The Impact of Oil Prices on the Nigerian Economy

Nigeria, or the “Giant of Africa,” has a peculiar make-up of its economy that is fantastically reliant on its colossal oil reserves. Its crude oil exports and production have been the cornerstones of its revenues, foreign exchange, and even sociopolitical engagements. Instability in world oil prices thus permeates a wide and calamitous impact on the entire spectrum of the Nigerian economy. Call of purpose demands proper consideration of immediate as well as indirect channels upon which price instability affects the livelihood of the country’s economy.

Direct Impacts: Government Exchequer and Flows of Foreign Exchange

The most apparent and largest impact of oil price volatility is heaped on the government revenue of Nigeria. The lion share of Nigeria’s federal budget is largely drawn from Nigeria’s oil revenue, primarily in the form of taxes, royalties, and revenues and joint venture revenues of NNPC and the IOCs.

1. Boom in Oil Prices: With higher global oil prices, Nigeria’s oil revenue is also boosted. This boom can result in:

-Increased Government Spending: With its pockets fuller, the government is able to take more money from its coffers to invest in infrastructure (road, power, health, education), social welfare programs, and debt servicing. The increased fiscal space can accelerate economic activity and living standards, provided the money is spent effectively and made more transparent.

-Increased Foreign Exchange Reserves: The major foreign exchange earning business for Nigeria is the export of petroleum products. Increased oil prices mean increased foreign exchange inflow, and therefore the foreign exchange reserves of the country are increased. This strengthens the Naira and makes imports cheaper, and therefore pressure on the exchange rate is decreased. An improved exchange rate is extremely important to businesses that use imported raw materials and machinery.

– Balance of Payments: An increase in the price of oil is sure to enhance the balance of payments since the price of oil export is greater than the price of oil import. This has the potential to enhance Nigeria’s foreign credit rating and trigger foreign capital.

2. Falling Oil Prices: In contrast, a fall in the international price of oil has catastrophic effects on the Nigerian economy:

-Financial Revenue Decline: Abrupt decline in petroleum prices leads to tremendous fall in financial revenue, and thus, formation of budget deficits. It typically involves retrenchment of budgets, delayed projects, and increased borrowing with a potential to add more national debt. Decreased government spending may lead to slowing economic growth and social services impact.

-Weak Foreign Exchange Reserves: Lowering oil proceeds from export decrease the quantum of foreign currency, and thus weak foreign exchange reserves. This is a cause of pressure on the Naira whose devaluation cannot be prevented. The strengthening Naira increases the cost of imports, thus inflation and injuring foreign input-exposed firms.

-Deterioration in Balance of Payments: Declining prices for oil can be preceded by a worsening balance of payments situation, which can increase the nation’s need for foreign finance and challenge the nation’s ability to meet its foreign debt obligations.

The inherent volatility of the price of oil in reaction to the forces of global supply and demand, shift in the strategic environment, and speculation created enormous skepticism about the Nigerian state’s role in economic management and budgeting.

Indirect Impacts: The Ripple Effect Across the Economy

Apart from direct effects on government treasury and foreign exchange, oil price has far-reaching indirect effects that cut across Nigerian economy sectors:

1. Impact on Inflation

-Increased Prices of Crude Oil: An increase in the prices of crude oil would translate into higher prices of petroleum products (kerosene, petrol, diesel). In a nation whose main source of power comes from generators and road transport, this would mean higher transport costs, higher business costs, thereby higher prices of goods and services, resulting in inflation.

– Decreasing Oil Prices: On the other hand, decreasing crude oil prices can decrease the price of refined petroleum products and thus decrease transport and business costs and therefore de-pressurize inflation. But if the Naira appreciates immensely due to falling oil revenues, the impact of falling crude oil prices on domestic inflation can be off-set by raising the cost of import.

Impact on the Non-Oil Sector

-Inflated Oil Prices: Although seeming to be good, high oil prices can be capable of stifling growth in the non-oil sector. Dominance of the oil sector can be capable of leading to a “Dutch Disease” where the lucrative oil sector can be capable of appreciating the exchange rate, hence increasing non-oil export prices and hence becoming less competitive in the international market. This is also poised to slow the growth of the manufacturing, farming, and other non-petroleum sectors. Furthermore, giving preferential attention to the petroleum money will precipitate neglect by the other industries required.

– Oil Price Decline: Oil price decline can put pressure on shifting the economy from oil. Oil revenue decline can force the government to focus its efforts on building the non-oil sector with a view of establishing alternative employment sources and income-generating opportunities. This can trigger investment in manufacturing, agriculture, technology, and services.

2. Employment Impact

-Increased Oil Prices: The higher oil prices can even lead to higher investment in the oil and gas sector with resultant creation of some direct employment. The capital-intensive character of the industry, however, implies that the created employment would not be significant enough to take care of the majority of out-of-work Nigerians. Dutch Disease impact would have adverse impacts on employment in the non-oil sector.

-A Decline in Oil Price: A decline in the price of oil can cause unemployment in the oil and gas industry when companies reduce investment and production. The following economic slowdown due to it can also cause further unemployment from other industries. The need for diversification of the economy can, however, generate new opportunities for future employment in the new areas of non-oil industry.

