The Impact of the Oil Sector on the Nigerian Economy

The Impact of the Oil Sector on the Nigerian Economy

In the process of reviewing past studies on the impact of crude oil on the Nigerian economy. There is the need to make certain classifications.Nigeria as pointed out in the industry chapter is a member of OPEC and a major oil exporter in the world. The nation is also a developing country based on the fact that natural and human resources abound for development; if effectively and efficiently managed. If the above characteristics of the nation in taken into cognizance; a through review can be carried out. This is because these have been studies on “developing oil-exporting countries.”

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Moreover, studies on OPEC countries also abound; these studies, due to their signification to this research work on Nigeria, will therefore need to be considered. Doing so will bring forth the time position of the impact to the petroleum industry on the Nigerian economy as it has been highlighted by various researchers either generally or relating specifically to Nigeria.


Starting from the global perspective, Aluko and Ijere (1965), postulated this on the importance of crude oil in the world; “Today, oil, either as gasoline (petrol), diesel, or fuel, increasingly market the world’s wheels go round,” As kerosine it illuminates population. Its importance as asource of agricultural, industrial and commercial energy has been rising since the beginning of the twentieth century. From the above role and expected contribution of crude oil (in its various forms) to the world economy, a look into the impact of the same in the OPEC countries could be taken.

According to Carm (1980) in his analysis of the economic future of OPEC countries started by making references to the widely speculated belief that oil exporting countries are “bonausa countries with a gift from God that permits them to live a never ending life of ease, leisure and luxury.

This image, he believed, has prevented the analysis of the various social and economic constraints which the oil countries have faced since the early 1970’s, as a result of their dependence on oil exports. (pp. 323). Sanusi (1994) draw from the knowledge of economics of development in which specialization on the production of one main export commodity is regarded as one of the key factors underlying most of thee imbalance that characterizes the underdeveloped economy and paralyses all efforts to correct such imbalances.

Hence, these countries are actually subjected to a number of interrelated constraints, both local and foreign, to the extent that the opportunities offered by the disposal of oil have become negative factors, antagonistic to their own political, social and economic aspirations. His work therefore, shows that opportunities arising in an underdeveloped environment may rapidly become new constraints, aggravating inbalanced in the local economy, while the traditional constraints to real economic growth are not effectively removed especially; Yinlen (1996) pointed out that for oil exporting countries, “it’s the opportunities created by the flow of exported oil that exacerbated the problems already existing in the local economic.” (pp. 324).

The opportunities were highlighted as the disposal of foreign exchange earnings, disposal of energy and accumulation of financial – surpluses and the increase in their regional and international role as well as the possibility of technology transfer. Moreover, the dramatic decline in the agricultural production, Yinkea noted, has also been a common feature of most OPEC countries since the increase in oil revenues inspite of the big potential existing in places like Iraq Nigeria, Iran, etc. This he believed is as a result of concentration of investment in the urban areas, and how levels of development of these oil nations before the discovery of oil.

Nankani (1999) in his study on Development problems of mineral – Exporting countries examined mineral economies performances with respect to savings, inflation, agricultural production and export diversification among others. In his analysis, he distinguished the petroleum economies between 1989 and 1996 compared to the 2000 era. From a 2.5 percent rate of inflation than non-fuel ecomonmics between 1990 – 2000 era, the petroleum economics in the 1970-76 era witnessed a 19-2 percent rate of inflation rate moved up from 5.5 percent to only 13.6 percent. Taking a further look at the inflationary experiences of two petroleum economies – (Iran and Nigeria) Mankan (1989) concluded thus: “the Nigerian experience parallels that of iron, except, that it has been even more traumatic. “ (pp. 42)

In his analysis, the Federal Capital Expenditure of Nigeria (in current prices) between 1970 and 1976 increased by a factor of forty, while the corresponding factor for state capital expenditures was sixteen. The money supply grew in 1974 by 50 percent, in 1975 by 70 percent and in 1976 by 40 percent, while the rate of inflation in 1974/75 was 34 percent.Further more, he emphasized that rough the use of various Government’s short-term “palliative measures” (like massive import-programmed and consumer subsides) the rate of inflation was reduced to 22 percent in 1976. Since the Government can hardly continue to pay these subsidies indefinitely nor can Nigeria afford to rely an imports for more then a small share of its aggregate supply, a reduction in Government spending among other measures was recommended.

