Journal of Economic Studies

Growth prospects of oil and gas abundant economies: the Nigerian experience
(1970-2000)
Musa Jega Ibrahim

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JES
35,2

Growth prospects of oil and gas

abundant economies: the Nigerian
experience (1970-2000)

170

Musa Jega Ibrahim

Received August 2006

Accepted March 2007

Economic Policy and Statistics Department (EPSD),

Islamic Development Bank (IDB), Jeddah, Kingdom of Saudi Arabia
Abstract
Purpose This paper seeks to explore the factors behind the slow growth of economies with
abundant oil and gas resources, despite the opportunities these resources potentially represent.
Design/methodology/approach The building blocks of standard economic growth models and
the implication of natural resource utilisation is the methodological and analytical approach adopted.
A qualitative analysis of the impact of oil and gas activities on the growth of the Nigerian economy is
carried out using relevant macroeconomic indicators.
Findings The oil and gas sector is imbued with enormous linkage potentials that can stimulate
other sectors to generate endogenous growth. Emphasis on the extraction and export of oil and gas
subverts technological progress, stifles the revenue earning potential of the economy and stultifies the
effectiveness of factors of production, thereby retarding economic growth.
Research limitations/implications Data on technological input into oil and gas activities could
not be obtained, but the changing pattern of productive capacity, especially in the downstream
sub-sector, is used as a measure of technological change.
Practical implications Oil- and gas-abundant economies can exploit potential comparative
advantage by creating favourable conditions in value-adding oil and gas activities. Through spill-over
effects a wide range of economic activities evolves, with concomitant market expansions. Positive
externalities for learning-by-doing arising from this process can lead to endogenous technological
progress to drive sustainable economic growth.
Originality/value The findings show that rather than reliance on foreign exchange revenues from
oil and gas, creating the appropriate conditions for the effective domestic utilisation of oil and gas
resources to bolster inter-sectoral linkages is a more virile strategy for oil-and-gas driven economic
growth.
Keywords Economic growth, Oil industry, Gas industry, Value added, Nigeria
Paper type Research paper

Introduction
Oil and gas are crucial to the contemporary global economy and their prices are key
components of economic forecasts and performance. Crude oil and refined petroleum
products constitute the largest single item in international trade, whether measured by
volume or value (Stevens, 2005). Thus, oil and gas are strategic resources in national,
regional and global economies. Despite this significant and strategic influence,
empirical evidence suggests that oil and gas abundant economies are among the least
Journal of Economic Studies
Vol. 35 No. 2, 2008
pp. 170-190
q Emerald Group Publishing Limited
0144-3585
DOI 10.1108/01443580810870155

The author is very grateful to Professor Roger Sandilands for taking time look at the drafts and
offering suggestions and also to the anonymous referees for comments and suggestions. Usual
caveat applies.

Downloaded by MANAGEMENT AND SCIENCE UNIVERSITY At 17:45 03 February 2015 (PT)

growing economies (Gelb, 1988; Auty, 1990; Berge et al., 1994; Sachs and Warner, 1997;
Stevens, 2005). This phenomenon is often conceived within the prisms of the resource
curse and Dutch disease but both are manifestations of inefficient utilisation of
resources rather than the inevitable outcome of the availability of oil and gas resources.
The Nigerian economy revolves around the oil and gas sector, in that it exerts a
prominent influence on the economy as a key revenue earner. The proportion of oil
revenue to total government revenue rose from 26.3 per cent in 1970 to 81.1 per cent in
1980, decreased to 64.4 per cent in 1981, increased significantly to 86.2 per cent in 1992
and fluctuated between 68.3 per cent in 1992 and 83.5 per cent in 2000. In terms of GDP,
the contribution of the oil and gas sector was 20.3 per cent in 1981, 13.6 per cent in 1986,
37.5 per cent in 1991, 46.8 per cent in 1992 and 47.5 per cent in 2000. While oil and gas
resources have very high revenue yields due to increasing international demand, the
efficient use of the revenues to ensure effective utilisation of domestic resources
through robust macroeconomic policies is crucial in generating economic growth.
Economic growth of a country constitutes a long-term rise in capacity to supply
increasingly diverse economic goods to its population; this growing capacity is
based on advancing technology and the institutional and ideological adjustment that
it demands (Kuznets, 1971). Key macroeconomic indicators such as the gross
national product (GNP), gross domestic product (GDP) and net national product
(NNP) are used, among other economic parameters, as measures of economic growth
performance of an economy. Thus progressive increase in the outputs of major
sectors of an economy is a manifestation of the attainment of economic growth.
Considering that oil and gas are versatile resources that fuel a wide range of
economic activities that could stimulate the productive fibre of the entire economy
towards sustainable growth, it is pertinent to evaluate the process of oil and gas
driven economic growth. An analysis of the experience of the Nigerian economy is
carried out using data between 1970 and 2000.
The remaining sections comprise theoretical analysis, the economic growth
implications of oil and gas activities, and evaluation of the impact of oil and gas
activities on the growth of the Nigerian economy and conclusions.
Theoretical analysis
Neoclassical growth analysis (Ramsey, 1928; Solow, 1956; Swan, 1956; Cass, 1965;
Koopmans, 1965) is based on a constant return to scale and labour augmenting
technology production function of the form:
Y t FK t ; At Lt ;

where Y is output, K is capital, L is labour, and A is knowledge or effectiveness of

labour or technology.
The economy converges towards a balanced growth path, where capital, output and
consumption per unit of effective labour, as well as the saving rate, are constant.
Economic growth can be achieved only through technological progress that increases
the effectiveness of labour. The dynamics of consumption, savings, investments and
labour input and their relationship to technological progress are the fountain for
generating economic growth.
Endogenous growth analysis (Arrow, 1962; Romer, 1995; Rebelo, 1991; Aghion
and Howitt, 1998) argues that technological progress evolves from the interplay of

