The Dutch Disease of Nigeria’s Oil Sector

Oil

Shell-BP oil drilling training rig, Port Harcourt, Nigeria, 1959. ELISOFON ELIOT / SMITHSONIAN LAB. Collage by Dami Mojid / THE REPUBLIC.

THE MINISTRY OF BUSINESS x THE ECONOMY

The Dutch Disease of Nigeria’s Oil Sector

While Nigeria has experienced oil-fuelled growth, over-reliance on the sector and a lack of diversification have kept the economy shackled, raising critical questions about Nigeria’s ability to move beyond resource dependence.
Oil

Shell-BP oil drilling training rig, Port Harcourt, Nigeria, 1959. ELISOFON ELIOT / SMITHSONIAN LAB. Collage by Dami Mojid / THE REPUBLIC.

THE MINISTRY OF BUSINESS X THE ECONOMY

The Dutch Disease of Nigeria’s Oil Sector

While Nigeria has experienced oil-fuelled growth, over-reliance on the sector and a lack of diversification have kept the economy shackled, raising critical questions about Nigeria’s ability to move beyond resource dependence.

On 29 May 2023, during his inaugural speech, President Bola Ahmed Tinubu announced the immediate removal of the fuel subsidy. Following this announcement, prices of petroleum products, especially fuel, skyrocketed. Fuel prices rose from ₦185 per litre to ₦557 per litre, and in October 2024, fuel reached an all-time high with prices ranging from ₦998 to ₦1,500 per litre, depending on the region. The removal of fuel subsidy, apart from increasing living costs, reveals a deeper problem—Nigeria’s over-dependence on its oil sector.

Eliminating fuel subsidies is expected to serve as a safety net for the government in times of crises, ensure the reallocation of resources to more productive sectors of the economy, and encourage economic diversification. Apart from economic reform, the world is moving away from fossil fuels and advocating for low-carbon emission energy sources to protect the environment. The International Energy Agency predicts that around 2030, the world will reach a point at which oil demand and production will go into terminal decline. Hence, there is an urgent need to diversify the economy.

However, the challenges Nigeria faces in achieving true economic reform and diversification are rooted in a history of oil dependence that stretches back over half a century. As global conversations increasingly call for a just energy transition coupled with the national clamour for economic growth and development, Nigeria’s ability to make a change is limited by the enduring effects of what is often referred to as ‘the Dutch disease’.

THE DUTCH DISEASE IN NIGERIA

The Dutch disease was first used by economists to describe the economic situation that followed the discovery of natural gas reserves in the Netherlands in the 1960s. The Dutch reaped substantial benefits from gas exports, but this newly found wealth caused unintended consequences for other sectors of the economy. Industries, other than the natural gas sector, declined. Thereby, leaving the economy overly reliant on natural gas. Also, the influx of foreign currency through the sale of natural gas caused the Dutch currency (the Dutch guilder) to appreciate—making other exports less competitive and leading to a decline in manufacturing and agriculture. Hence, the Dutch disease describes an economic phenomenon where a country diverts all focus to the rapid development of a specific high-income and lucrative industry while neglecting other sectors of the economy.

Nigeria’s experience with the oil industry is a prototype of the Dutch Disease. Nigeria’s economy began to exhibit similar characteristics following the discovery of oil in 1956. Before the discovery of oil, agriculture sustained the economy. Farm products were traded among the different regions of the country and cash crops were exported. Even after the discovery of oil, from 1960 to 1969, agriculture continued to sustain the economy, as the sector accounted for an average of 57 per cent of gross domestic product (GDP) and generated 64.5 per cent of export earnings.

Yet, Nigeria soon realized that in comparison with members of the Organization of the Petroleum Exporting Countries (OPEC), it was not fully reaping all benefits from its oil industry. Green Nwankwo, a pioneering banking and finance scholar, in his 1982 economic and financial review, ‘Nigeria and OPEC: to be or not to be?’, noted that it became abundantly evident to the federal government that Nigeria was losing revenue from its petroleum tax administration and that joining OPEC would correct the situation as Nigeria could learn from the experiences of older OPEC members. Thus, Nigeria joined OPEC in July 1971.