In line examination of the agricultural production and food imports in the mineral economics (particularly the petroleum economics to which Nigeria belongs) tend to exhibit low growth in agricultural production. This was shown to have fallen from 3.6 percent in 1960-70 to 3.1 percent in the 1970-76 era, was not due to low agricultural potentials such as land and labour, but the neglect of the oil wealth.

He therefore, summed that the major short sum consequences of the poor agricultural performance of the mineral economies in general has been that a large share of their imports in total imports.In 1967, the share of food imports in total imports was higher in the non-mineral (where it was 16.8 percent) then in the mineral economies (where it was 15,0 percent). However, the position has since change over the years that by the 1970-75 era –mineral economics share of ford imports in the total imports had increased to 17.9 percent while the non-minerals share had fallen to 14.6 percent.

Further more, Namleani (1979) identified instability in export earnings of both mineral and non-mineral economies (in short a problem of most developing countries). He however probed the hypothesis that such export earnings instability has tended to cause higher international debt-ratios in the mineral than the non-mineral economies. Rather, Namleani submitted that savings performance (which is significantly low) and the accumulating external debts in mineral economics to diversify their export-earnings was also identified. As a recommendation, he suggested that price stabilization and export diversification should be regarded as power farl alternative weapons the arsenal of the mineral economics if the cost of export earning instability are to be arrided.” (pp.51)

Summarily, therefore, Namleani brought into focus mineral economics advantage of industrializing via economics processing and the likely problem of these economies in form of low marginal saving rate, higher rated of inflation, lower growth in agriculture and higher shares of food in total imports. The possibility is therefore there, for  these problems “to develop into: high wage/high unemployment, poor performance of economics on export-diversification and to some extent, to be ore open to  export earnings instability. (pp.57)

It is important to mote that all these highlighted problem of the mineral economics particularly the petroleum economics, are today present in the Nigerian economy; despite the fact that the study was carried out and published over a decade ago.

Oritz in his work “crude oil; issue and policies for oil-exporting countries, “identified the major problem facing all oil-exporting nations. This he said is the “concern about the disruptive economics and social effects of a massive inflow of oil money and the keeping of a large share of that wealth in the form of financial assets. Subject or the guaranteeing of those assets abroad.” (pp. 237) To achieve the prime objective of transforming these depletable assets into fixed one. Oritz believes there should be development and industrialization.


The problem some OPEC members with substantial financial assets at their disposal encountered, according to Oritz, was this transformation problem. Hence, their inability to achieve the specified economic development goals.This common problem of OPEC members was specifically single out as the crux of the downtrend being faced by most of these countries to day. Since the wealth brought by oil was not transformed into tangible assets but rather consumed extravagantly (the case of Nigeria being a vivid example).


With the general view of the impact of the oil industry identified in the global and international perspectives, the specific impact of this sector on the Delta State economy can therefore be examined as written by earlier scholars. Quinean (1980) in his work identifying crude oil as the major product of the oil industry in Nigeria which made the nation Africa’s most rapidly developing state in the 70s; when viewed interns of its wealth. This comprised of the national resources, per capital income and Government expenditure which “vastly exceeds that of the neighboring states” (pp. 270).

He undertook a historical journey of Nigeria’s oil industry, making a revelation of how production has been increasing over the years from 1956 with increasing investment in the industries the Government’s effort through state participation was also examined along with the membership of OPEC that brought about the unprecedented increase in oil revenue accruing to the Government. Quinean’s study however, can only be seen as an “eye opener” on the oil sector in Nigeria, since it failed to examine in depth the impact of this soaring Government revenue on the economy of the nation.

Synge (1986) asserted that Nigeria has considerable influence through out the continent, as Africa’s biggest oil producer; both as a potential leader of produces such as Angola, Gabon, Congo, and Cameron, and as a potential source of supply to the power nations. Synge in his work, (1986) foresees a role for Nigeria in Africa. He maintains that Nigeria has been so far “Cautions in exploiting” its influence, but being a potential source of energy to the poorer nations in the region, it can perhaps best enhance its neighbors through ECOWAS, of which it is an active and enthusiastic member.