Oil and gas

abundant
economies
171

JES
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172

economic forces based on a two-way interaction between technology and economic

life. Thus, technology is a by-product of innovation, which is nurtured by rational
economic behaviour. In the absence of diminishing returns to capital, per capita
growth will occur in the long run even without exogenous technological change.
Constant returns to scale imply an equi-proportional increase in output as a result of
increase in inputs such as physical or human capital. This give rise to an AK
production function:

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Y t At K t ;

where A is a positive constant reflecting the level of technology.

Per capita output growth is sustainable in the long run even in the absence of
technological progress simply because there is no diminishing return to capital
accumulation, and the savings rate positively affects the long-term growth of the economy.
Learning-by-doing is a veritable source of technological progress, in that investment and
production make use of ideas but new ideas are also generated in the process of production
through the positive effect of the production experience, thereby eliminating the tendency
to diminishing returns. Complementarily, research and development (R&D) activities lead
to innovations that are used to improve quality and variety.
It is perceived that natural resources such as oil and gas exist in finite quantities, so
it is impossible to use constant and positive amounts of them over an infinite horizon.
Consider a neoclassical production function with Hicks-neutral technological progress
and with a natural resource component:
Y AFK; L; R;

where A is technology, Y is output, K is capital, L is labour, and R is the rate of flow of

natural resources.
The natural resource, R, is said to be essential if output is zero without it. Thus if
Y 0 when R 0, then R is essential, otherwise it is inessential. In Cobb-Douglas
form:
Y AK a R b L 12a2b ; 0 , b $ 1; a b # 21:

The production function exhibits constant returns to scale in K, R and L together.

Population and technology grow at constant exogenous rates:
_
L_
A
g and n:
L
A
Capital accumulates according to:
K_ sY 2 dK:

In a steady-state growth, the capital-output ratio K/Y will be constant. The pool of
resources available is finite so the growth rate of total output along a balanced growth
path, gY, is given by:


gY g 1 2 An;
where, for notational convenience:

g;

gA
;
12a

;
A

b
:
12a

Oil and gas

abundant
economies
173

The growth rate of output per worker will be:

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gy g 2 b
n:
If b 0, then R plays no role and gy g. The long-run growth rate of the economy
depends not just on the rate of technological change, but also on the significant role
of natural resources, measured by b, and the rate of population growth in a
relationship interpreted by Jones (2002) as a classic race between technological
progress and the diminishing returns introduced by the finite natural resource, S0. If
g 0, meaning that there is no technological progress, the production function will
exhibit diminishing returns to capital and labour since constant growth rate of
population will lead to increasing pressure on the pool of resources, as a result of
which marginal product of labour will fall to an extent that accumulation of capital
cannot fully offset. There will be negative per capita growth in output per worker at
a rate proportional to the population growth rate, and the level of per capita income
will decline. Technological progress will make labour, capital and resource
utilisation more productive and could possibly offset the population pressure to
ensure sustained growth in per capita income. This implies that technological
progress can alleviate the depletion of natural resources. However, the effect of
exogenous technological progress on production will be diluted by the diminishing
returns to capital and labour.
The more the natural resource is used, the more the resource stock is depleted.
Thus:
S_ t 2Rt ;

or:
St S0 2

tt

R t d t:

t0

Assuming a single homogenous resource stock, the total exhaustive use of resources
over time must equal the fixed initial stock. In the long run, a constant proportion of the
stock of resources, denoted as g R=S is used in production. The declining rate of the
resources will be:
S_
2g:
S

The behaviour of the stock will exhibit negative exponential growth at the rate g, so
that:
S t S 0 e2gt :

10

JES
35,2

174

Since R gS, the amount of resources used in each period is given by:
R gS 0 e2gt :

The remaining stock of the resource declines over time, implying that the amount of
the resource used in production also declines over time, giving rise to a production
function of the form:
1

