Oil is an essential resource in today’s market. Despite its environmental consequences, the uses of petroleum are both immense and essential. But does its over-reliance by oil-producing countries doom them to failure?
The Oil industry is immense, and changes in its price can make or break entire economies. Not only oil-producing ones. This is because of its importance in our everyday lives from transportation affecting the final price of goods on our supermarket shelves to the everyday plastic we use.
However, it is a volatile good which may lead to big consequences due to being a commodity. While the biggest producers of oil, as evidenced by OPEC’s members, have changed over the years, the over-reliance on oil remains unchanged. OPEC is the largest international cartel which has a considerable influence on a large part of the world’s oil reserves, and consequently oil prices. With eight of the thirteen current OPEC members being African countries, it is undeniable that Africa has a key role in oil production.
Oil Volatility is not a new concept, but an unavoidable aspect of such an essential raw resource. While groups such as OPEC and OPEC+ (OPEC plus partners) attempt to reduce this volatility, market shocks and states outside OPEC’s grasp (even those within) seek to disrupt the market.
The Coronavirus hit the world markets hard. The Oil industry was no exception, people staying at home and consuming less tanked oil prices. This was further exacerbated by the oil war between the largest producers: OPEC, Russia, and the United States.
Even during these tough times, with tools already in place to protect the oil industry, international cooperation seemed far-fetched. The reasoning goes back to the Tragedy of the commons, all countries decide to cut production to drive the oil price up in times of low demand. Strengthening all producers. However, if only one country backtracks in its promise, it stands to gain a large amount. The world’s largest producers cannot trust each other with such a task, increasing their own production and further pushing down prices.
The falling prices, leading to large deficits, can also mean increased borrowing for African countries overly reliant on petroleum sales. Which may then fall victim to China’s debt trap diplomacy.
Nigeria’s Leadership Failures
Nigeria, a member of OPEC since 1971, is Africa’s most populous country and thought to be an emerging world power. However, it is still fraught with difficulties as 40% of Nigerians live below the poverty line. This is due to its failure to diversify and reform sectors of its own economy. More than 90% of Nigeria’s exports is Petroleum, displaying how dependent it is on this sole product.
This situation is worsened by the corruption found within Nigeria’s own institutions. Which have led to both negligence and a lack of much needed modernization to improve the economy and wellbeing of its citizen. While politicians used profits from oil to fill their own pockets.
While it is clear the Commodity is both keeping alive and destroying the Nigerian economy, the country is in dire need to move away from petroleum and diversify. With a large population, Nigeria could benefit from a bottoms-up approach improving the productivity and skillsets required for the creation of a manufacturing sector. From improving education and increasing productivity within the young, working age population, to promoting entrepreneurship and the small-time farmers within agricultural sector.
Furthermore, while the Covid-19 pandemic has worsened Nigeria’s condition, it provides a moment of both realization and opportunity. With the world’s need for PPE (Personal Protective Equipment) and ventilators at an all-time high, and the scarcity of it. Nigeria’s manufacturing sector could exploit this occasion.
As times change, so does leadership. And the current administration acknowledges the evident reliance on petroleum exports that are at the foundation of the economy and looks towards the future.
Non-oil exports increased to their highest levels, and a reduction of food imports show developments in their own agriculture sector. Much needed infrastructure projects are scheduled for improving logistics and supplies within the region. And the African Continental Free Trade Agreement (AfCFTA) may provide further momentum.
Nigeria finally realizes how oil, as profitable as it may be, cannot be the solution to its crumbling economy. And looks towards other sectors of the economy.