Preamble:
The cyclical movement of crude oil prices, characterized by periodic falls, stabilizations, and rises, continues to significantly impact economies worldwide. For nations like Nigeria that heavily depend on oil exports, fluctuations in global oil prices pose economic challenges as well as potential opportunities. The primary concern is whether Nigeria can leverage these periods to formulate a more sustainable economic strategy.
Historically, declines in oil prices have benefited oil-importing countries through reduced inflationary pressures, enhanced productivity, and improvements in welfare indicators such as the misery index. These advantages stem from lower production costs, decreased energy expenses, and reduced inflation expectations. Conversely, oil-exporting nations lacking diversified revenue bases may face fiscal instability, currency depreciation, escalating debt burdens, and constrained spending during periods of declining oil prices.
Nigeria has traditionally relied on crude oil for foreign exchange earnings and government revenue. Prominent figures like Chief Obafemi Awolowo have long advocated for economic diversification to mitigate the risks associated with a mono-product economy. Despite this, successive administrations have continued this dependence, resulting in fiscal complacency during high oil price periods and reactive measures during downturns.
This op ed underscores the importance of sound government policies, legal compliance, market efficiency, and investor confidence for the stability of Nigeria’s oil and gas sector and its broader economy. It also examines the cyclical nature of crude oil prices and their substantial impact on Nigeria’s economy, which remains significantly reliant on oil exports.
Additionally, it addresses the imperative need for economic diversification and enhanced governance to mitigate the adverse effects of fluctuating oil prices.
Challenges and Consequences of Nigeria’s Overreliance on Crude Oil
The consequences of this excessive reliance are significant. Every decline in oil prices unveils structural vulnerabilities: excessive recurrent expenditures, inadequately funded essential infrastructure, and a diminishing fiscal capacity that limits policy responses. However, these periods offer opportunities for reform. Lower oil prices can mitigate inflation and reduce production costs, supporting industrial growth, agriculture, and private sector development through appropriate policy measures.
Nigeria’s comparative advantages extend beyond hydrocarbons. The nation has extensive arable land, a burgeoning youthful population, and untapped mineral and human resources. Nonetheless, the cyclical nature of oil revenues has led to policy stagnation that prioritizes short-term stabilization over long-term structural transformation. Each increase in oil prices risks reinforcing a false sense of fiscal stability, delaying the urgent need to diversify the economy’s productivity and revenue bases.
This challenge encompasses both economic and political dimensions. Will Nigeria capitalize on oil price declines as pivotal moments for reform, or will it continue the cycle of boom-induced complacency and bust-induced crisis management? Without decisive action, the country risks maintaining a development trajectory vulnerable to external disruptions and constrained by its own policy decisions. Chief Awolowo’s advice remains relevant today. The critical question facing Nigeria is not whether oil prices will rise again — as they certainly will — but whether the nation will overcome its dependency on oil.
Impact of Falling Oil Prices on Nigeria’s Economy
The recent decline in global crude oil prices presents a complex array of challenges and opportunities for petroleum-dependent economies such as Nigeria. While lower oil prices can provide certain benefits to consumers and industries reliant on petroleum products, the broader implications for the Nigerian economy are concerning, given its substantial dependence on oil exports for government revenue and foreign exchange earnings.
A decrease in crude oil prices reduces the acquisition cost of crude oil for refineries. Since crude costs typically account for 70–80 percent of petroleum product prices, lower crude prices should theoretically lead to reduced prices for petroleum products. This reduction benefits consumers and businesses by easing energy costs and lowering production expenses across various sectors.
However, the adverse consequences for Nigeria far outweigh these short-term gains. Nigeria’s national budget heavily relies on revenues from oil exports, often based on high price expectations and ambitious production targets. A sharp decline in oil prices undermines these assumptions, resulting in significant revenue shortfalls. Consequently, a budget deficit for 2025 is likely, which could force the government to resort to increased borrowing to finance its expenditures. Given that a considerable portion of Nigeria’s future oil production has already been committed to debt servicing, taking on further debt may only exacerbate the country’s fiscal vulnerabilities.
A sustained fall in oil prices threatens to destabilize the Nigerian economy on multiple fronts. Reduced government revenue will curtail funding for public services, infrastructure projects, and social programs. Furthermore, lower oil export earnings will exert downward pressure on the value of the naira, potentially triggering inflation and reducing the purchasing power of ordinary Nigerians. As budget deficits widen and borrowing increases, Nigeria faces the risk of slower economic growth and even a recession, particularly if diversification efforts remain inadequate and fiscal mismanagement persists.
The degree of economic risk depends, in part, on the government’s ability to implement effective mitigating measures. Long-term solutions must prioritize economic diversification, prudent fiscal policies, and sound management of foreign reserves. However, in the immediate term, fiscal discipline is critical to preventing an economic crisis. It is imperative that Nigeria avoids accumulating further debt to address short-term budget shortfalls, especially given existing debt obligations tied to oil revenues.
The government should consider adopting a supplementary budget that reflects more conservative assumptions about oil prices. Rather than maintaining a benchmark oil price of $70–$80 per barrel, a more cautious range of $60–$70 per barrel would provide a buffer against market volatility and reduce the likelihood of unsustainable deficits. Addressing the prohibitive cost of governance is essential. Public resources continue to be drained by inefficiency, waste, and the extravagant lifestyles of political elites, undermining efforts to achieve fiscal stability and economic development.
