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The Oil Curse: Two (Counterintuitive) Lessons to Keep in Mind

February 1, 2012

By Fiorenzo Conte

When President Goodluck Jonathan announced that fuel subsidies were to be repealed, people in Nigeria felt betrayed. They would the first to feel the pinch of the price spikes, they thought.  In a country such as Nigeria where poor people have benefited very little from oil, setting up fuel subsidies was the least a government could do for its people, so the poor thought. However they might not be entirely true. In Nigeria as in other countries, what was supposed to be a bonanza –  i.e. the discovery of oil – turned into a curse. In the debate around the oil curse there are two very important lessons to bear in mind, which are difficult to do so because they are counterintuitive to a certain extent .

1.Fuel subsidies are bad for the poor. At least in the long run. As an article in the FT explains, an artificial low price within Nigeria discouraged from refining the crude locally. As the local price of fuel did not reflect the cost of real cost of supply, local refineries were left aloof: nobody, neither the government nor private investors, wanted to invest because there was no incentive to do so. So most of the crude which is pumped out is sold abroad whereby the four national refineries run at 25% of their capacity. As a result, Nigeria which produces 2m barrels of oil per day, needs to import the petrol to satisfy its needs. More importantly fuel subsidies have encouraged a rampage of graft. Officials sitting in the NNPC (the state-owned National Nigerian Petroleum Company) have an incentive in selling the fuel abroad to pocket the difference between the international and local price or presenting domestic fuel as imported thus getting the difference. As NNPC has stopped paying external traders, the foreign reserves necessary to buy other more necessary imports, hold by the government have shrunk. Meanwhile, a polarized society has emerged with a ruling billionaire elite and the remaining majority of the population that is poor.

2.Drill Your Oil as Slowly as Possible. When oil is discovered the first thing a government would think is to get as much crude as possible as soon as possible. In this fashion, so the argument goes, one can use this gigantic pile of money to invest in other areas. The experience from one of the few countries successful in escaping the oil curse says the contrary however. Iraqi geologist Farouk al-Kasim, advisor to the  Norwegian government, explains to NPR Planet Money that the best decision the Norwegian government ever took was to drill its oil very slowly. The rationale behind this being that limiting the oil tap prevents your currency from appreciating. And if your currency does not go up, other exporting industries will not be forced to sell their products at a much higher price (the so-called Dutch disease). If you do not have an exporting industries, you prevent to pull all resources and workers away from a fledgling manufacture sector. If you do so you avoid to crowd out manufacturing. Lastly, if you take it slowly you have time to create safeguards against the oil curse. If you do not, the common sense will drown in the sea of oil.

Doing away with fuel subsidies in the medium term and controlling the oil tap are however very tough to be put in place. They require self-control and self-restraint. And these qualities do not go together with the arrogance which follows suit the discovery of oil. As journalist Ryszard Kapuscinsky puts it (quoted in the blog NaijaBlog)

Oil creates the illusion of a completely changed life, life without work, life for free. Oil is a resource that anaesthetises thought, blurs vision, corrupts.  People from poor countries go around thinking: God, if only we had oil!  The concept of oil expresses perfectly the eternal human dream of wealth achieved through lucky accident, through a kiss of fortune and not by sweat, anguish, hard work. In this sense oil is a fairy tale and, like every fairy tale, a bit of a lie.  Oil fill us with such arrogance that we begin believing we can easily overcome such unyielding obstacles as time

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One Comment leave one →
  1. February 2, 2012 4:48 pm

    And then there’s also the fact that loads of Nigerians just buy up cheap oil and sell it more expensive just across the border – a practice the poor definitely do not benefit from. See some of the articles of The Economist of the past few weeks.

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