This development is worrisome when you consider it against the notion that oil as a commodity is exhaustible, non-renewable and worse still, easily prone to the effects of international politics and market forces. The concern here is that the country needs to take the advantage of its abundance and the volatile global oil market to better the lives of the citizenry because the opportunities might not last forever.

Anecdotal evidence has often assumed that countries that greatly depend on natural resources for their livelihood are more likely to have economic growth and sustainability; however the converse is true for most of such countries around the world. It is worthy of note that our near absolute dependence on oil as a source of budget funding by various tiers of government in the country largely affects the implementation of these budgets negatively. For instance, Nigeria experiences budget failure whenever there is a price crash in the international oil market. Worse still, the country’s situation is compounded by the problems of lack of accountability and transparency in the oil-sector. The way and manner by which the oil and gas sector has been managed has been the bane of development of the sector with its attendant effects on the ever increasing rate of poverty and hunger in Nigeria.

Ordinarily, our present position in the committee of oil producing economies in the world portends that an average income earner in Nigeria, should live above poverty line as described by the United Nations. It implies that Oil rather than be a blessing, has been a curse to the nation. Nigeria’s overdependence on oil resources seems threatens not only the security of the nation but also its existence as a corporate entity. The restiveness of the youths in the oil producing areas and the incessant call for resource control by the political class was as a result of the country’s overdependence on petroleum products. 

That Nigeria is one of the highest producers of crude oil in the world today makes it a beneficiary of windfalls occasioned by sharp price increases. However, the uses of such windfalls have continued to be a source of concern to our economists and other stakeholders in the sector and the economy at large. Rather than use such earnings to deliberately plan and manage a huge savings for raining days as well as a diversification process that would sustain a higher rate of economic growth, they are spent as if they are a mere part of recurrent income. It is worthy of note that countries such as Saudi Arabia, Brazil, Qatar, Indonesia, Botswana have succeeded in using their windfalls to the benefit of their economies, but the reverse is the case in Nigeria. If Nigeria must enjoy dividends such as desired economic growth, generation of employment opportunities, national security in terms of reduction of armed attacks by the insurgent groups on the country’s citizen and top Government functionaries, which hitherto has been attributed in various quarters to be the aftermath of youth idleness, unemployment and poverty; the God given resources  especially  petroleum should be well spread and utilized for the good of all citizenry. Meanwhile, with the recorded increase in foreign exchange earnings and reserves over the years from petroleum products, it is imperative to find out why Nigeria’s poverty status has refused to change positively. Therefore, this study specifically examines the effect of petroleum resources on Nigeria’s poverty level, between 1981 and 2012. 

Various authors have used different model to analyze and assess the effects of petroleum resources on poverty level in Nigeria and other economies of the world. This study begins the theoretical underpinnings with the consideration of Dutch disease Syndrome. The impediments of oil revenue to economic growth and development of oil-dependent states is what is cumulatively called Dutch Disease in the of development economics literature.

According to Otawa (2001) ”a variant of the resource curse called the  Dutch Disease can cause an enormous influx of cash from oil to foster wasteful, overzealous and imprudent expenditure. The resulting rising oil revenue can raise exchange rates sales which can promote adverse balance of payment as the cost of imports rises, killing incentive to risk investment in non-oil sectors, the competitiveness of all non-oil sectors such as agriculture and manufacturing industries may thus have been crowded out since the employment of both labour and other resources has been exchanged for unemployment as the government and private expenditure multipliers have been exported abroad.” 

Otaha (2012) further noted that “in some places like Niger-Delta region of Nigeria, oil revenue allowed continuous conflict, as commercial oil extraction has repeatedly been a source of the conflict. All too often, the economic benefits accrue to a small business or government elites, as well as the agent of multinational companies while on array of burdens such as expropriation of land, disruption of traditional ways of life, environmental devastation, are imposed on local communities unabated. In response to the application of neo-liberal policies coordinated and imposed through the International Monetary Fund (IMF), World Bank and World Trade Organization in conjunction with local political networks, local communities have to fight against not only the companies seeking to plunder their land, livelihood, culture and habitat but also to work against a judicial system that, far from defending their rights, makes laws in order to take the communities’ rights away”. The role of political elites with multinational companies who are the agents of IMF, World Bank and World Trade Organization creates weak environmental regulations, preferential tax regimes, cheap and legally unproductive labour. These conditions allow  companies to operate with disregard for the affected communities and to use destructive processes, toxic substance and pollutants that are banned or severely restricted in developed countries. All these negative variables that accompanied the exploitation and sale of oil are what economists referred to as Dutch Disease.

