Nigeria: Oil, Poverty, and an 'Ungodly Mess'

ANALYSIS

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Nigeria oil subsidy fraud
With oil receipts generating 75 percent of government revenue, a sharp and sustained fall in oil prices would affect the economy as a whole.

Thanks to expansive oil fields and a reservoir of millions of barrels of crude, Nigeria is the third-richest country in Africa. But due to corruption, poor wealth distribution, and lack of infrastructure, the nation's people suffer from staggering rates of poverty.

It's sickening because Nigeria should be one of the richest countries in the world, said Charles Ebinger, a senior fellow at the Brookings Institute and an expert on the energy industry.  

And the [Niger River] Delta, where all the oil is, is one of the poorest regions in the whole country.

Nigeria exports two million barrels of oil every day, about half of which is sold to the U.S. Oil is by far the country's biggest industry, and it is a profitable one -- the nation's GDP is close to $250 billion. But that money does not flow down to the average Nigerian citizen, who lives on less than $2 a day.

Nigeria is a cautionary example of the oil curse's destructive impact, said John Campbell, the former U.S. Ambassador to Nigeria.

Nigeria's post-colonial history is steeped in oil. Oil was discovered in the country in the 1950s, but the real money started coming in during the so-called oil boom of the 1970s after the end of the 1967-1970 Biafra civil war.

(While the war wasn't about wealth or resources, a huge percentage of Nigeria's oil fields were situated in the self-proclaimed Republic of Biafra region, which attempted to secede from Nigeria, and rebels quickly captured major oil wells.)

When the war ended in 1970, the military took control of the state and the economy. A year later, Nigeria joined OPEC  and billions of dollars began to flow into the country -- but almost all of it went into the palms of the few people at the top of the food chain.

Since oil belonged to the state, holding public office became the route to riches. This confluence of the militarization of political life and the arrival of oil riches fostered a dysfunctional political economy that has endured, Campbell said.

Before the civil war and before the oil industry gained traction, agriculture was the country's main source of revenue. Indeed, Nigeria was one of the world's leading exporters in certain crops, such as cocoa and palm oil. However, petroleum now accounts for 95 percent of Nigeria's exports, as well as 80 percent of government earnings, and it has stifled the potentially lucrative fields of mining and manufacturing.

Now Nigeria imports food and gasoline, its manufacturing sector is mostly moribund and it has fallen almost to the bottom of most development indexes, Campbell noted.

When a civilian government took over in 1999, the corruption remained entrenched. Oil contracts were given to the president's friends and political allies, environmental clean-up funding goes into politicians' pockets and the oil itself gets adulterated with water.

One of the biggest problems with corruption is that it doesn't allow the industry to grow, embedding old problems into society. Mismanagement has left Nigeria without even have the infrastructure to refine its own crude -- there are four refineries in the country but none are in top working order -- and so it must import refined oil into the country.

Because the cost of importing raises the domestic price of oil, the government imposed a subsidy that covers the import costs and provides gas, kerosene and oil to Nigerian citizens at a discount.

The subsidy costs the government 1.2 trillion naira a year, roughly $8 billion, but is effectively the only way that the average Nigerian can possibly benefit from the country's oil wealth.

In an effort to save money, which current President Goodluck Jonathan promised would be re-invested into the country's infrastructure, the government left the subsidy out of the 2012 budget. The subsidy removal instantly doubled the price of gasoline and fuel, sending the price per gallon above the average Nigerian's daily income of $2 and sparked a week of protests across the country. It was partially reinstated after unions shut down almost all crude production in the country.

Trouble in the Delta

Since coming to power, the civilian government has made some noteworthy progress.  While oil money is still filtered through the president, there is a system in place to distribute it fairly to Nigeria's 36 state governments and then to the residents of each state.

Under the democratic system, the presidency has been far better about sharing money with the states and local governments, said Darren Kew, the Director of the Center for Peace, Democracy, and Development at the University of Massachusetts' McCormack School.

Naturally, the system is always a source of minor controversy because each state feels it deserves a bigger share of the pot -- local politicians embezzle a percentage of the funds, but it's still an improvement over previous decades.

What has gotten worse is the problem in the Niger delta, Kew said.

The virulent combination of widespread poverty and wealthy civilian government officials birthed a number of militant movements in the Delta region. Unlike the ideological militants in the north, the southern rebels are generally more like gangs looking for money and power in a country where unemployment is approaching 25 percent.

The militant groups are now a complex mix of political muscle or political entities on their own -- militias that provide security for [the] oil industry and politicians or [they may sometimes] pursue their own goals, said Kew.

The Movement for the Emancipation of the Niger Delta -- or MEND -- is the largest of these militias. It is essentially a collection of about 20 smaller groups, each connected politically. MEND's stated goal is to take all control of the oil sector away from the government, but the group is from the same ethnic group as President Jonathan -- the Ijaw people - and has at times worked with the administration, although relations have soured of late.

Most of these organizations actually make deals and sign ceasefires with the government when it suits them, and when they don't get what they want, the militias attack and sabotage oil pipelines and even offshore platforms.

In 2008, MEND shut down 10 percent of Nigeria's oil production overnight when it closed an offshore field operated by Shell.

'An Ungodly Mess'

Experts disagree on how to solve Nigeria's corruption and wealth issues, if they can be solved at all. The current system is so ingrained in Nigerian politics that even those who would like to reform it are not able to bring about much change.

Foreign oil companies, long criticized in Nigeria for their apparent disregard for the country's environment, are starting to bypass the government all together and to work with people in the Delta, building democratic community development associations.

But some have a more pessimistic view of Nigeria's future.

No problem in the petroleum sector is insoluble, but it's so riddled with corruption from top to bottom that it's almost impossible to know where to begin, Ebinger said.

It's just an ungodly mess.

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