Oil, Blessing, Curse or Catalyst

PEOPLE & ORGANISATIONS

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Oil

Blessing, Curse or Catalyst?

By Dotun Adegbite

Photo Credit: Brecorder

PEOPLE & ORGANISATIONS

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n Nigeria, the debate on oil being a blessing or curse typically stems from its relatively low level of contribution to GDP and number of jobs created when compared with the country’s dependence on revenues from the sector to run the government and provide public services.

The role of the oil and gas industry in the Nigerian economy is huge. It is the largest revenue earner for the federal government and provides the bulk of foreign exchange earnings. Expected proceeds from the oil industry made up 41.7% of the revenue in the 2018 budget although historically, the contribution has been up to 70%. At the states which do not earn oil proceeds directly, most states and local government revenues are dominated by the monthly payments received from the consolidated revenue fund called the Federation Accounts Allocation Committee (FAAC) and Joint Accounts Allocation Committee (JAAC) respectively. This is in an economy where government is clearly the largest spender and employer of labour by a wide margin.

Additionally, the National Bureau of Statistics reports that the oil sector contributed only about 8.68% of GDP in 2017 compared with 21.6% for agriculture.

Hardly can it be a surprise then that the economic fortunes of the country and its populace rise and fall with the price of crude oil. As oil prices declined from a high of over $100 to less than $50, the Nigerian economy which had been one of the fastest growing in the world for years went into a recession in 2016. The economy has been recovering slowly as oil prices also recovered but the effects of the sudden decline are still being felt in tangible measurable ways. According to official National Bureau of Statistics, unemployment rate among the general population and among youths have reached highs of 18.8% and 33.1% respectively and failed to moderate in response to the slight economic recovery.

The message is loud and clear. Oil is extremely important to us a nation, we should be grateful for a resource base that provides such significant financial flows to our economy; but our dependence on it is unhealthy and must be strongly reconsidered so we can find other means of driving economic growth and funding our development aspirations.

Extractive Resources vs. Human Capital It turns out the cliché saying “our people are our most important resource” used by companies is actually true of countries. In 2012, Thomas L. Friedman, a three-time Pulitzer Prize winning American journalist and author wrote an article for the New York Times titled “Pass the books. Hold the Oil”. In the article, Friedman reviewed an interesting study by the Organization for Economic Cooperation and Development (OECD). The study interrogated the relationship between a country’s possession of natural resources and quality of human capital development. This was measured through performance on an educational test - Program for International Student Assessment (PISA); which every two years tests math, science and reading comprehension skills of 15-yearolds in 65 countries correlated with the total earnings on natural resources as a percentage of GDP for each participating country.

The results revealed “a significant negative relationship between the money countries extract from natural resources and the knowledge and skills of their high school population”. Of the 65 countries tested, the nations with little or no national resource earnings did best e.g. Singapore, Finland and South Korea. Those with the most natural resources

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PEOPLE & ORGANISATIONS

performed worst e.g.

Qatar and Kazakhstan. The resource-rich countries with high scores in the test such as Canada, Australia and Norway had established deliberate policies of saving and investing rather than simply spending their resource revenues, the authors argued.

Using Oil to Buy the Future

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From studies such as the above, the argument is strong in favour of using current revenues from oil to buy more of the future and funding less of today. Listen to the leaders of the UAE especially the Vice President/ Prime Minister and Ruler of Dubai Sheikh Mohammed Bin Rashid Al Maktoum speak about their vision and you can see a few threads. They are aware that the revenues from oil are practically a gift which they should steward carefully and expect not to last forever. As such, they are conscientiously investing as much as possible of the oil revenues into other economic sectors – tourism, hospitality, science and technology – to prepare the nation for tomorrow’s economy beyond oil. The Sheikh’s profile on LinkedIn says “We are building a new reality for our people, a new future for our children, and a

“We are building a new reality for our people, a new future for our children, and a new model of development.” new model of development”.

It is not just hype if you take a look at their “UAE Strategy for the future” which states “…The citizens of the UAE are our most important resource in building our future. To nurture their skills, we will strengthen education and training initiatives.” and goes on to specify actual capacity building goals to be achieved at every level and across sectors as diverse as education, technology and public service.

Trapping Value InCountry A big chunk of work needed to be done is ensuring we are deriving maximum economic value from the oil and gas industry. Resource extraction is only the beginning of the entire horizontal economic value chain of the oil industry and represents a

PEOPLE & ORGANISATIONS

“The future will come, whether we are ready or not...”

Photo Credit: Penspen

small portion of the total economic value added in the process. Processes involved in transporting, refining and processing the crude oil and gas, then marketing the end products all add significant value and create jobs, contribute to the economy and create large companies.

Vertically, there are other economic activities such as rig and ship repair, welding, fabrication, engineering services, maritime transportation etc. which service the industry and can be huge economic contributors. Nigeria has made progress in this area via the local content act passed into law in 2010 and executed by the Nigerian Content Development and Monitoring Board (NCDMB).

The Act set targets for activities in the upstream sector to be performed by Nigerian content companies.

This move has created

stronger oil service providers in the industry in virtually every activity listed in the act’s schedule. Beyond this initial success story, the NCDMB in its 10 year strategic plan launched in 2017 has set some daring goals. It aims to retain 70 percent of the annual spending of the oil and gas industry in the country from the current 25 percent. The Board expects that achieving this would create 300,000 direct jobs in the country.

This is decent thinking and should be commended and supported by all. Imagine if we had been thinking like this since oil was first commercially produced?

Planning for the Future The challenge ahead of us is clear. The future is going to be really different and the world has demonstrated a clear statement of intent to reduce and eventually eliminate reliance on fossil fuels to save the environment. It is now a question of when and not if. Oil producing nations

need to review their long term strategy and readiness for an economy beyond oil.

For a country as dependent on oil as Nigeria, it would be interesting to simulate a month without earnings from sales of crude oil, and play out the impact on running government at the federal, state and local government levels; as well as impact on the private sector.

While there is an unending argument about oil being a blessing or a curse to Nigeria; we should perhaps focus on how to make oil the catalyst to fund the foundation we require for a future economy beyond oil and avoid the current behaviour of spending it all.

The future will come, whether we are ready or not, better to be ready.

Dotun Adegbite holds the CFA Charter, an MBA and an Engineering Bachelor’s Degree. dotunadegbite@gmail.com

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