Another theory which underlies the relationship between resources abundance and poverty is the institutional model which shifts its attention from the behaviour of the political elites to the nature of political institutions. The argument is that where there are weak political, bureaucratic and economic institutions corruption tends to thrive. What then prevails, in spite of resource abundance, is poor economic policy or management. As the economy is not protected against commodity price fluctuations, authoritarianism tends to result; and the rate of economic growth declines. The solution is obvious: build strong institutions; embark on policies that stimulate economic diversification; institute mechanism to cushion the effects of price fluctuations; intensify taxation; abuse of democratic values among others. This model has received significant attention; it is believed to be closer to reality than other related state model. It strengthens weak political and economic institutions in particular, and in general, embarking on good political, economic and corporate governance, as well as constitutes the appropriate response to resource curse (Asobie, 2011).

However, the institutions-augmented Solow model which is a modified version of the Solow (1956) model, postulated that final goods are produced using a constant return to scale (CRS) technology in a market characterized by perfect competition. Institutions are assumed to play a central role in determining factors’ productivity and technology adoption, so that output (Y) is produced according to the following production function:

where L denotes labour, A≥1 is an index denoting the quality of institutions, and t is time level of state-of-art technology, K is capital, T is an index of institutions. We assume that the representative economy is small and has access to a pool of technology generated exogenously that grows at a constant rate of g. In addition, the growth rate of the labour force and the labour force participation rate are constant over time, where n is the population growth rate. Moreover, T is assumed to be increasing with the quality of institutions and, for simplicity, normalized to range between zero and one (Therefore, is equal to one for an economy with the best relative institutions). The Equation poses a major question: how do institutions affect the adoption of available technologies and the productivity of physical capital. Tebaldi and Elmslie (2008) argued that poor institutions prevent the use of available technologies and limit the efficiency gains from current innovation. It’s worthy  of  note,  that  effective institutions improve the efficacy of technology and augment the productive capacity of both labour and capital. With respect to capital, it has been shown that poor institutional arrangements (due its tendency to inducements in form of corruption and poor enforcement of laws and contracts) which brings about a decrease in returns to investments and impair capital accumulation.

“The tragedy of the common” is another hypothesis put forward by Hardin (1968) to explain resource ownership and management. The hypothesis posited that lack of common resources ownership was doomed to over exploitation. Common property rights were seen as the causal factor behind resources destruction because it would be in users’ private interest to harvest the resources as soon as possible, before other users.  When everybody owns the resources, nobody has incentive to conserve it for future use. Each user imposes an external cost on all other users in terms of reduced resources availability. In the absence of property rights, the externality of future scarcity is not internalized by individual users and the outcome is inefficient and high intensity utilization. The consequence is overgrazing, overfishing, appropriation of irrigation water, clearing of forests among others. Such resource use is inefficient because at lower intensity of use, resource stock and output would be higher while the harvesting costs would be lower. The hypothesis further explains that overuse can endanger the sustainability of the resource. The ‘tragedy of the commons’, as put up in Hardin, has been regarded by Heltberg (2002) to be in tandem with Olson’s Logic of Collective Action (1965). According to him, the problem of coordinating resource users to limit their exploitation has free-rider problem similar to organizing potential beneficiaries to contribute towards a public goods.

Undertaking investment that would enhance the value of the resources suffer from similar free-rider problems. Therefore, under-investment in common property may result. The policy implication of the ‘tragedy of the commons’ hypothesis is to either privatise or nationalise the resources, that is, vesting property rights in the individual or the state. The view is that resource under a well-coordinated and conscious control will be efficiently harnessed by the managers.

Resource curse

The reason why some countries with natural resources endowment seem to have slow growth and development has been blamed on the resource curse phenomenon. The resource curse simply referred to as the ‘Paradox of Plenty’. It refers to the paradox that countries and regions have less economic growth and development than countries with fewer natural resources (Ross, 2015). This is hypothesized to happen for many different reasons, including a decline in  the  competitiveness  of  other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities).