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11

Y A 12a

121 a
b
b
K
gS 0 e2gt 12a L 1212a :
L

12

The negative exponential term in equation (12) measures the depletion of the resource.
The utilisation intensity, g, plays a dual role by entering the function twice; first
multiplying the stock and second as a rate of depletion, illuminating the fact that more
intensive use of the resources increases current output, Y, by raising R gS 0 e2gt
directly while on the other hand it leads to depletion, and decreases the remaining stock
to be used in subsequent periods of time. The exhaustibility of the resource constitutes
a constraint to long-term growth of the economy. Therefore optimal depletion and
population policies are required to forestall the adverse effect of a declining stock of
natural resources on economic growth.
Given the high revenue potential of the oil and gas industry, efficiency in
government expenditure could have expansionary multiplier effects with far-reaching
impacts on economic growth. According to the Smith-Young-Currie exposition of
endogenous growth (see, for example, Currie, 1997; Sandilands, 2000), economic
growth is spurred by the opportunities for increased productivity that depends much
on the extent of increased specialisation that, in turn, hinges on the increasing size of
the market. This exposition is considered to be relevant to the process of oil-and-gas
driven growth of the Nigerian economy. That is, a larger output multiplier for the
economy, over and above the direct input-output linkage effects, can be attained if the
income earned from oil is expended in a pattern that creates increasing markets for
goods and services that are domestically produced by industries that absorb oil and
gas resources in their production processes.
The leading sector strategy of economic growth (Currie, 1974) illustrates how a
sector that is inherently a viable source of large scale economic activities but
strangulated by institutional and related policies can be liberated to spring up an
impetus for economic growth. This strategy argues that the most effective way to raise
the overall rate of growth in both output and employment is not to rely on aggregate
demand, spontaneous innovations, cost reductions, tax incentives or direct government
investment in general but rather to remove barriers or provide incentives to investment
in sectors in which there is actually a large but latent demand that can be exploited, so
that an increase in investment and consequent output can find a market without
resulting in a depression in prices and incomes in the sector. In this case, the sectors are
regarded as leaders in which it is possible to generate a rise in the overall rate of
growth. There are two main characteristics of sectors that qualify to be considered as
viable to provide a lead for overall growth of the economy:
(1) there must exist an unexploited or latent demand that can be actualised, the size
of which must be large enough to have significant impact on the whole economy
if it is actualised; and

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(2) an increase in the sectors growth can be exogenous and occur independently of
the current overall rate of growth of the economy.
Oil and gas activities and economic growth
The extent of the growth impact of oil and gas activities on the larger economy lies not
in the growth in output of crude oil per se but the processes and the value-adding
functions of factors of production. Oil and gas are depleting and non-renewable natural
resources, implying that a constant rate of extraction cannot be guaranteed. Perrings
and Ansuategi (2000) averred that there is weak empirical substance to support the
notion that environmental resources impact negatively on economic growth. Based on
his study of the Saudi Arabian economy, Fadil (1985) argued that when crude oil
production is not economically integrated with the rest of the economy, oil revenues
tend to be divorced from the circular flow of income in the domestic economy.
Economic growth can be attained through a regeneration mechanism that transcends
the stock of oil and gas by enhancing the effectiveness of the factors of production as a
reflection of positive technological change. Intensive value-adding oil and gas activities
generate positive externalities to the entire economy through spill-over effects. A
complete reliance on exogenously given technology to extract crude oil at a persistently
increased level, with little value-adding activities, weakens the stimulus for
learning-by-doing and limits the synergy for generating economic growth.
The chain of activities involved in the extraction and transformation of crude oil
into final petroleum products provide avenues for endogenous technology acquisition
while the use of the by-products of oil and gas resources in different activities
reinforces the learning-by-doing and R&D stimuli for generating endogenous economic
growth. The spill-over and multiplier effects on the economy will offset the effects of
depleting stock and enhance the capability of factors of production to respond
efficiently to effective demands for goods and services thereby generating economic
growth. An emerging self-perpetuation mechanism provides sustainability safeguards
instead of relying on depletion and consumption limits for generational equity. Thus
the availability of oil and gas resources does not automatically lead to economic
growth but can provide the requisite stimulus for economic growth if mechanisms for
harnessing the resources are effectively established.
In contemporary terms, the surging industrialisation of developed and emerging
economies of the world and the attendant increase in demand for oil and gas resources
weakens the argument for quantum control as an optimal depletion strategy for
attaining economic growth. The stock of natural resource endowment is not absolutely
determinable, more so in that scientific evidence indicates that human activities on
earth, which are never ending, are responsible for the formation of particles that
coalesce into natural resources such as crude oil and natural gas. Besides, Kemp and
Stephen (2005) averred that Hotellings (1931) prescription of an optimal depletion rate
based on the equalisation of present value returns through time in a steady manner has
been found to be less illuminating. The existence of a large and expanding market for
petroleum products brought about by advancing technologies and the surging
industrialisation of world economies requires dynamism in the acquisition and use of
technology as a safeguard for inter-generational equity. To establish a balanced
safeguard for inter-generational equity while pursuing sustainable growth, revenue
from the export of crude oil should be invested in social and economic services such as

