FROM the landmark COP26 international climate change summit to the vagaries of the international marketplace and production hiccups, the wake-up bell has been ringing loudly for oil-dependent countries. The message is clear: as more countries switch to cleaner energy sources, the value of oil as the mainstay of any economy is shaky and uncertain.
For Nigeria especially, with over 200 million persons, wracked by poverty and fiscal haemorrhage, diversifying revenue sources is desperately urgent.
Although environmental activists said its resolutions fell short of their radical agenda, the recent 26th Conference of the Parties of the 197 countries that have signed the United Nations Framework Convention on Climate Change agreed to limit global temperature rise to 1.5 degrees Celsius till 2030. More to the point, over 100 countries agreed to cut methane emissions, transition to clean energy and decarbonisation. The national governments, cities, states, and car manufacturers that signed the Glasgow Declaration on Zero-Emission Cars and Vans resolved to stop the sale of internal combustion engines by 2035 in major markets, and worldwide by 2040. Eleven countries went further, creating the ‘Beyond Oil and Gas Alliance’, to jointly set an end date for national oil and gas exploration and extraction.
For years, analysts have foreseen the decline of oil and gas as the world’s dominant energy source, which has been powering economies, playing a key role in industrialisation, technology and transportation, and facilitating the wealth of countries blessed with its abundance. But as the Environmental Working Group, a US think-tank, observed, the industry, “from extraction to transportation to refining, is no longer the profitable and financially stable enterprise it long was.”
Though the fall in global oil demand to 91 million barrels per day from 95mbpd in 2019 is attributed to the COVID-19 pandemic, experts forecast that in the medium to long-term, the fossil fuels industry is headed for a decline. Already, for several years, revenues, profits and cash flows have shrunk, so have stock prices and bankruptcies have occurred. The International Energy Agency reported a steady decline in oil and gas upstream investment since 2015 when it shrank by 25 per cent and by 26 per cent in 2016. Combined, investment in the upstream in the 13 members of the Organisation of Petroleum Exporting Countries declined from $40 billion in 2017 to $30 billion in 2019.
Its nemesis is primarily the shrinking of the global economy in the near term, headlined by lower demand from China and India, but more threateningly in the long term by a world transitioning to cleaner energy use. As more countries commit to the shift and newer technologies emerge, renewable energy is getting cheaper, rising electric car sales, and increasing resort to recycling plastics are impacting on demand for oil and gas. Indeed, asserts the EWA, new technologies are set to make some fossil fuels use obsolete. The European Union, Japan, South Korea, Canada, and Iceland among others are committed to implementing bans or 100 per cent sales of zero-emission vehicles. Research outfit, BloombergNEF, reported that electric vehicles accounted for 7.2 per cent of global car sales in the first half of 2021, up from 4.3 per cent in 2020.
Among major oil producers, Nigeria’s situation is precarious. With an installed capacity of 3.0 million barrels per day, production, including crude and condensates, has not surpassed 2.0mbpd since 2017, with output oscillating between 1.5mbpd to 1.9mbpd 2017 to 2019. On the back of OPEC quotas, reduced demand, oil theft and sabotage, and the COVID-19 setback, production has gone barely above 1.5mbpd since late 2020, plunging to 1.25mbpd in September 2021.
Dangerously, oil and gas revenues provide 90 per cent of total export earnings and almost 70 per cent of total government revenue. It contributes only 9.0 per cent to GDP and less than 1.0 per cent to formal employment. Since the oil boom of the early 1970s, its huge revenues notwithstanding, it has dominated the economy in harmful ways, fostering neglect of agriculture, mining, and crafts. It has created a rapacious rentier class and distorted the economy. The country is at the mercy of the fluctuations of the global oil market, facing bankruptcy and recession anytime there is a prolonged crash in prices. Three such recessions have hit hard since 2016. Revenues have fallen, debts and repayment obligations have mounted, and productive activities have shrivelled and created a vast army of 23.2 million unemployed persons.
Urgently, the President, Major-General Muhammadu Buhari (retd.), and the 36 state governors must take drastic measures to pull the country from ruin, diversify production, exports, and revenue sources. For starters, Buhari should go for the quick wins offered by immediate privatisation and liberalisation of all sectors of the economy, accompanied by radical improvement in the ease of doing business. Researchers at the Centre for International Development at Harvard University conclude that countries that have diversified their economies into more complex sectors, like India and Vietnam, are those that will grow the fastest in the coming decade. The government needs to identify and promote potential sectors and product categories for export expansion and diversification based on a chain of domestic capabilities.
Extraordinary measures and incentives need to be put in place to attract domestic and foreign direct investment to the massive job-creating agriculture, mining, ICT, and industrial sectors. Power should receive priority attention. Similar emphasis should be placed on SMEs, start-ups, and ICT, universally acclaimed as the drivers of industrialisation, exports, diversification, job creation and innovation.
The economy should transform from a consumption-oriented one to a productive engine. Attention should focus on leveraging FDI-driven private sector investment in the railways, steel, power, maritime and aviation sectors. Tourism should be promoted by the federal and state governments. The World Tourism and Travel Council said it provided $140 billion or 7.68 per cent to Brazil’s GDP in 2019, and $43.3 billion, representing 12.1 per cent of GDP and 5.4 per cent of total employment in the United Arab Emirates.
In all this, states must shake off their laziness and operate like self-sustaining economic units. Like other federating units everywhere else, they should devise and strenuously implement effective economic policies, competing for investments, markets, and human talents.
Continuing to rely on oil revenues to run unproductive, dependent territories is no longer tenable. The future of oil is fragile, and Nigeria must act now to avoid much worse hardship than the current adversity.
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