Fortunately, Nigeria’s admission into OPEC coincided with the oil boom of the early 1970s which led to global oil price appreciation. During this period, the increased revenue from oil made it all too easy to neglect other sectors. The Nigerian civil war of 1967-1970 also contributed to the decline of agriculture and the move towards oil, as the war severely affected food production and agricultural exports. The revenue from the oil sector was nonetheless sufficient to sustain the economy during that period.

The newfound oil wealth caused a significant shift in economic focus, as agriculture and other non-oil sectors were neglected in favour of the lucrative oil industry. The influx of oil revenue led to currency appreciation. The official exchange rate in 1973 was N0.62 to $1, making agricultural exports more expensive in the global market and less competitive. This reliance on oil revenue and the corresponding decline in other productive sectors resulted in a structural imbalance in the economy, laying the foundation for the Dutch disease that continues to affect Nigeria to this day.

NIGERIA’S NATIONAL OIL COMPANY

In the 1970s, Nigeria’s newly found wealth was so large, that the government found it difficult to manage. By 1976, the country’s GDP was $36.31 billion compared to the $5.2 billion in 1966. With the government’s increased participation in the oil industry as a result of joining OPEC and the increasing stream of revenue generation, it became necessary to have an agency to manage government affairs in the sector. Consequently, the Nigeria National Oil Company (NNOC) was formed in 1971. The NNOC was tasked with managing domestic refineries and ensuring price uniformity across the national market. In April 1977, under the Nigerian National Petroleum Corporation (NNPC) Act, the NNOC was merged with the Ministry of Petroleum Resources to establish NNPC.

NNPC was created with commercial and regulatory responsibilities. It was involved in the entire petroleum value chain, from exploration and production to refining and distribution. As the statutory corporation through which the government participates in the oil and gas sector, its primary role was to implement government policies and oversee the regulation of the sector, alongside managing upstream, midstream, and downstream activities. Importantly, NNPC oversaw the building, management and operations of refineries, and attracting investments into the sector. NNPC also remits to the Nigerian government.

NNPC, to properly carry out its functions, entered into joint venture partnerships with international oil companies (IOCs) that were already operating in the Nigerian market. The IOCs served as operators, implementing the collective will of the joint venture and responsible for the day-to-day management of the operations, with NNPC as the non-operator. Thus, the Nigerian government through NNPC holds 60 per cent participatory interest in all oil and gas concessions except within Shell where it holds 55 per cent. With the commercialization of NNPC in 2021, the existing contracts will be analyzed, evaluated, and transferred to NNPC Limited (NNPCL).

While NNPC’s role in overseeing the oil sector was crucial, its focus on short-term revenue generation rather than sustainable development hindered the country’s ability to capitalize on its vast oil reserves. Before the removal of fuel subsidies, it attributed financing subsidy as the cause of its failure to remit profits to the federal government. In a 2022 tax dialogue organized by Kaduna State, the former governor of the state, Nasir El Rufa’i stated that ‘NNPC has not brought ₦20,000 to the federation account. We are living on taxes. It is PPTs (petroleum profit tax), royalties, income tax, and VAT that are keeping the country going because NNPC claims that subsidy has taken all the oil revenue.’

The lack of transparency, poor investment in infrastructure, lack of profits, and missed opportunities for refining contributed to Nigeria’s failure to excel at value addition. Lilian Adat and Izuchukwu Gideon Okpara, legal practitioners at Alliance Law Firm, are of the opinion that political influence and interference in the activities of the corporation have hampered its growth into a world-class oil company like its contemporaries globally.

It is however important to note that with the removal of fuel subsidies and commercialization of NNPC as NNPCL, the industry is on the path to success. After the removal of fuel subsidy, it remitted ₦4.5 trillion in October 2023 to the federal government.