Apart from this continental role, Synge – argues that ultimately. It is agriculture rather than oil which has to be “the real cornerstone” of the Nigerian economy, if there is to be “Coherent development.” Energy, he believers, should be the “vital link between the oil and gas products, and agriculture in the form of tractor fuel, nitrogen fertilizers etc, oil revenue, he argued further, should therefore be channeled directly into rural road construction. Different studies on the impact of crude oil in Nigeria highlighted the oil sector’s contribution to the economy in various formula. At the 5th world congress of Economists in Tokyo, Japan, Diejomach (1977) demonstrated the dominating position of oil in the Nigerian economy and the extent to which oil has transformed the economy towards development. His evaluation of oil’s position in the Nigerian economy, covers the productivity of oil, its contribution on GDP, contribution to Government revenue, contribution to foreign exchange earnings, contribution to balance of payments and direct linkage to other sectors (both forward and backward). This analysis of the forward and backward linkages of crude oil production uncovers its direct effect on other economic activities such as the energy consumption, the liquefied National Gas plants, the Nitrogenous – fertilizer complexes and other companies servicing the oil industry.

Diejomach in his analysis of economic indicators in Nigeria revealed that there was no substantial achievement in growth and development inspite of the rapid increase in Nigeria’s oil production and oil revenue.According to him Nigeria is still a relatively poor and underdeveloped nation based on his assessment of several development indicators. The result of this study is sufficient to stimulate researchers into further studies to find out whether the above stand holds.

Further review of studies on the impact of crude oil production and export. What was left unanswered in all the studies is the Categorization of such impact (whether positive or negative) as well as the significance on the economy.

Amu asserted in his paper, on the “Nigerian oil industry and the National Economy, that the significance of crude oil in the economy in not solely explained by its impact on the domestic economy. He summed up that other important variable such as the dynamics of the international energy market, the role of OPEC, etc. exerts greater influence on crude oil’s domestic impact on the national economy.Further in his paper, he highlighted the impact crude oil revenue had on capital expenditure of Government by examining the development plans. The second National Development plan (1970-74) budgeted total expenditure of N3 million while the third plan (1975-80) as a result of the oil revenue, budgeted a whopping sum of N45 billion total expenditure. The fourth plan (1981-85) however, budgeted a total of N72 billion with minimum internal and external borrowing.was therefore, “fifteen tines the size of the second while the fourth was about double the third.

Looking at the direct contribution of petroleum to income in Nigeria, Pearson (1994) identified that the magnitude of the petroleum industry’s gross value added-depends on the value of crude oils export and local sales. (p.56) the net direct cauterization therefore requires the knowledge of the split of the petroleum industry’s annual expenditures among factors and materials. (p.59)

Apart from these direct benefits, there are also, other direct benefits to the Nigerian economy.

These comprises to the contribution of factors of production to non-petroleum sectors of the economy as well as the linkage effects.In Perason’s own words; “The petroleum industry’s payments to the Nigerian Government leads to potential public domestic savings and thus contribute to investment resources petroleum export earnings and net private foreign-capital inflows provide foreign exchange in amounts significantly in excess of industry requirements on current account.And the oil industry’s initial-importation of management and skilled labour, followed by its gradual training of indigenous replacements and future local entrepreneurs, furnish skilled manpower to the Nigerian economy.

At a given point in time any or all of these factor contributions might allow additional Nigerian economic development, “(pp. 70-71)From the above words Pearson, it is obvious that the petroleum industry contributes foreign exchange for use by other sector of the economy. It also contributed investment resources and some skilled labour to the Nigerian economy.

The linkage effects, considered as the second category of indirect benefits associated with direct private foreign investment was described by Pearson’s (1970) as “economic benefits or cost that rises as a result of inter sectoral relationship”. (P.86).

Due to lack of sufficient data, he provided a qualitative evidence of these linkages which he categorized into investment linkages (both backward and forward effects). Find demand linkages, technological linkages and fiscal linkages.

