example, as a result of huge oil revenue flows, countries tend to de-emphasize income taxes as a source of government revenue[4]. Besides, low tax ratios and high consumption expenditures (typically on imported goods) reinforce inflationary tendencies. With regard to expenditure, no use is made of openings for diversifying the economy, enhancing infrastructure or expanding education systems.[5]
- The problem of the “Dutch disease”[6] effect of mineral resource production: on the one hand, resource booms tend to cause real exchange rates to rise due to the large inflows of foreign exchange generated by the increased resource exports; on the other hand, labour and capital tend to migrate to the booming resource sector from other productive sectors.[7] Together, these two effects result in higher costs and reduced competitiveness for domestically produced goods and services, thereby reducing agricultural and manufacturing exports.
- Volatility of oil prices makes planning difficult, hampers growth, aggravates investment conditions, income distribution and educational attainment.[8]
- Foreign debt accumulation: after the oil boom in 1973, borrowing by many oil-exporting countries rose dramatically in order to cover shortfalls from expected oil revenues.[9]

Social and political implications:

- Oil dependence has been linked with unusually high poverty rates, poor health care, high rates of child mortality, reduced expenditures on social services, poor educational performance. Besides, mineral dependence has strongly been correlated with income inequality.[10]
- Natural resources tend to considerably increase the chances of civil conflicts in a country.[11]
- Strong tendency towards corruption; rent-seeking mentality on the part of governing elites.[12]
- Diminishing willingness of governments to pursue reforms.
- Environmental degradation, pollution of land and rivers tend to increase with oil production leading to loss of income-earning opportunities for the population; oil extraction activities can also induce large migrations into oil producing areas, placing strains on community infrastructure and threatening public health.

It has been argued that these negative outcomes are not inevitable since they can be avoided or at least minimized when good governance, public accountability and transparent resource management, willingness of countries to transform oil revenues into positive development outcomes are prevalent.

This paper examines the impacts of the oil wealth in Nigeria on different spheres – economic, social, political and enviromental, both in the regions where oil drilling and shipping take place (the southwestern oil producing areas of Rivers, Cross River, and Delta), and in the country as a whole. The analysis of the regional effects is of immense importance, due to the fact that the influences brought by the international oil companies and ensuing extraction activities have strikingly became evident in the oil-producing regions. Furthermore, some comparisons will be made with reference to the size of impacts on oil-producing provinces and on the country as a whole. Besides, the paper will find out why the oil boom in Nigeria did mostly brought negative consequences such as poverty, low level of human development, enviromental degradation, social and political conflicts, and has not turned into a “blessing” so far, and what policy and actions are to be implemented in order to make it otherwise.

2. The oil boom in Nigeria

2.1. Economic profile of Nigeria

Covering an area of 924 000 km2, Nigeria is located in the tropical zone of West Africa and shares borders with Niger, Chad, Cameroon, and Benin. Its natural resources include minerals, forest and water resources. Nigeria is characterised by a federal system with 36 state governments, 774 Local Government Areas and the federal capital territory of Abuja.[13]

Nigeria is the most populous country in Sub-Saharan Africa with about 137 million[14] people (2005), comprising nearly 25 % of Sub-Saharan Africa’s population, and has been growing at an annual rate of around 2.8% since 1991.[15] The age structure of the Nigerian population is typical of that of a developing country with a high proportion of the population belonging to the “dependant” ages: the share of the population under 15 years was estimated at 45.5 % of the total population in 2003.[16]

The composition of GDP shows that Nigeria’s economy heavily depends on the oil sector, with around 44.7% of GDP in 2003. Within the non-oil sector, agriculture plays a key role, with 26.4% of GDP in 2003. This sector accounts for almost 90% of non-oil foreign exchange earnings, and provides employment to about 63.5% of the total labor force. It is estimated that 70% of Nigeria’s poor live in rural areas and are primarily engaged in smallholder agriculture. Other sectors include the service sector with 24.2 % and the industrial sector with 4.7% of GDP in 2003.[17]

During the years 2000-2004, real GDP grew at an annual average rate of 4.8 %. Real output has been increasing continuously since 2000 but recorded particularly strong growth in 2003 at 10.9% due to a sharp increase in oil-GDP of 26.5%, which was mainly on account of higher production quota granted by OPEC. Within the non-oil sector, agriculture grew by an annual average rate of 4.4%, the industry sector by 6.7% and the services sector by 5.0% respectively during 2000-2004.[18]

2.2. The oil sector characteristics

The rise of Nigeria as a strategic player in the world of oil geopolitics has been dramatic and has occurred largely in the wake of the civil war that ended in 1970. In the late 1950s petroleum products were insignificant, amounting to less than 2% of total exports. Between 1960 and 1973 oil output exploded from just over 5 million to over 600 million barrels. Government oil-revenues in turn accelerated from 66 million naira in 1970 to over 10 billion in 1980.[19]

The energy reserves of Nigeria include 34 billion barrels of oil, 5.3 trillion cubic meters of gas, 639 million tons of coal and hydro resources. Daily crude oil and gas production were, respectively, 2.46 million barrels and 165 million cubic meters in 2004. At that rate, oil reserves would last 40 years and gas reserves 100 years.[20] (see fig. 1).

