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Oil: Blessing or Curse?

Oil: Blessing or Curse? Free Essay Sample

Abstract

A question whether the oil is a curse or a blessing is a critical issue in the modern conditions due to the effect it produces on the oil-dependent countries. The paper is focused on the idea that the oil revenue is a curse and explains it on the Nigeria case example. Basing on the Dutch Disease theory, the work describes three main reasons that provide the key to understanding why the oil is more a curse than a blessing. The first point outlines the negative influence of the non-oil sectors neglect on the economy growth and domestic development of Nigeria. The second point is focused on the idea that oil price changes determine the governmental spending and inflation rates that, in response, affect the economic growth level. The third issue describes the corruption problem that the oil sector and its destructive impact on the economic well-being of Nigeria have provoked. The paper supports all points with the research and studies data. Therefore, it is focused on the idea that the oil is more a curse than a blessing basing on the Nigeria case example.

Keywords: Nigeria, oil, economy growth, domestic development.

 

Oil: Blessing or Curse?

Nowadays, the oil question is often raised due to the effects it has on oil-dependent countries. Many studies were provided in this area, and some of them assured that the oil was a blessing while others stated that it was a curse. Analyzing these issues from the Nigeria case perspective, it is possible to claim that the oil is a curse. The main point is that oil resource wealth is not always a blessing for countries. Very often, it leads to the conflicts, corruption, and poverty that are the barriers to the countries domestic development. Therefore, in Nigeria, the oil revenue has provoked the problems that negatively impacted on its development and economic growth. Hence, the paper is focused on the non-oil sectors neglect, oil price changes, and corruption as main reasons for why the oil is a curse that has decreased the success of Nigeria in achieving external and inner progress.

A bright example of the negative oil impact can be the above-mentioned country. It is considered tenth largest oil producer in the world and third largest oil producer in Africa (Uwakonye, Osho & Anucha, 2006, p. 62). However, from the economic perspective, Nigeria is significantly dependent on the oil sector. It accounts 95% of foreign exchange earnings of the state, and the oil is produced in the amount of ninety million tons per year (Uwakonye et al., 2006, p. 62). The main point is that the economy of Nigeria is based only on the oil revenue that has a negative impact on the domestic development. At the end of the 1950s, Nigeria started to drill for oil, and in 1970, it experienced the oil boom that led to the civil war. In general, Nigerian population does not feel like the investment in the oil revenue influence its life positively (Uwakonye et al., 2006, p. 62). In Nigeria, there are six oil companies that dominate the oil industry. They are: Texaco, Chevron, Agip Mobil, Elf, and Shell. In common, they hold around 98% of the oil reserves and operating assets (Baghebo & Atima, 2013, p. 103). Unfortunately, notwithstanding these resources, the country presents poor human development rate and negative economic issues including corruption, poor income distribution, violence, poverty, and unemployment among others (Baghebo, 2012). What is more, despite the huge oil wealth, Nigeria remains one of the poorest countries in the world. The economic problems mentioned above are the result of the government failure to use oil revenue successfully and apply it effectively to the other sectors development (Baghebo & Atima, 2013). Therefore, except the oil sector, the economy of Nigeria is extremely inefficient.

Therefore, there are three main negative issues, which prove that the oil revenue has a negative impact on the domestic development of Nigeria. It is believed that oil can be a blessing, and its sector development will only lead to the positive consequences. This position is reasonable since oil revenue is a great way of improving the economic situation in the country but only if it would be developed just like the other branches. The first reason for why oil resource is a curse is the neglect of the other sectors of state economy (Nwosa & Ogunlowore, 2013). In general, it is expected that the enormous oil wealth can provide more possibilities for the government to implement infrastructural facilities as well as increase the granting abilities in tax incentives or other industrial and manufacturing stimuli that are critical for the effective non-oil sectors performance. For instance, the proposed practice was applied to the East Asian countries (Nwosa & Ogunlowore, 2013).

However, for countries with rising oil revenue, steady non-oil export deadline is a common thing. It leads to the employment of labor and other resources since private and governmental expenditure multipliers are exported abroad (Otaha, 2012). The non-oil sector has a huge potential for the foreign exchange earnings; hence, the attitude mentioned above is a great problem. The same problem is rising in Nigeria, and nowadays, it is a critical issue that decreases the domestic development of the country.

There are several studies that researched the oil sector, non-oil sectors, and their relation to the economy growth. Hence, one of them analyzes oil revenue, export trends, and their connection with other potential variables that are needed for the Nigerian economy transformation. It was found that the economy of the country has not reaped the oil resource benefits due to the high mismanagement level of the sources. Thus, the study recommended the maximization of the revenue derived from the oil export by channeling oil income towards the development of other crucial economy sectors, for example, manufacturing or agriculture (Edame & Efefiom, 2013). Another study is focused on analyzing the contribution of oil revenue that has been generated over the past decades to the non-oil export performance in Nigeria from 1970 to 2011. Through the co-integration approach, it was found that the oil revenue had extremely negative impact on the latter in the country. It was stated that the oil income did not enhance the non-oil export sector and even more, it seriously impaired that sector over the mentioned period. In the result, it was strongly recommended for the government to channel oil revenue to the development of non-oil sectors especially agriculture and manufacturing in order to promote the economic growth and sustainability (Nwosa & Ogunlowore, 2013).