Oil and gas

abundant
economies
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176

education, health and physical infrastructure, which can enhance the investment
attractiveness of the economy that could form the basis for innovation, endogenous
technology and sustainable growth, the benefits of which will encompass different
generations in an infinite horizon. In essence, viable economic growth strategies for oil
and gas abundant economies revolve around enhancing the endogenous character of
oil and gas activities through expansions in oil and gas absorbing investments that
enhance the value-adding capabilities of factors of production. A low level of
value-adding activities tends to limit the absorptive capacity of the economy, strains
balance-of-payment optimality and undermines technological progress. Considering
that activities in the oil and gas sector generate both positive and negative
externalities, regulatory and macroeconomic policy challenges arise based on the need
to mitigate the negative externalities while taking advantage of the positive
externalities for attaining sustainable economic growth.
Impact of oil and gas activities on growth of the Nigerian economy
The upstream activities of oil and gas are largely primary, while the downstream
activities are secondary and mostly manufacturing in nature. The upstream activities
involve pre-drilling (exploratory) surveys, drilling, field development and
decommissioning, which requires heavy financial capital and technology input. The
downstream activities comprise a chain of value-adding processes of transforming crude
petroleum and associated gas into various final and intermediate petroleum products.
These include refining crude oil into final products such as gasoline, heating oil,
lubricants and wax as well as such intermediate products as aviation fuel, industrial fuel,
bitumen, asphalt and petrochemicals. The gas chain involves the processing of natural
gas into cooking gas (a final product) and such intermediate products as liquefied natural
gas and liquid gas. Each of these strands of downstream activities involves the use of
various factor inputs that are sourced from different activity sectors in addition to labour
inputs from the household sector. The wide ranging production chain of the downstream
sub-sector constitutes the fountain for effective linkages with other sectors that can be
consolidating and expanding with appropriate policy initiatives that creates a favourable
investment climate with a targeted supply response to existing markets and the
exploration of new market opportunities. Absorption of oil and gas resources by
domestic production activities can induce supply of inputs needed by domestic
production to generate backward linkage effects. Some of the activities which do not cater
for final demands will induce attempts to utilise their outputs as inputs in some other
activities to generate forward linkage effects.
As a less developed country, Nigeria lacks the appropriate technology for the
effective linkage of domestic capital goods industry with upstream activities of the oil
and gas sector. This constitutes a major constraint on the level of interdependence that
can occur between the oil and gas upstream activities and domestic capital goods
sector. Exogenous technology through international contract agreements (ICAs) can
provide a basis for appropriate production activities. Also, through the benefits of
spin-off activities and learning-by-doing, endogenous technological change can occur
to enhance the linkage relevance of the capital goods sector and its interdependence not
only with the oil and gas sector but other sectors as well, further stimulating the
growth process. The intuition of endogenous growth analysis gives credence to this
prognosis.

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Over the years, Nigeria has established requisite structures for deriving the
economic advantages that are associated with oil and gas activities: four refineries
(Port Harcourt I and II, Warri and Kaduna) with a total installed capacity of 450,000
barrels per day (bpd); Petrochemical Industry at Eleme and the Nigerian Liquefied
Natural Gas (NLNG) project. The processes of production in each of these ventures are
associated with high levels of externalities that can diffuse to other sectors of the
economy. Spill-over effects arising from the surging need for responses to incentives
generated by thriving industrial operations of these ventures could form the basis for
self-perpetuation of value-adding activities in the various sectors of the economy.
Effective operations in the oil and gas industry can prompt the emergence of such other
activities as textile, plastics and bitumen production, which can expand the chain
activities that are prompted by the oil and gas sector across sectors of the economy.
An appropriate investment climate creates favourable markets that lead to
cost-effectiveness and appreciable returns on investment that are important factors for
effective operations and efficiency of the activities of the sector. Thus the expansion in
different aspects of upstream and downstream activities does not lead to automatic
high linkage and economic growth contributions of the oil and gas sector. A
robust-linkage performance of a sector is hinged more on the effectiveness and
efficiency of its operations than the nature of the products. It is therefore pertinent to
evaluate the efficacy of the regulatory framework as well as the effectiveness of the
structures and operations in the sector so as to enable a contextual analysis of the
impact of oil and gas activities on economic growth of the Nigerian economy.
In a nutshell, the key regulatory and policy features of the Nigerian oil and gas
sector are:
.
Emphasis on ownership and the distribution of benefits of exploration activities
between the government (as owners) and the international oil firms (IOFs) as
operators with insufficient considerations to linkage relevance of the industry to
other sectors.
.
Very favourable tax incentives, especially in the upstream activities, with the
rate of 50 per cent for Petroleum Profit Tax (PPT) considered to be among the
lowest at the international level (similar to Venezuela) compared to other
countries, especially those in the Middle East where the petroleum profit tax rate
ranges between 65 and 80 per cent (Akpan, 2000).
.
The Nigerian National Petroleum Corporation (NNPC), the main government
agency in the sector, is vested with overriding regulatory and operational powers
even without relevant technological knowledge, giving rise to bogus functional
responsibility of the corporation that has resulted in inefficiency.
.
Refining of petroleum products, the main value-adding and most profitable of the
downstream sector activities is, through regulation, the exclusive right of the
government. The entry and exit law preclude any firm from refining activities
and grants the sole right to the federal government (Petroleum Refining
Regulations of 1974).
.
Laws regulating the health and safety of the work places and products in both
the upstream and downstream are either non-existent or weakly enforced. Also,
adequate information dissemination on activities of the oil operators did not