While non-oil exports hold potential for reducing Nigeria’s dependence on oil, developing these sectors requires sustained effort, investment, and policy support. Economic diversification cannot be achieved overnight. This challenge underscores the so-called “oil curse,” where the influx of oil wealth can blind oil-rich nations to alternative economic opportunities until they face a crisis. Without decisive action, Nigeria risks perpetuating this cycle of dependence and vulnerability.
The Nexus between Crude Oil Prices and Product Prices
The continuous rise in petroleum product prices in Nigeria, despite the decline in crude oil prices, highlights underlying structural issues within the market. These challenges partly stem from the perception of essential economic goods and services—such as petroleum products and electricity—as public goods, leading to government interventions that unintentionally disrupt pricing mechanisms. The Nigerian petroleum market remains anticompetitive and is dominated by a few influential firms vying for market share and producer surplus.
Nigeria’s reliance on imports to enhance market participation has proven counterproductive. It exerts pressure on the naira, depletes reserves, and prevents reduction in petrol prices despite decreasing crude oil costs. This dependence on imports underscores governmental shortcomings and exacerbates market issues, disrupting both efficiency and economic stability. Effective regulations should prioritize ensuring fair competition rather than merely controlling prices. Behavioral regulation of market participants is more effective than using imports to address anticompetitive behavior. An improved pricing strategy would involve price modulation, particularly considering the government’s reliance on imports to create competitive pressure amid struggles with domestic refineries.
The decline in crude oil prices poses a significant challenge to Nigeria’s economic resilience. To navigate this effectively, the government must adopt fiscal discipline, reduce wasteful expenditure, implement realistic budgeting practices, and accelerate efforts to diversify the economy. Only through such comprehensive reforms can Nigeria mitigate the adverse impacts of fluctuating oil prices and establish a foundation for sustainable economic growth.
Investor Confidence and Governance Issues:
Nearly four years following the enactment of the Petroleum Industry Act (PIA) 2021, its objectives appear to be neglected. The PIA was intended to establish robust institutions within Nigeria’s oil and gas sector, with clear roles designed to improve transparency and boost investor confidence. However, no independent policy institution has been created, as the role is assigned to the “Minister.” Recently, the Presidency has assumed this policy authority, which reflects practices from the Petroleum Act of 1969.
A notable instance is the directive issued by the Presidency, instructing the Minister to oversee the functions of the boards of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA). This action undermines regulatory autonomy and centralises authority, contrary to the principles outlined in the Petroleum Industry Act (PIA).
This executive overreach generates uncertainty, discouraging investment in exploration and production. Investors perceive the sector as one where reforms are applied inconsistently and institutions are subject to political influence. Investor confidence hinges on stable policies, independent institutions, and predictable regulation, which are presently deficient, thereby impeding investment in Nigeria’s oil and gas potential.
Summary and Conclusion:
Nigeria, recognized as Africa’s largest oil producer, is facing economic challenges due to a recent decline in global oil prices. This situation has highlighted Nigeria’s heavy dependence on crude exports and issues within the governance of its oil and gas industry. Despite having substantial reserves—over 37 billion barrels of oil and 200 trillion cubic feet of natural gas—Nigeria has struggled to translate this wealth into sustainable economic growth.
Governance issues such as opaque licensing procedures, oil theft, regulatory inconsistency, and delays in implementing reforms have contributed to these challenges. The Petroleum Industry Act (PIA), which aims to modernize the sector, has faced delays in implementation. The Nigerian National Petroleum Company Limited (NNPC), now commercialized under the PIA, continues to deal with inefficiencies and public scepticism. Centralized governance in Nigeria’s Oil and Gas sector may impede the objectives of the Petroleum Industry Act and affect investment negatively.
As Brent crude prices fluctuate and the global shift towards renewable energy gains momentum, Nigeria’s revenues from oil exports are decreasing. The government’s budget, heavily reliant on oil, is struggling under rising debt servicing costs, inflation, and poverty. To address these issues, Nigeria must focus on strategies that ensure long-term economic stability and growth. Developing a framework for energy transition, utilizing renewable energy resources, and enhancing domestic refining capacity are crucial steps toward reducing import dependence and improving energy security.
Improving the business environment involves addressing governance inefficiencies, implementing consistent reforms, and depoliticizing key institutions. By promoting transparency and accountability, the government can attract local and foreign investors, fostering long-term capital investment. Transforming Nigeria’s oil and gas sector requires decisive action and strategic planning to achieve diversified, sustainable economic progress.
Stakeholders in Nigeria’s energy sector, including experts like a petroleum economics professor emeritus, support this approach. Nigeria must prioritize transparency, accountability, and strategic foresight. While gas is positioned as the transition fuel, its potential lies in responsible management. Domestic power generation and regional exports could benefit from a regulatory framework that builds investor confidence, combats corruption, and provides tangible benefits to local communities. With volatile oil prices affecting economic stability, Nigeria faces a choice between reform and stagnation. Effective decision-making is essential for future progress.
OMOWUMI O. ILEDARE, PhD, Sr.
Fellow USAEE, Fellow NIPetE, Fellow
EI, Professor Emeritus, Louisiana
State University, Baton Rouge, USA &
Executive Director, Emmanuel Egbogah
Foundation, Abuja, Nigeria.
Email:wumi.iledare@iaee.org