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NIGERIA’S FAILURE AT VALUE ADDITION

If Nigeria had succeeded in adding value to its crude oil, by transforming it from raw material into final consumables such as diesel, premium motor spirit (fuel) and kerosene, we would be singing a different song today. For instance, Singapore, a country with no natural oil reserves was able to become one of the world’s largest exporters of petroleum products through refining. This success is owed to its strategic location, sound financial system, excellent infrastructure, transparent legal system and skilled workforce. 

In 2023, Singapore’s oil refinery throughput was 857,000 barrels per day. This contributed 5 per cent to the country’s GDP, while in the same year, Nigeria’s entire oil industry contributed approximately 5.5 per cent to the country’s GDP. However, it accounted for the majority of Nigeria’s exports at 92 per cent. 

Nigeria’s struggle to maintain effective refineries stems largely from a lack of clear vision as refineries were not developed with the long-term goal of boosting the economy. Nigeria’s first refinery was not built by Nigeria but rather by Shell-BP petroleum development company. Shell BP was able to capitalize on Nigeria’s newly found independence, the growing population, and increased demand for petroleum products—to propose the building of a refinery in Port Harcourt, which was commissioned in 1965. 

The federal government held 50 per cent shares in the refinery at its inception. By 1969, the National Petroleum Act, which vested all petroleum resources in the federal government, increased the shareholding to 60 per cent. Following the formation of NNPC in 1977, the federal government in 1978 acquired the remaining 40 per cent of shares in the refinery under an outright buyout and renamed it NNPC Refinery, Port Harcourt. 

By the mid-1970s, projections by the economic surveillance unit of the NNOC indicated that based on the economic growth rate, NNPC refinery’s supply of petroleum products would not meet growing demand. One factor attributed to the increased demand was the government subsidy which began in 1977 to mitigate the impact of the oil price shock of 1973. As a result, between 1978 and 1989, three other refineries were commissioned to meet demand—another in Port Harcourt, one in Warri and Kaduna. 

With the establishment of another refinery in Port Harcourt in 1985, the Nigerian government began an initiative to export refined petroleum products. This was nonetheless short-lived. By 1991, the decreasing production at the Warri and Kaduna refineries coupled with naturally increasing domestic demand for refined petroleum stopped exports from the new Port Harcourt refinery. Since then, the Nigerian refining industry has been unable to produce sufficient levels of refined petroleum to meet domestic demand. Anthony Ogbuigwe, former group executive director of NNPC, suggested that pipeline vandalism and oil theft have also remained major obstacles to oil refining. Despite the partial operation of refining activities, Nigeria has since become a net importer of refined petroleum products. 

REDUCING THE COST OF LIVING AND PRODUCTION

Nigeria’s inability to cater to domestic needs led to the continued import of refined products leading to dwindling government revenue and in turn increasing economic hardship. To lessen the costs of fuel for citizens, the Olusegun Obasanjo military regime institutionalized subsidies through the Price Control Act of 1977. This created a fixed price range for some refined oil products such as fuel and made it illegal to sell above the regulated price. While the subsidy regime was conceived for the economic welfare of Nigerians, its administration has been fraught with various challenges, particularly mismanagement and corruption. 

As a result, conversations on subsidy removal were initiated. The first holistic attempt to remove fuel subsidies was in 2012 during the Jonathan administration. The announcement of subsidy removal on 1 January 2012, caused fuel prices to skyrocket from 65 per litre to 141 per litre. This caused transportation and food prices to double, sparking nationwide protests and strikes by trade unions to which President Jonathan responded to the pressure by partially reinstating the fuel subsidy. 