Oil and gas

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178

receive any regulatory and legal consideration. Garba (2000) argued that the
regulations in the sector fall below international standards.
Thus, the regulations in the industry are inadequate, fall below international standards
and are weakly enforced, which provide opportunities for operators to maximise their
profit objectives to the detriment of macroeconomic achievements. The regulatory
environment is a systemic failure as a result of regulatory capture and thus
multinational oil companies easily slip through the regulatory net, leaving the
government to account for a crisis of regulatory management (Abdullahi, 2002).
From an economic growth perspective, the regulatory and operational features do
not provide the requisite conditions for efficient utilisation of oil and gas resources for
an inclusive economic growth process. The emphasis on revenue earnings from
extracted oil as against utilisation of oil in the domestic chain of productive activities is
not only a weak strategy for growth but also undermines balance-of-payment (BOP)
optimality. Samiei (1990) illustrated the BOP vulnerability of OPEC members and
Darrat and Suliman (1990) established high levels of insulation of real imports against
foreign price shocks, probably because of the insignificance of import-substitution and
export-consumption sectors. The public sector control of downstream activities implies
a lack of incentives for competitive investments in downstream activities. This gives
rise to production inefficiencies and associated cost-ineffectiveness. For instance, the
World Bank reveals that while the cost of turnaround maintenance of the Port Harcourt
II refinery to the Nigerian government was $37 million, the global standard rate was
$5-6 million (Garba, 2000). The resulting distortions tend to prevent viable investments
in downstream activities, thereby supplanting healthy competition that could enhance
efficiency. Positive externalities through learning-by-doing and endogenous
technological change are emasculated and inherent underutilisation of resources
permeates to weaken the process of economic growth. In essence, restrictive
regulations, nationalisation, and exclusive government participation in downstream
activities alongside weak domestic technological capability key features of the
Nigerian oil and gas industry have implications for the extent of linkage and
economic growth relevance of the oil and gas sector.
Trends in output and its proportion to GDP as well as the revenue earnings of
government from oil and gas and its proportion to total revenue earnings of the
government are indicators of contribution of the sector the growth of the economy.
Table I indicates that output of crude oil has been steady, with an exceptional rise only
between 1970 and 1971 of 41.2 per cent, 19.1 per cent in 1972 and 21.4 per cent in 1979.
A negative growth rate of 30.9 per cent occurred in 1981. Apart from these few cases of
very high increases and decreases in output, the overall trend has been steady.
However, the growth rate of revenue (foreign exchange) earnings has increased
continuously at an extremely high rate as a result of rising world market prices. The
proportion of oil revenue to total government revenue is very high and shows an
increasing trend. Figure 1 provides a graphical illustration of the wide disparity
between the rate of growth of crude oil output and the rate of growth of revenues from
crude oil. The high government dependence on oil revenue implies that the economy is
susceptible to the volatility of international oil prices. To provide a cushion for
macroeconomic shocks, it is essential to create avenues for forward-looking
investments that are based on effective value-adding production with significant

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Crude oil
Associated gas
Year Output growth rate Export Domestic utilisation Output growth rate Utilisation Flared
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

41.2
19.1
8.1
14.4
2 19.8
14.8
1.1
2 9.1
21.4
2 10.1
2 30.9
2 10.4
2 4.2
12.5
7.8
2 2.0
2 9.8
9.6
18.2
5.5
4.4
3.1
2 2.8
0.7
2.8
3.5
2.6
2.2
0.3
2.4

96.9
97.1
97.8
96.7
96.6
95.1
97.2
93.4
96.8
95.5
86.3
89.3
85.3
86.9
88.8
88.9
90.8
80.8
82.3
83.5
83.0
84.9
85.0
81.5
83.0
86.2
87.6
88.8
88.6
85/6
86.2

3.1
2.9
2.2
3.3
3.4
4.9
2.8
6.6
3.2
4.5
13.7
10.7
14.7
13.1
11.2
11.1
9.2
19.2
17.7
16.5
17.0
15.1
15.0
18.5
17.0
13.8
12.4
11.4
11.4
14.4
13.8

0.6
0.3
0.3
0.2
20.3
0.1
0.0
0.0
0.3
20.1
20.3
20.1
0.0
0.1
0.1
0.0
20.1
0.2
0.2
0.1
0.1
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.3

0.9
1.4
1.6
1.8
1.5
1.7
3.1
8.8
8.8
5.6
6.7
17.2
22.4
21.4
21.2
20.0
25.7
28.1
27.2
25.2
22.5
22.2
21.7
22.5
20.1
21.0
27.5
27.8
30.2
35.0
46.2

99.0
98.6
98.4
98.2
98.5
98.3
96.9
91.2
91.2
94.4
93.3
82.8
77.6
78.6
78.8
80.0
74.3
71.9
72.8
74.8
77.5
77.8
78.3
77.5
79.9
79.0
72.5
72.2
69.8
64.1
53.8

Source: Central Bank of Nigeria (2000b)

endogenous character that leads to a high level of domestic utilisation (absorption) of

oil and gas resources.
Table I also indicates that the average level of domestic utilisation of extracted crude
oil was less than 4.6 per cent between 1970 and 1980. This improved to 14.0 per cent
between 1981 and 1990, and marginally improved further to 14.3 per cent between 1990
and 2000. This implies that oil and gas activities are heavily concentrated in the
extraction of crude oil for export with a relatively very low value-adding chain of
activities. As a logical reflection, Table II indicates that both the contribution of the
sector to GDP and the changes in real GDP over the years do not match the levels of
increase in oil revenues. Figure 2 illustrates the pattern of mismatch of changes in real
GDP and total government revenue. From 1970 to 1979, the average contribution of the
oil and gas industry to government revenue was 59 per cent. This increased to 70.2 per
cent between 1980 and 1989 and increased further to 77.7 per cent between 1990 and
2000. The average growth rate of real GDP was 6.18 per cent between 1970 and 1980,

Oil and gas

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economies
179

Table I.
Production and
utilisation of oil and gas
(per cent)