Being the largest industry as a percentage of GDP (44.7% in 2003), the oil sector contributed around 81.2% of total public revenue[21] (in the form of crude oil and gas exports, petroleum profits taxes and royalties). The energy sector is export-oriented: more than 90% of oil production and 50% of gas production are exported, with the oil sector constituting over 97% of total exports.[22] (see table 1).

The Niger Delta Region

The Niger Delta Region is the bedrock of Nigeria’s crude oil production. The region includes all nine oil-producing states in Nigeria (Abia, Akwa Ibom, Bayelsa, Cross River, Delta, Edo, Imo, Ondo and Rivers states) with a total land area of about 75,000 square kilometres ( which is equivalent to 7.5% of Nigeria’s land mass) and 185 local government areas.[23] Today, there are about 606 oil fields in the Niger Delta, of which 360 (60%) are onshore and 246 (40%) are off-shore. Delta, Rivers and Bayelsa States make up about 80% of the Niger Delta Region. Together, they produce about 75% of Nigeria’s oil and over 50% of federal revenue.[24] Apart from the oil sector, industrial development is virtually non-existent.

In the 1991 census, the total population of all nine states of the Niger Delta was 20.5 million. The projected total population for 2005 is 28.9 million, rising to 39.2 million by 2015 and 45.7 million by 2020. The states with the highest population sizes are Rivers, Delta, Akwa Ibom and Imo.[25] The main livelihood activities include fishing, subsistence agriculture and extraction of forest products. The region contains the world’s third largest wetland, with the most extensive freshwater swamp forest and rich biological diversity.

Ownership of oil resources and oil producers

In accordance with current legislation, all the oil reserves are state property. Oil multinationals have to form joint ventures with the Nigerian National Petroleum Corporation in connection with oil exploration, exploitation and production. Since the civil war, ownership of oil resources has been vested in the federal government (rather than in the state or community where it is located) and the revenue earned from them is pooled into a Federation Account for distribution among the constituent governments based on agreed revenue allocation formula. The current formula is: federal 43.0%, states 30.0%, local governments 20.0% and special fund 7.0%. In addition, oil-producing states are allocated an additional 13% which is shared on the basis of the volume of oil produced in each state.[26] However, a lack of transparency and mismanagement pervade both state and local government structures.

Since 1958, when the first oil well was drilled at Oloibiri, over 1,481 oil wells have sprung up, producing from about 159 oilfields. Today, there are more than 7,000 kilometres of pipelines and flow lines, 275 flow stations, ten gas plants, four refineries and 275 flow stations operated by 13 oil companies.[27] Among international oil companies, Shell, Chevron, Mobil, Elf, Agip and Texaco are the leading players. The Royal Dutch/ Shell Group is the largest multinational oil company active in Nigeria. Having been in the coutry for more than 50 years, Shell produces more than 50% of the Nigeria’s oil[28] and has over 100 oil fields at its disposal.[29] Mobil and Chevron are the Nigeria’s second and third largest oil producers. Thus, the three companies that account for more than 65% of Nigeria’s oil[30], operate in a highly integrated manner globally in both upstream and downstream operations.


[1] OPEC Annual Report 2005, p. 19.

[2] Wurthmann 2006, p. 2; p. 6.

[3] African Development Bank 2005, p. 1.

[4] ANEEJ 2004, p. 5-6.

[5] Wurthmann 2006, p. 5.

[6] Named after the negative effects as a result of the North Sea oil boom on industrial production in the Netherlands.

[7] Pegg 2003, p. 8.

[8] Garry 2003, p. 22.

[9] About further effects on external debt accumulation see Garry 2003, p. 22.

[10] Pegg 2003, p. 14.

[11] Collier and Hoeffler 2004.

[12] Subramanian and Sala-i-Martin 2003.

[13] African Development Fund, 2000, p. :3.

[14] U.S. Department of State 9/2006.

[15] African Development Bank 2005, p. 2.

[16] UN Database Population Division 2006.

[17] African Development Bank 2005, p. 3-4.

[18] African Development Bank 2005, p. 4-5.

[19] Watts 2006.

[20] African Development Bank 2005, p. 12.

[21] UNDP Nigeria 2006, p. 14.

[22] African Development Bank 2005.

[23] African Development Fund 2004.

[24] ANEEJ 2004, p. 7.

[25] UNDP Nigeria 2006.

[26] ANEEJ 2004, p. 7.

[27] UNDP Nigeria 2006.

[28] African Development Fund 2004.

[29] Kempf 2005.

[30] Obi 1997.

Excerpt out of 27 pages


Oil boom in Nigeria and its consequences for the country s economic development
University of Paderborn
Commonwealth of Nations
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ISBN (Book)
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Nigeria, Commonwealth, Nations
Quote paper
Irina Romanova (Author), 2007, Oil boom in Nigeria and its consequences for the country s economic development, Munich, GRIN Verlag, https://www.grin.com/document/67959


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