Pearson (1970), in making his projection into the future, consider the important political factors (particularly the crisis situation-created by the civil war). Based on this he concluded that imputed political costs would have to be extra ordinarily high in Nigeria to offset potential genius of about 18 percent of national income projected for 1970-75. This gain being higher than the aggregate 7 percent net direct and indirect benefits of prewar national income Nigeria. (p.166)

Schaal (1969) in the same vein projected that the oil industry will establish some of the important material condition necessary for development and prosperity in Nigeria. Just like Pearson, he identified the tragedy inherent in the political problems continue to disrupt the exploration and production of what he referred to as “a first-class economic resources” of Nigeria.

To reach the above conclusion Schatal (1969) had examined the various effects of the problem industry on the Nigerian economy these include the influence of the industry on the external trade structure; the balance of payment; Government income; regional distribution of income; industrialization and infrastructure development. In spite of the predominance of agricultural exports in Nigeria then, he noted that crude oil exports has growing since (1958) reaching a first grant of 33 percent of total export in 1966. having analyzed the effects of the oil industry upon balance of payment he further proved “that the growth of crude oil exports and nearly complete import substitution of petroleum products will in the long run free Nigeria from severe balance of payments problem even with the assumption of progressively growing imports of capital goods. (Schatal. 1969; p.188)

Since industrialization is owe of the essential conditions for the increase of per-capital income in Nigeria. It is also a condition for economic growth and development. Schatal (1969) therefore asserted that the desire for growth will be achieved through the petroleum industry. This assertion was based on his analysis of the share of crude oil exploration and production in the GDP which increase from I percent in 1962/63 to about 4 percent in 1966/67.

Further, he argued that besides employing approximately 3,500 workers in the crude oil sector, investment in the industry- stimulated by forward and backward linkage effects will accelerate the process of industrialization. (p. 189)Giving a vivid picture of the Nigerian oil sector and the national and international setting under which it operates, Sokunbi (1962) gave the various ways in which the operations of the oil sector contributes to the economic progress of Nigeria.

He emphasized the importance of the fact that the money which an oil company spends on exploration in a new industry or territory comes from profits made by that company or its associates in other parts of the world. He claims therefore that some economic benefits accrue to the nation being explored already, “whether oil is discovered in the new territory or not”. (Shokunbi, 1962; p. 81).

In addition to this obvious benefit, the discovery of oil, he said, brings about employment, revenue, accessibility to remote areas, introduction to new technology and training lastly, he considered the international effects of oil sector on Nigeria as Shokunbi (1962) asserted, “the discovery of oil in any country usually focuses world attention on that country.”Hence, the increasing volume of oil production in Nigeria is expected to give her “a special prestige in international relations” (p. 83)

The conditions and limitations under which the business of oil is conducted in Nigeria were clearly brought out by Robinson (1964) in an attempt to show the effect of crude oil. He therefore examined the economic effect of the oil business in Nigeria as well as the prospects for the future. This was differentiated into direct and indirect effects.

With respect to the direct impact-which comprised of the effect on employment and industrial development, Robinson (1964) asserted “the oil industry is not and in its nature, cannot be a really dominant force”. (p. 225) for the industrial aspect that comprises of payment to government and the balance of payment.

Alli (1987), in its days of glory, production of crude oil reached 2.3 million barrels per day, though the current daily production was fixed at 1.30 million barrels per day by OPEC”. (p. 149) it is therefore clear that the burden of Nigeria’s economic development in modern times was borne by the oil sector of the economy. Without the contribution of oil neither the nation’s industrial agricultural non infrastructural development would have been capable of being financed by traditional sources.

The phenomenal growth in the GDP of Nigeria, according to Alli (1987) is also attributable to crude oil production. This bizarre growth decline of GDP Alli claims to be a result of the catalytic role played by crude oil in the economy for the past30 years off its production in Nigeria.


With the continued availability and demand for crude oil, the economy stands to survive, despite its present travails. This necessitates therefore the need to consider the future of crude oil and the Nigeria economy.