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180

Figure 1.
Percentage growth rates of
oil output and revenue

20.01 per cent between 1981 and 1990, and 2.94 per cent between 1991 and 2000. This
mismatch in the impact of oil and gas activities on revenue earnings as compared to GDP
implies that revenue earnings of government are heavily tied to the sale of extracted oil
and gas with relative low levels of productive activities of sectors of the economy.
Table III reveals that domestic refineries have been operating sub-optimally, even
with increasing levels of domestic demand, as evidenced by increasing domestic total
consumption of petroleum products. This is an indication of declining capacity
utilisation of structures of downstream activities, which weakens the stimulus for
endogenous growth. After flaring associated gas for several years[1], the NLNG was
initiated in 1995 and the construction of the plant was completed in 1999. The evidence of
success is reflected in the shipping of gas to various foreign ventures[2], which has led to
a gradual reduction in gas flaring, as can be deduced from Table I. The NLNG is very
significant for the Nigerian economy in terms of revenue, but its pattern of production
and market outlets suggests that it lacks a endogenous character that can propel the
expansion of domestic economic activities for engendering economic growth.
The versatile use of oil and gas in modern economies implies that a growing
economy tends to absorb increasing quantities of these resources in its real productive
sectors. The low level of utilisation of oil and gas in the Nigerian economy indicates a
low level of productive capacity, with adverse effects on the revenue earning potential
of the economy. For instance, there is a difference of $52/tonne between the value of
crude and refined products like naphtha; $232/tonne when compared with basic
petrochemicals such as ethylene, while crude transformed to textiles gives a value
added of up to 60 times the original value (Nore, 1976). OPEC[3] reveals that during the
period 1996-2000, oil tax revenue accruing to G7 industrialised countries is about $270
billion annually, while the total revenue from oil accruing to all OPEC member
countries together is about $170 billion annually during the same period. The total
revenue that accrued for the entire period was $1.3 trillion for the G7 countries and
$850 billion for OPEC countries. Thus, oil and gas producing countries earn far lower
revenues from oil and gas than oil and gas absorbing countries. In addition, the
multiplier effects and the positive externalities that could arise from value-adding oil

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Year

Growth rate of
real GDP

Oil and gas

to GDP

Growth rate of
oil revenue

Oil revenue to
total government
revenue

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

0.0
21.3
5.5
6.4
11.7
2 3.0
11.1
8.2
2 7.4
2.4
5.5
2 26.8
2 0.3
2 5.4
2 5.1
9.4
3.1
2 0.5
9.9
7.4
8.2
4.7
3.0
2.7
1.3
2.2
3.4
3.2
2.3
3.1
3.6

20.3
16.3
13.7
15.2
17.0
13.6
23.8
21.0
35.4
33.4
37.5
46.8
35.5
24.8
40.4
43.6
38.9
27.9
28.1
47.5

206.2
49.8
32.9
266.5
14.7
25.6
13.3
225.1
94.9
39.1
230.7
28.8
27.2
14.0
32.1
225.8
134.7
4.2
97.3
83.7
15.0
98.5
21.2
21.2
102.6
26.0
2.0
222.2
123.4
119.7

26.3
43.6
54.4
59.9
82.1
77.5
79.3
75.6
61.8
8.1
81.1
64.4
68.3
69.0
73.5
72.6
64.4
75.0
71.9
72.6
73.3
81.9
86.2
84.1
79.3
70.6
78.6
71.5
70.0
76.3
83.5

Government
revenue
growth

84.4
20.2
20.7
167.6
21.5
22.7
18.9
2 8.3
1,380.5
286.0
212.8
214.0
2 8.1
7.1
33.7
216.3
101.5
8.7
95.2
82.1
2.9
88.6
1.2
4.7
127.8
13.1
12.0
220.5
104.7
100.8

Source: Basic data obtained from Central Bank of Nigeria (2000b)

and gas activities, such as learning-by-doing and other endogenous stimuli are stifled.
The lack of economic growth emanating from this disposition sustains itself by
cultivating a complacent consumption pattern in public expenditure that stultify
domestic markets and weaken productive structures, thereby accentuating the cycle of
growth slowdown.
The government expenditure version of endogenous economic growth analysis
postulates that public expenditure on essential non-excludable social and economic
services creates a favourable atmosphere for investments to stimulate economic
growth. A review of the public expenditure trend in Nigeria indicates that the social
and economic sectors have received relatively little attention for several years. For
instance, as Table IV reveals, capital expenditure on social and community services
was 0.7 per cent of total in 1970 and has been very low for several years. The highest
level was 29.3 per cent in 1974, but decreased continuously thereafter. It was as low as

Oil and gas

abundant
economies
181

Table II.
GDP and oil revenue
growth rates (per cent)

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182

Figure 2.
Growth rates of real GDP
and government revenue

Year

Table III.
Domestic production and
consumption of
petroleum products

1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Capacity utilisation
Total output
Total domestic consumption
Net exports
(per cent)
(millions of barrels)
(millions of barrels)
(millions of barrels)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
71.2
64.3
76.7
69.1
72.4
57.1
49.7
58.8
N/A
43.3
29.6
29.5
19.9