3. Impact on Investment:

-Increased Oil Prices: Foreign investment would be attracted to the oil and gas industry with high oil prices. Political instability problems, corruption, and regulatory risk, however, may discourage long-term investment. Besides, discrimination against the oil industry would lead to diversification of investment away from other productive industries.

– Slumping Oil Prices: Falling oil prices would be able to de-mobilize investment in the oil and gas industry, but especially marginal field development and exploration. It may, however, offer space for investment in the non-oil sector since the government is keen on economic diversification and draws in domestic and foreign capital into such industries.

4. Social Development Impact

-Increased Oil Prices: In theory, higher oil revenues should translate into more government expenditure on social development programs such as health care, education, and poverty-reduction efforts. But whether additional expenditure is worthwhile hinges on governance, transparency, and lack of corruption.

-Declined Oil Prices: Low oil revenues can translate into lower social expenditure, with higher likelihoods of poverty, worsening access to health care and education, and worsening social unrest.

Historical Evidence of Oil Price Impact

Nigeria’s economic history is full of examples that illustrate the immense impact of oil prices on their economic luck:

– 1970s Oil Boom: The boom in the oil industry in the 1970s came along with a government and economic spending boom which lasted for a decade in Nigeria. It also planted seeds of Dutch Disease, in which other economies were not prioritized as the intention was to concentrate on the oil economy alone while the country depended on importation alone.

– 1980s Oil Price Crash: The precipitous drop in oil price during the 1980s caused a catastrophic economic crisis in Nigeria, ranging from hyperinflation to currency devaluation and debt buildup. This subjected the Nigerian economy to oil price shocks and signaled the necessity for diversification.

-Volatility of Price in the 21st Century

The two decades of the 21st century were characterized by unprecedented volatility of price in oil with spikes in price followed by sharp falls in price, most characteristically through the 2008-2009 worldwide economic crisis and then the 2020 price crash due to the COVID-19 pandemic. The crises served only to expose the same aged problems of Nigeria failing to be able to handle its oil prosperity effectively and construct a more diversified and stable economy.

Policy Responses and Pursuit of Diversification

As a symbol of the risk associated with dependency on oil, past and present governments in Nigeria have all issued statements about the pursuit of economic diversification. Policy and program interventions towards the stimulation of growth in Nigeria’s non-oil sectors in agriculture, manufacturing, solid minerals, and services have been adopted as a step towards stimulating growth in these sectors. The adoption and effectiveness of theirs have been however limited by such factors as:

-Inconsistency in Policies: Government’s most policy changes do tend to produce uncertainty and discourage long-term investment in the non-oil sector.

-Shortages of Infrastructure: Power, transport infrastructure, and other infrastructure facilities shortages weaken competitiveness of non-oil firms.

-Poor Governance and Corruption: Corruption leads to diversion of resources from their most productive use and lowers efficiency of government programs.

-Limited Cheap Capital Availability: The majority of the small and medium-sized enterprises (SMEs) in the non-oil sectors have limited access to cheap capital.

-Inadequate Skills: Inadequate skilled human capital in significant non-oil sectors limits their growth prospects.

All of these challenges notwithstanding, there have also been some encouraging trends in recent times with more emphasis placed on such as information technology and agriculture. Even so, however, the economy continues to rely on the oil sector, and the uncertainty in oil prices still continues to be one of the drivers of what continues to depress the performance of Nigeria’s economy.

Global Trends and the Future of Oil Dependence

The global energy equation is being redefined at its core by the arrival of green energy and climate change. The transition is posing challenge and opportunity to Nigeria:

-Challenges: As the world shifts towards clean energy, future oil demand can fall, which can affect Nigeria’s source of main revenues. Nigeria must adjust to this new reality by diversifying its economy and investing in cleaner forms of energy.

-Opportunities: Nigeria is endowed with vast renewable energy resources like solar, wind, and hydro power. Investing in these can be the magic wand to open up new industries, jobs, and a cleaner future for the country’s energy sector.

Conclusion: Riding the Oil Price Rollercoaster

The impact of oil prices on the Nigerian economy cannot be evaded and is two-edged. Higher oil prices can be a short-term budget stimulus and accretive to foreign exchange reserves but induce Dutch Disease and more dependence on an unstable commodity, alternatively. Lower oil prices underscore the vulnerability of the Nigerian economy and call for fiscal consolidation and re-prioritizing diversification.

Lastly, the construction of a resilient and strong Nigerian economy requires collective and consistent action on de-oiling its economy. This involves the deployment of dedicated and consistent policies for developing its non-oil sector, investing in infrastructure and good governance, and the exploitation of opportunities generated by the shift in the global energy paradigm. It is only through actual diversification that Nigeria can insulate itself from world oil market volatility and realize its potential for economic growth. The exercise will be cumbersome and painstaking, but it is the cost of future economic prosperity and health. The ability of Nigerian policymakers to ride the rollercoaster of the price of oil and steer the economy towards diversification will make or break the fate of the nation.