Despite its heavy politicization, the subsidy regime has long been unsustainable and riddled with fraud but continued as an onslaught of the Dutch disease, as any fluctuations in the oil sector had a knock-on effect on the entire economy. The BBC in 2012, reported on a leaked 205-page parliamentary report that uncovered a long list of alleged wrongdoings involving oil retailers, Nigeria’s Oil Management Company, and NNPC—while also indicting government officials as personally benefiting from the subsidy fund. Further, in 2015, President Muhammadu Buhari referred to the subsidy as fraud and non-existent implying that the subsidy allocation was being embezzled before benefiting the end consumers. Recently, in 2023, Kayode Fayemi, the former governor of Ekiti State, in a keynote address at a national dialogue mentioned that the 2012 protest against subsidy removal was merely political. He declared that most politicians then knew that the subsidy was unsustainable. 

On an annual basis, a substantial portion of Nigeria’s national inflow was committed to funding the subsidy scheme. In 2022, the National Assembly approved 4 trillion to finance fuel subsidies which amounted to about 20 per cent of the budget for the year. Zainab Ahmed, the former Minister of Finance, Budget and National Planning stated in 2023 that the government has been borrowing to fund fuel subsidy. All these show that Nigeria could not maintain the subsidy regime. 

While the Tinubu administration finally did away with the fuel subsidy, the anticipated fear associated with its removal came to pass. Following the removal, there was a surge in transportation fares, a hike in food prices, as well as a general increase in the cost of living. Peterson Ozili, an economist, in his 2023 article, ‘Implications of Fuel Subsidy Removal on the Nigerian Economy’ , highlighted the negative impacts of fuel subsidies including an increase in prices of petroleum products, inflation, poverty, and loss of jobs in the informal sector. 

BBC reported that, ‘Nigerians see cheap oil as the only benefit they get from their country’s oil wealth.’ Thus, fuel subsidy is a symptom of the Dutch disease being present in the country. The clamour for the subsidy and the conflict over its removal depict the low purchasing power of Nigerians caused by the government’s inability to grow other sectors of the economy. 

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THE NIGERIAN GOVERNMENT’S DIVERSIFICATION DRIVE

As refineries were being built and the subsidy regime implemented, the Nigerian government was also enacting policies to cushion the economic hardship and deterioration caused by the over-reliance on oil. However, policies aimed at economic revitalization concentrated heavily on the agricultural sector rather than full-scale diversification. 

In 1976, the Murtala Mohammed/Obasanjo regime embarked on Operation Feed the Nation, an agricultural and rural development initiative aimed at maximizing national welfare through increased local food production and countering poor nutrition. Despite its lofty ideals, the programme failed to effectively cater to the right category of (occupational) farmers. Loans were given to non-farmers, and the enabling environment for addressing the objectives of the programme took flight. 

In a similar attempt to boost local food production, the Shehu Shagari administration in 1980 embarked upon the Green Revolution. The programme failed to meet its goal of boosting food supply due to significant delays in the implementation of many of the projects. Additionally, there was a lack of monitoring and evaluation for the projects, despite the substantial financial investments made. 

The Structural Adjustment Program (SAP) implemented in 1986, led to significant reforms in Nigeria’s foreign exchange system, trade policies and business regulations. Despite these reforms, real per capita consumption and income only slightly exceeded the pre-oil boom levels of the early 1970s. The adoption of the SAP was triggered by a collapse in oil prices. This decline in oil revenues significantly affected Nigeria’s purchasing power, but as over 90 per cent of Nigeria’s export earnings were from oil, growth in agriculture and manufacturing were insufficient to offset the impact of the oil crash. 

In 2009, the Umaru Musa Yar’Adua administration launched Vision 20:2020, an ambitious economic strategy to develop Nigeria’s economy into one of the top 20 globally. The vision was for the economy to grow at an average of 13.8 per cent during the time horizon, driven by the agricultural and industrial sectors over the medium term with a transition to a service-based economy envisaged from 2018. Fundamental to the vision were two broad objectives: optimizing human and natural resources to achieve rapid economic growth and translating that growth into equitable social development for all citizens. This also failed and Nigeria’s attempt to realize Vision 2020 was constrained by inadequate financial resources and poor execution. 