According to Aluko and Ijere 91965), “oil is a natural resources which is subject to diminishing returns. The more that is taken out, the less is left for future take.” The  increasing use of oil has therefore, “given rise to the question of how much longer can the oil industry last before the deposits are exhausted? (p.218).


Take the case of the Isokoland Ogoni, oil was found in Uzere, in Isokoland, around 1956. Commercial mining began in 1958, and at the peak of their life span, the Uzere oil well had a comined capacity of about 120,000 barrels per day. In the early 1970s, with commercial production going on in the Olomoro, Oleh, Owhe and Enwhe oil fields, Isoko was producing some 200,000 bpd of the total national output of about two million bpd. But for 40 years Isokoland has known only devastation, incomparable in scale and wantonness to even the long suffering Ogoniland. Its environment has been despoiled, its flora and fauna devastated by oil-prospecting activity. A few year after the gas flares were lit, new but totally useless plants began to supplant cassava and yam farms in Isokoland. In frustration, the Isokos have named the weed “shell”, after the multi-national oil giant which has sole prospecting rights in the area.

In Uzere, there is an ancestral lake named Eni. Years before, its rich rippling expanse provided fish and other proteins for both indegenes and others from far-flung reaches of the Niger Delta. Today it is more or less dead. Its new limped waters are filmy in large sections, a sobering evidence of what oil has done to the people of the Delta.Yet, they get next to nothing in return for smaller and smaller agricultural yields each year, and for the millions of dead fish which belly up across the Niger Delta season after season oil spill after spill.

Even in terms of employment, we are cynically treated. Our people can only get work as artisans and vig climbers who fall and break their necks while the expatriates and other tribes who control the oil companies mock us behind crocodile tears,” declared by Dan Odhomo, an unemployed Isoko graduate of Zoology who has had to take to petty business in order to survive. (TELL, January 18, 1999) (p.22)

In the modern era according to Adekunbi Ero (1998) Nigeria’s worst fire out break caused by a burst petroleum pipeline claims over 1,200 lives amidst recriminations that Abubakar’s junta is insensitive to the people’s plight.

He noted that Jesse is an agrarian community consisting of about 56 villages. Rich in oil deposits which have attracted exploration by the various oil company like shell and chevron the community boasts of over 30 oil wells.

But despite its status as an oil producing community, there is nothing in the town by way of infrastructural facilities or social amenities to show for it.Paradoxically, its oil wealth has become its doom as epitomized by the unfortunate fire incident. (Tell mag. Nov 2, 1998 p.11).

 In (1995), Savo-Wiwa was to be executed for stopping the flow of oil in Ogoniland. This time he was captured by indigenous troops, tried by a kkemgaroo court and hanged right in the face of an astonished world.

Today, the people of Niger delta whose psyche had been suitably brutalized by that event, appear determined to ensure that savo-Wiwa and his compatriots did not die in vain.

The yaws, given their size, are said to specifically feel a vicarious guilt for the death of a man, who, it would appear, counted on the rest of the Delta people to vise up to his defense during the last critical hours of his life. Yet, as part of the strategy to keep the people of the Niger Delta divided, there had recently arisen a rash of fire fights mainly between the Ijaws and their neighbbours which, according to Douglas, fit a manipulative pattern aimed at distracting the people from the main issue of the exploitation of their collective destinies. (p.23)

According to Governor James Ibori Delta state Governor (2001)” thepeople of Delta state suffer long years of environmental pollution, devastation of the productive land without much compensation, which are the issues agitating the mind of the youths. (Tell mag. May 7, 2001. p 46).


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The Impact of the Oil Sector on the Nigerian Economy

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  1. nice work, pls i need help on this topic THE CONTRIBUTION OF OIL SECTOR TO ECONOMIC DEVELOPMENT IN NIGERIA…

    • chinarzah says:

      Oil sector has contributed to nigerian economy. Instead try checking this address;PETROLEUM AND ITS EFFECTS ON THE NIGERIAN ECONOMY.that will do.

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  4. Please, i need an urgent answer.
    What is the importance of crude oil to Nigeria?

  5. Idris hassan umar says:

    Pls sir i need answer about the problems of opec in nigeria

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