N/A
N/A
N/A
N/A
N/A
N/A
N/A
62.3
72.8
89.3
86.3
84.0
78.8
53.3
66.8
N/A
70.3
41.5
47.9
32.3

104.3
106.5
80.3
69.0
69.6
71.7
68.0
60.4
57.8
57.8
60.6
80.5
64.3
59.0
57.5
62.7
41.1
11.7
69.0
69.0

N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
11.7
1.05
9.0
4.7
7.9
N/A
2 4.9
2 31.0
2 19.4
2 43.1

Note: Some of the original data were measured in tonnes but were converted using a conversion rate
of 7.5 barrels 1 tonne
Sources: Basic data obtained from Central Bank of Nigeria (1999, 2000a, 2001) as well as other sources

2.2 per cent in 1997 and 3.0 per cent in 1999 before increasing again to 11.7 per cent in
2000. In terms of recurrent expenditure, the percentage expenditure on economic
services has been within the range of 4.0 per cent and 7.2 per cent for many of the years
with only one exception, the highest percentage being 10.3 in 1981; that of social
services increased gradually but not consistently over the years from 0.4 per cent in

37.40
36.40
24.10
23.70
21.90
23.30
19.70
20.20
21.40
18.20
14.80
11.00
6.00
22.50
6.40
8.40
3.10
28.50
22.80
17.40
12.10
11.80
12.90
14.80
12.40
11.00
9.40
15.90
9.70
7.50
22.20
11.20

8.30
33.50
29.40
44.10
38.10
41.00
55.20
62.40
58.00
66.60
58.80
55.30
39.60
46.90
16.00
16.30
12.90
33.90
25.50
26.10
14.50
11.10
5.90
33.70
38.20
35.60
40.10
54.40
55.50
69.80
46.60
59.20

Sources: Central Bank of Nigeria (2000, 2003)

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

Year Administration
0.70
7.60
9.30
7.10
29.30
28.90
22.3
16.50
16.70
14.50
24.20
19.80
15.10
21.00
5.80
21.10
7.70
9.70
20.70
12.30
8.70
5.30
5.40
6.60
7.00
7.60
5.50
2.20
6.50
3.00
11.70
12.20

Capital expenditure
Economic
Social and community
services
services
53.60
22.50
37.10
25.10
10.70
6.80
2.80
0.80
3.90
0.60
2.20
14.00
39.30
9.60
71.80
54.10
76.30
27.90
31.00
44.20
64.60
71.80
75.90
45.00
42.40
45.80
45.10
27.40
28.30
19.60
19.50
17.40

19.60
5.60
49.20
47.20
36.60
38.60
26.50
27.20
47.50
31.40
39.90
44.90
42.60
48.60
45.90
34.80
34.80
38.60
29.80
24.10
18.10
18.20
16.40
22.40
23.90
21.60
37.90
38.70
30.70
28.70
26.30
31.20

Transfers Administration
4.30
4.00
4.60
5.40
4.90
4.80
3.70
5.00
8.00
3.60
9.80
10.30
7.10
7.20
5.60
4.20
6.70
7.00
6.30
5.50
4.50
3.40
5.80
5.70
4.60
4.50
4.70
4.90
6.70
6.00
6.50
9.20

0.040
0.60
2.90
3.20
6.30
10.50
16.60
9.60
14.50
16.00
16.80
17.70
14.80
17.10
13.20
14.90
11.20
3.00
10.90
16.30
9.40
7.00
2.50
10.70
11.70
10.40
10.40
14.20
13.50
11.10
12.70
13.80

Recurrent expenditure
Economic
Social and community
services
services

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75.70
89.80
43.30
44.20
52.20
46.10
53.20
58.10
29.90
49.00
33.50
27.20
35.50
27.00
35.30
46.10
47.40
51.40
53.00
54.10
68.10
71.40
75.30
61.30
59.80
63.50
43.20
43.00
49.90
54.20
54.50
45.90

Transfers

Oil and gas

abundant
economies
183

Table IV.
Patterns of government
expenditure, 1970-2001
(per cent)