Another reason that negatively impacts the economic growth and domestic development of the country is oil price volatility. It is true that the countries possessing oil have a great financial support but it is also critical to understand that they are dependent on the “black gold” and, therefore, have problems with resources price changes. It is important to note that one of the most critical forces driving global economy is the oil, and shifts in its price have a strong impact on the economy growth and population well-being (Mgbame, Donwa, & Onyeokweni, 2015). The oil revenue impediment to the development of states that are dependent on this resource is called the Dutch Disease (Otaha, 2012). The main point is that dependence on natural resources, particularly oil revenues, makes the national economy vulnerable to marked prices. Hence, the oil dependence and oil price volatility in international markets create serious problems in the fiscal planning, lead to financial disaster in case of oil prices collapse, and reduce public spending quality. What is more, if the oil prices fall, the fiscal budgets go into deficit, and countries, at the end, start taking loans leveraged against their reserves as well as have problems with debts (Otaha, 2012). In fact, the oil price changes can determine the unemployment level, inflation rate, and governmental expenditures amount that, in turn, define the Nigerian economy growth. It was stated that absolute dependence on the oil export revenue has increased the vulnerability of the country economic mechanism (Mgbame et al., 2015). Hence, in a case of the establishment of low prices on oil due to such factors as excess supply, low demand, and seasonal aspects, Nigeria will experience difficult trade conditions that low economic growth and budget deficit can prove (Mgbame et al., 2015). This statement can be supported by the study that analyzed the relation of oil price volatility to the economic growth in Nigeria from 1970 to 2010 through the quarterly data use. It was found that oil price changes have a direct impact on the real import, real exchange rate, and real governmental expenditure that, in turn, strongly affect the real GDP, inflation, and money supply. Hence, it means that the oil price volatility determines the governmental expenditure amount that, in response, determines the Nigerian economy growth and domestic development (Oriakhi and Osazee, 2013). Thus, this impact can be highly negative.

It is believed that oil revenue leads to the more intensive structural development since all structural parts will have finances to improve own work. However, this position can be wrong since often, oil revenue creates corruption problems in the country. Hence, the third problem that results from the oil income is the corruption. It is a wide-spread issue for the countries that are dependent on this resource. Nigeria is a bright example of the state, for which corruption is a critical problem. Despite the significant oil expansion towards Nigerian economy, the structural development has been poor, and the situation became even worse due to the high corruption level in the oil sector (Onyinye, 2015). Due to Nigerian GDP absolute dependency on the oil export, the government spending has been fluctuated by it. It has caused the government inability to provide accurate policy and minimize the corruption level within the economic system (Onyinye, 2015). In addition, the oil dependence leads to political forces skewing. The production is concentrated in the hands of elites that creates fisherman market for rent-seeking behavior. As a result, rich states create huge poverty gap, lack of press freedom and accountability, and absence of political transparency (Otaha, 2012). Communities, on the territories of which the oil has been discovered and exploited, particularly Niger Delta, also suffer from lack of legal protection against oil companies that have corruptive ties with the regional leaders. There are cases when the oil firms refused to publish their financial statement honestly and release the appropriate information about their operation that the government needed for the effective statistical analysis and monitoring (Onyinye, 2015). Instead they do everything possible to make the government protect their unfavorable practices. In response, the administration provides given information to persuade the public in companies statements honesty despite their falsity. This problem has a great impact on the domestic development and economic growth. Corruption declines them since the oil companies hide the truth about huge sums of money spending in their false reports (Onyinye, 2015). At the same time, corruption leads to the poverty, environmental problems, and conflicts that, in turn, decrease chances of the provision of successful domestic development of Nigeria. The research aimed to discover whether the corruption had negative impact on the economic growth of Nigeria from 1380 to 2012 supported the above-mentioned position (Onyinye, 2015). The results showed that there was correlation between the economic growth of Nigeria and corruption development; if one does not take serious measures, it cripples the oil sector that, in, response can affect the state of the economy of the country. The main point is that the higher the corruption rate is, the lower the development level and investment ratio in the economy are. Hence, Nigeria is an oil-based country, and this resource is seen as the economic growth engine, which can help to reach successful results if the accurate policy is applied.

Overall, it is critical to note that the oil question is highly crucial nowadays. It is quite difficult to decide whether oil is a blessing or a curse since its use provides positive as well as negative results. However, analyzing this issue from the Nigerian economy growth and domestic development perspective, it is possible to suggest that after all, oil revenue is a curse. Its effect can be explained through the Dutch Disease theory. Thus, it is crucial to state that there are three main points, which support the position, according to which the oil is the curse for Nigeria. The first point is the non-oil sectors neglect, the second is the oil price changes, and the third is the corruption issue. All these aspects decrease the domestic development and economic growth of Nigeria. Hence, it is essential to search for solutions in order to handle these highly significant problems.

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