The Blessing of Oil – a Peculiar Mess

By Les Leba

Our parlous economic predicament is generally regarded as a “resource curse”, a phenomenon, which the free encyclopedia defines as a paradox of plenty, in which countries with abundant revenue from mineral resources show less economic growth with a beleaguered manufacturing sector when compared with other countries with less resource endowments.

The causes of such paradox are said to include exposure to global commodity market swings; weak and corrupt institutions, which condone fraudulent diversion from revenue streams from such mineral exploitations; government’s mismanagement of resources, and expected appreciation of a nation’s real exchange.

Let us briefly examine the identified causes of resource curse from the Nigerian perspective!

In reality, global commodity market swings cannot be responsible for the parlous state of our economy, as crude oil price climbed from less than $4/barrel to stabilise at over $100/barrel in the last three or so decades, while improved extraction technologies also more than doubled daily production output to about 2.5bn barrels; furthermore, price and output swings are often few and short-lived.

Conversely, we cannot dismiss the incidence of weak and corrupt institutions as a contributory cause of our inability to translate our huge resource endowment into a blessing for our people.

Incidentally, lately, in a report titled “Swiss Traders’ Opaque Deals in Nigeria”, a Swiss non-governmental advocacy organization, called ‘Berne Declaration’ accused the Nigerian National Petroleum Corporation (NNPC) of conniving with major Swiss oil trading companies to drain Nigeria of billions of dollars revenue through the sale of crude oil below market value!

Consequently, ‘Berne’ report alleges that NNPC plays a significant role in maintaining the so-called resource curse. Prominent amongst NNPC’s reported shady deals are its partnership with Vito and Trafigura corporations, (two Geneva based commodity trading firms, which are registered in Bermuda, where they do not pay any tax). These two companies, incidentally, paid over $6.7bn for about 27 per cent of Nigeria’s crude oil exports in 2011.

The ‘Berne’ report further decries the unfortunate reality that Nigeria is the only major oil producing country that sells 100% of its crude to private traders rather than marketing it itself, and benefitting from the resulting added value! The report wonders why NNPC continues to allocate over 400,000 barrels of crude daily to its ‘comatose’ refineries, “as if they were operating at full capacity, while the excess allocations are sold at knockdown prices or exchanged for refined petroleum in shady swap contracts”!

The Berne report identifies the ‘MRS’ Group and its subsidiary, Petrowest Services SA amongst other culprits, which include Ontario Oil and Gas, allegedly owned by Ugo-Ngadi Adahoha. Others are the RahaManiyya Group, the Tridax Energy and Mezcor Limited, which were traced to allegedly close associates and the younger brother of the Petroleum Minister, Diezani Alison Madueke!

Furthermore, ‘Berne’ report also identified government mismanagement of resources as being contributory to our predicament of resource curse. This observation is underscored, for example, by our nation’s lopsided fiscal strategy, which, in spite of our severe infrastructural deficit, steadily commits over 70% of federal and state budgets to recurrent expenditure!

The Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala,’s promise to redress the expenditure imbalance with just 1-2% incremental rise in annual capital budgets does not demonstrate a convincing resolve!!

Worse still, a fiscal strategy, which accommodates over N2tn fuel subsidy (i.e. equivalent of about 40% of 2013 federal budget) annually is undoubtedly a misguided approach to successful planning!

Besides, Nigerians have wondered why better-endowed oil producing countries can earn respectable levels of income from a levy of a reasonable sales tax on fuel, while the Nigerian government conversely pays out a horrendously large component of its crude revenue as subsidy! It is inconsequential that a significant proportion of the 35m litres daily fuel supply is smuggled to neighbouring countries, nor does it seem to matter that ‘briefcase’ fuel importers are paid billions of naira in fuel subsidies, even when they have not brought in a drop of P.M.S!

Worse still, government’s attempt to support the poor with over 50% subsidy on kerosene prices has been largely undermined, as NNPC’s porous regulatory structures and systems appear to deliberately create huge opportunities for excessive profiteering, in its partnership with fraudulent fuel importers!

Real exchange rate appreciation as increasing crude resource revenue flow into the economy, has also been identified as a responsible factor for resource curse. But herein lies the obvious contradiction in our own nation’s experience, as bountiful forex revenue earnings and vastly extended imports’ demand cover in the last three decades, somehow failed to stop the naira exchange rate plummeting from 1:1 to over N170=$1.

Consequently, in the Nigerian context, there is a contradiction in the notion of the ‘Dutch Disease’ as increasing oil revenue has led to a much weaker naira, rather than the realistic expectation of a stronger exchange rate, which may have created a challenge to the manufacturing sector’s competitiveness.

The main reason for above contradiction in exchange rate valuation can be easily traced to the process by which CBN infuses export crude dollar revenue into the economy; the CBN’s substitution of naira allocations for dollar revenue constantly ensures that the ensuing excess naira liquidity ultimately weakens our naira, when pitched against CBN’s rationed weekly dollar auctions! Consequently, we have the paradox of increased dollar revenue instigating excess naira liquidity and ultimately a lower naira/dollar exchange rate!!

The above fraudulent rape of our resources notwithstanding, salt is further rubbed into our injury as poverty deepens in communities, which host oil exploration and exploitation, as both local and international oil majors defile the agricultural landscape and jeopardise the traditional mainstay of subsistence fishing! In a recent report, Amnesty International also claims to have fresh evidence that Shell falsifies and manipulates oil spill investigations, and documents in Nigeria, and also mischievously blames sabotage for oil spills, which are sometimes caused by corrosion in its own aging pipelines.

Regrettably, there is yet no indication that the corporate rape of our resources with the partnership of NNPC is about to end!!