With the price of oil skyrocketing, the search is on for explanation. One reason is violence and unrest in Nigeria, which has reduced production by at least a quarter, according to some estimates. The economic and political failures that lay behind rebel violence in Nigeria’s oil-bearing Delta, however, are not amenable to any easy fix.
While the recent rebel attacks are not directly responsible for the logic-defying $11 surge in oil prices as of June 6, they complicate the market, challenging policymakers and governments to take effective steps to stem the rise. Nigeria is not a bit player in international markets; it is OPEC's fifth-largest oil producer, with a quota of 2.3 million barrels a day. Policy pronouncements, increasing production quotas, plans to build nuclear-power plants, imposing taxes on air travel or talk of unlocking the strategic petroleum reserve in the United States have not calmed markets. Unrest in Nigeria only aggravates the situation.
The unrest also hurts poor countries most dependent on commodity imports, as their fuel bills rise without an accompanying increase in any revenue. Discontent over globalization increases in such a context, since those at the vanguard of maintaining the global architecture – the G8 finance ministers, the UN Security Council, CEOs who meet at Davos – have little influence over events in the Niger Delta.
The standing of the African West Coast as oil producer has grown because of ongoing instability in the Middle East. According to a US congressional estimate, the US alone expects perhaps one quarter of its future imports to come from the Gulf of Guinea region within a decade or so. Nigeria, the biggest producer there, hardly provides an encouraging example of what might follow in Equatorial Guinea, Sao Tome or further inland in Cameroon or Chad.
Oil was discovered in the Niger Delta in 1956, in Oloibiri. Since then, Nigeria has exported oil worth billions of dollars, but poverty has worsened. While the capital city of Abuja has sparkling buildings, the Niger Delta, where much of the oil is found, has few public services such as electricity, clean water, primary health clinics or schools. The governmental authority the Delta communities see most often is the military, usually defending oil-industry installations. Most oil companies operating in the Niger Delta have signed on to corporate social responsibility initiatives that address chronic poverty, but the companies can only provide relief to some communities, and such initiatives cannot become a substitute for governmental action.
On top of that, many communities are angry over years of environmental degradation due to gas flaring and groundwater contamination. The contamination is at least partly due to sabotage of oil pipelines by rebel forces, but the communities want clean water, not analysis of who blew up the pipes. Writer and environmental activist Ken Saro-Wiwa captured the global imagination with his campaign against oil companies in the Ogoni region, but was arrested by a former dictator and executed in 1995, after a trial that most observers dismissed as unfair by any standard.
Since the return of electoral politics in Nigeria in the late 1990s, successive governments have vowed to address the Delta crisis by allocating more resources to the region. But the pace has been sluggish, and corruption remains rife. Capitalizing on the discontent, a rebel group called the Movement for the Emancipation of the Niger Delta (MEND) has taken it upon itself to pursue justice. Its armed militia have killed government soldiers, kidnapped oil-industry workers, and attacked industry infrastructure repeatedly. They fund their illegal activities through ransom payments as well as stealing oil from pipelines and selling it to unscrupulous traders, often in collusion with some Nigerian authorities. With fast motorboats, the masked rebels operate with virtual impunity in the inaccessible creeks, their hands wielding AK-47s, engaging in frequent bloody skirmishes with military who patrol the region. With their boats and barges often leaking, they leave a trail of pollution in the creeks. Frequent attacks on the pipelines cause explosions that add to the region’s environmental woes.
The oil industry cannot fix this discontent. Including every subcontracting employee, the industry employs about 35,000 Nigerians. Even if the industry were to add a small percent of new jobs every year and replace staff lost due to attrition, the highest number of jobs it can create in a year won't exceed 5,000. The Niger Delta alone has nearly 30 million, about a fifth of the nation's population. Its population grows at 2.4 percent a year, implying the need for some 3 million jobs a year, with perhaps 700,000 in the Niger Delta. Oil can only play a small role in such an equation.
Oil can fuel the engine of the economy, with other industries creating jobs. But over the years, easy money from oil has distorted investment decisions, allowing Nigeria to neglect other industries. Some 95 percent or more of its foreign-exchange earnings come from oil, and with the current stratospheric prices, Nigeria might think it has no reason to look beyond oil. Its reserves are about 36 billion barrels, and at the current rate of production, it has enough oil to last another 40 years.
After that, what? Better management of oil revenues is one solution. Reflecting on the destructive role sudden wealth can play, policymakers have tried monitoring oil revenues. But the effort hasn’t borne any fruit. Take for instance Chad. When oil was discovered in the Chad basin and the Chad-Cameroon pipeline was built, the World Bank insisted on conditions to ensure that revenues would be deposited in an escrow account, with funds only used for approved development expenditures. However, with conflict in Darfur and the presence of hundreds of thousands of refugees on the border, Chad now ignores those commitments some of the time, and spends more on defense. Rising oil revenues, thanks to rising prices, means there are limits to the absorptive capacity in Chad for more development expenditure. A waste of those resources is, then, inevitable.
In the path-breaking 1997 study, "The Paradox of Plenty: Oil Booms and Petro States," author Terry Lynn Karl shows how sudden infusion of oil wealth, unless properly harnessed, leads to problems in countries without a tradition of good governance. The book focused on Algeria, Venezuela, Nigeria, Indonesia and Iran, but the message resonates beyond.
Still, there’s little to show for the better understanding of the problem. International financier George Soros funded several initiatives to seek greater transparency in the management of revenues from natural resources, such as the Publish What You Pay Coalition, which empowers the civil society to make authorities publicly accountable; the Open Society Institute; and the Revenue Watch movement. Former British Prime Minister Tony Blair launched the Extractive Industry Transparency Initiative, which calls upon oil, mining and gas companies to reveal their payments to host states.
In theory, the surge in the price of oil should provide ample resources for the government to address problems of chronic poverty. But clearly that hasn’t happened, and discontent simmers. Unless countries like Nigeria address this specific issue – and the international community helps it to develop a smarter macroeconomic policy that reduces dependence on oil exports and diversifies industries, its growing population will face a bleak future.
Nigeria's crisis is not only a Nigeria concern. The discontent in the Delta frightens markets, and instability could spread. Dependence on a single industry cannot be sustained, and economic diversification and fairer redistribution of resources must become a priority in Nigeria, to prevent another full-scale war.
Salil Tripathi is a London-based writer who specializes in Asian and international economic affairs. He is former correspondent for India Today and Far Eastern Economic Review. * Reproduced with permission from YaleGlobal.