The successive implementation of policies with recurring themes continued to fail mainly due to the lack of proper implementation strategy, low consultation of relevant stakeholders, and corruption. Perhaps Nigeria could learn a thing or two about transforming an oil-dependent nation from the Kingdom of Saudi Arabia. 

LESSONS FROM SAUDI ARABIA

As Nigeria launched Vision 20:2020 in 2009, Saudi Arabia equally implemented its Vision 2030 to diversify the economy away from oil and develop other sectors; especially tourism, technology, and entertainment. Vision 2030 took into consideration the specific economic situation in Saudi Arabia and devised strategies to turn its weaknesses into strengths.

In the years leading up to Vision 2030, Saudi Arabia’s economy demonstrated symptoms of the Dutch disease. With oil prices ranging from $90 to $100 a barrel for nearly a decade until 2015, the country’s GDP closely followed the fluctuations in oil prices. With little diversification in its economy, Saudi Arabia was in a similar place as Nigeria—leaving it vulnerable to oil price shocks.

A cornerstone of Vision 2030 was selling a portion of Saudi Aramco, the state-owned oil company, to the private sector, thereby injecting funds into other sectors. Nigeria has also begun to tread this path through the recent commercialization of NNPC. The Saudi Public Investment Fund, established in 1971 and positioned to be the key driver of Vision 2030, has been pivotal in channelling oil revenues into non-oil investments, fuelling sectors like tourism, manufacturing, and technology. Since 2021, Saudi Arabia’s non-oil GDP growth has averaged 4.8 per cent, and in 2022, it remained close to 5 per cent.

By drawing from these methods implemented by Saudi Arabia, Nigeria could better align its approach to policy implementation, especially with the 2021 Petroleum Industry Act (PIA) reforms. Implementing policies is not where it stops. There needs to be constant monitoring and checks and balances among government ministries, departments, and agencies in the oil sector.

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THE CURRENT STATE OF OIL

Nigeria’s discovery of oil and the economic benefits accrued from it created a one-track focus on oil. As the country has suffered from the Dutch disease it has consistently failed to pull itself out of the shackles of oil wealth.

With the introduction of the PIA, Nigeria’s oil sector is expected to turn a new leaf in the coming years. One of its most notable reforms is the commercialization of NNPC thereby making it an independent commercial venture. The company is now free from government restrictions and able to compete with its peers such as Saudi Aramco. This structural change is expected to attract private investment and improve operational efficiency.

The PIA also paved the way for the commissioning of the Dangote Petroleum Refinery in 2023. The refinery represents a tangible example of the government’s pivot toward private-sector involvement. Ayodele Oni, a partner at Bloomfield LP in an interview with the Energy Year believes that Dangote refinery would boost the Nigerian oil market by ensuring the domestic supply of refined crude and reducing importation. With the capacity to produce 650,000 barrels of fuel per day, the refinery is expected to not only meet domestic demand but also position Nigeria as an exporter of refined petroleum products. Moreover, one of Port Harcourt’s refineries and the Warri refinery have begun operations although not at 100 per cent capacity. Thus, Nigeria is making strides in value addition.

However, Nigeria’s attempt at diversification and economic rebuilding might still be fraught with challenges. As it stands, the government is making efforts to revitalize the oil sector so that the revenue generated can be used to fund the development of other sectors of the economy. Overdependence on oil revenues is not changing the status quo. Thus, the government needs to implement strategies that will ensure the generation of revenue from other sectors of the economy without depending on the oil sector.

Nigeria’s path to economic stability and growth requires drawing lessons from global success stories like Saudi Arabia while addressing the peculiar challenges of corruption, infrastructure deficits, and political interference. Only by breaking free from its oil dependency and embracing a diversified economic model can Nigeria overcome the Dutch disease and achieve long-term prosperity⎈

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