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184

1970 to 12.7 per cent in 2000 but much higher in other years: for example, 16.6 per cent
in 1976, 16.8 per cent in 1980 and 17.1 per cent in 1983, with the highest being 17.7 per
cent in 1981. Investment in education, health, housing, transportation and
communication, which could have satisfied the requirements of Hartwicks rule of
intergenerational equity, received only 5.87 per cent of the total public expenditure in
1984. This increased to 11.56 per cent in 1986, decreased to 2.78 per cent in 1987,
increased to 7.06 per cent in 1988, and thereafter declined continuously to 0.79 per cent
in 1997. Defence and the establishment and replication of several relatively
unproductive public administration institutions received very high public
expenditure allocations at the expense of social and economic services. This
unproductive and consumerist pattern of public expenditure, driven by the flow of
Hotelling rent (revenue from crude oil exports), has been a dominant feature of the
economy for several years. The volatility of international oil markets as amplified by
commodity concentration analysts emphasises the fact that Hotelling rent lacks
inherent sustainability hence a steady-state consumption is not possible from it.
The low level of expenditure on social and economic services could have hampered
the emergence of a favourable investment atmosphere. Nigerias infrastructure and
public utilities rank among the worst in the world. In a private sector assessment
survey by the World Bank, manufacturing firms considered inadequate infrastructure
as their most severe business constraint in Nigeria: over 90 per cent of firms surveyed
provide their own electricity power supply; the 2004 Africa Competitiveness Report
ranked Nigerias infrastructure second to last among 25 African countries and third to
last of 102 countries surveyed in the world (International Monetary Fund, 2005).
The growth performance of the economy between 1970 and 2000 can be deduced
from Table II. The growth rate of real GDP declined from 21.35 per cent in 1971 to 5.48
per cent in 1972, and improved slightly to 6.42 per cent in 1973 and to 11.74 per cent in
1975. The economic growth process is not merely about GDP indicators but the
structural composition of production that determines the ability of the economy to
sustain the process and gains of growth. In essence, it involves the inclusiveness and
the transformational mechanism of production structures, composition of output, and
absorptive capacity of the economy. All this translates into the need for increasing
roles of the secondary and tertiary sectors while the role of the primary sectors of the
economy makes a smaller relative contribution to GDP. Ajakaiye (2003) established
that the structure and pattern of growth of output in the Nigerian economy was
characterised by excessive dominance of the primary sector followed closely by the
tertiary sector, with a relatively very small contribution of the secondary sector to
output, employment and income which indicates that the economy is not generating
growth through inclusive productive activities.
Apparently, the dispensation of the economy has supplanted the potential
comparative advantage in downstream oil and gas activities. However, agglomerative
forces the stimuli that draw workers and firms to locate in the same place could
have a significant impact on the cost of living of the people of an area, leading to gain in
comparative advantage (Forslid and Wooton, 2003). The degree of embeddedness of
the multiple activities of multinational corporations in a local economy, especially
manufacturing aspects, determines the levels of linkage stimuli to be derived, and the
process of knowledge transmission is more effective if incorporated into national policy
via interaction between multinational and domestic enterprises (Brand et al., 2000).

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Conclusions
Evidence from the Nigerian economy illustrates that increasing revenue accruing from
the export of extracted oil and gas does not necessarily translate to growth in the
economy. The revenue contribution of oil and gas relative to total government revenue
grew from an average of 59 per cent between 1970 and 1979 to 70.2 per cent between
1980 and 89 and increased further to 77.7 per cent between 1990 and 2000, but the
average growth rate of the real GDP of the economy was 6.18 per cent between 1970
and 1980, 2 0.01 per cent between 1981 and 1990, and 2.94 per cent between 1991 and
2000.
There is further evidence of a persistent decline in the domestic production of
petroleum products, arising from a deteriorating absorptive capacity of production
structures, leading to an ineffective response to domestic markets. The economy is thus
unable to exploit the potential comparative advantage from its abundance of oil and
gas resources. The provision of incentives for investments in value-adding
downstream activities that can benefit from the effective utilisation of available oil
and gas resources is a route for attaining comparative advantage.
The key conclusion is that over-reliance on exogenous technology application for
the extraction and export of oil and gas, with an emphasis on revenue, tends to weaken
the absorptive capacity of domestic production structures. In turn, this subverts
technological progress, stifles the revenue earning potential of the economy, stultifies
the effectiveness of factors of production, and undermines economic growth. Oil and
gas abundant economies can establish a sustainable growth path by creating
opportunities for the wide-ranging use of oil and gas resources in the domestic
economy. This will lead to the expansion of domestic markets, an increase in the
absorptive capacity of the economy, an enhancement in the effectiveness of factors of
production, and the creation of conditions for technological progress, all of which are
essential for the attainment of sustainable economic growth.
Notes
1. By definition, associated gas is any gas that is separated from oil or bitumen production.
When crude oil or bitumen is removed from the ground, some natural gas will be extracted
as well, although in relatively smaller amounts than the quantity of oil. Gas flaring refers to
the tendency to allow these quantities of associated gas to evaporate into the air without
using appropriate mechanisms to process them for relevant uses. Nigeria has a high
formation of gas/crude oil ratio, and hence gas fields are usually discovered during oil
exploration but are not developed (Okoh, 2001).
2. See www.nlng.com/NLNGnew/marketing/default.htm
3. See www.opec.org/newsinfo/whogetswhat
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Further reading
Adam, J.A. (2001), Macroeconomic implications of oil resource availability and exhaustibility:
the case of Nigeria, Proceedings of the Annual Conference of the Nigerian Economic
Society, pp. 369-87.
Adewuyi, A.O. (2000), Absorptive capacity and macroeconomic policy in Nigeria, NISER
Monograph Series, No. 11, Nigerian Institute of Social and Economic Research, Ibadan.
Adewuyi, A.O. (2001), The implications of crude oil exploitation and export on the environment
and level of economic growth and development in Nigeria, Proceedings of the Annual
Conference of the Nigerian Economic Society, pp. 119-45.
Bankole, A.S. (2001), Incentives and regulations to abate gas flaring in Nigeria: towards an
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About the author
Musa Jega Ibrahim has taught at the Ahmadu Bello University (ABU) in Nigeria, and at
Strathclyde and Glasgow Caledonian universities in the UK. He has presented papers at various
conferences and has published in the Nigerian Journal of Economics and Social Studies and
jointly in the Conference Proceedings of the 1996 Annual Conference of the Nigerian Economic
Society. This paper is an aspect of his PhD research at the University of Strathclyde. Musa Jega
Ibrahim can be contacted at: mjega@isdb.org or musajega@yahoo.co.uk

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