Humphreys et al. (2007) opined that resource curse is characterized by countries with large endowments of natural resources such as oil and gas but often perform worse economically and politically than countries with fewer resources. Evidence of this can be seen in some resource-rich countries like Nigeria, Sudan, Congo and Angola among others, which are suffering from different civil, political and economic problems while countries like Hong Kong, Taiwan, Singapore achieved their rapid economic growth without large natural resource reserves but rather through a boomed exportation of manufactured goods.

Some authors such as Sachs and Warner (2001) and Gylfason (2001) are of the opinion that there is a correlation between abundant mineral resources and a negative economic and political outcome. Weinthal and Luoug (2006) also stated that the more intense a country’s reliance on mineral exports (measured as a percentage of GDP) the more slowly its economy grew. Based on their survey, GDP per capita in mineral-rich countries increased by 1.7% while that of mineral-poor countries increased by 2.5 and 3.5% between 1960 to 1990.  Gylfason (2001) also observed that from 1965 to 1998 gross national product per capita in OPEC countries decreased on average by 1.3 percent while there was a per capita growth by an average of 2.2% in the rest of the developing world. Collier and Hoffler (2002) in their own estimates revealed that natural resources have a strong and non-linear effect on conflict, thereby capable of increasing the chances of civil conflict in a country. 

Inversely, the problems of inefficiency, excessive borrowing, bribery and corruption, Lack of diversification and enclave effects, which characterize the public sector of the Nigerian economy, (with no exception on the oil and gas industry which is the major source of government revenue), have for a long time being left unaddressed. All these have been widely responsible for the persistent increase in poverty level and birth of various social vices in the country. However, various researchers have suggested various measures to abate the series of problems breading poverty in the country; such measures include the inculcation of true self-discipline and fear of God through religious teachings and exemplary behaviour from leaders at all level. Other measures are periodic and timely review of salaries and wages in line with prevailing cost of living to discourage workers from supplementing legal income with illegal income, and the involvement of consultants to run public enterprises or perform certain functions on behalf of government instead of privatization of everything owned or done by government.

However, privatization and the use of private consultants may become necessary when corruption and inefficiencies persist in the public sector. The government has also in the recent times made unsuccessful efforts at addressing the issues of poverty through the initiation of various policy documents such as National Economic Empowerment and Development Strategy (NEEDs), Extractive Industry Transparency Initiatives (EITI), Public- Private Partnership (PPP) and introduction of Petroleum Industry Bill (PIB) for legislation, which has attracted so much controversy from different segments of Nigerians. All these efforts are in the bid to address the rot in the oil and gas in order to create wealth and reduce poverty in the country. On the surface, this seems to be an impressive record, but it is not clear whether any of these has been able to bring about the much anticipated changes in the sector and also whether the funds accrued to that sector had been transparently and judiciously used.  It is also not clear whether the impact of funds earmarked for projects development in the oil sector had been significantly felt by the oil producing communities, in terms of reducing the incidence, depth and severity of poverty in the oil region. What is clear however is that poverty still remains pervasive, based on the available studies reviewed.

Figure 1 presents the growth of Oil revenue (GORV) and poverty (POR) situation in Nigeria between 1981 and 2012. It is evident from the above that despite the level of volatility that ravaged the global oil market since the 1980’s, Nigeria has recorded a sharp and tremendous increase in the amount of revenue accrued from oil from the early 1980’s to around the mid 2000’s. But the oil revenue recorded a fluctuation and plummeted fairly towards the end of the decade. In spite of this, the country in the same rate recorded an embarrassing increase in the rate at which the citizenry get poorer by having as high as close to 70% of the entire population trapped in poverty. It is worthy of note that Nigeria has been ranked as the sixth largest producer of oil in the world, but the country has not utilized the opportunities to better the lot of citizenry in terms of welfare and poverty alleviation. However, from the conclusion of Omadjohwoefe (2011) where it was asserted that “this unprecedented nature of poverty in Nigeria had become more disturbing when viewed against the background of her enormous human and natural resources”. He further stated that “various regimes have responded through numerous interventionist programmes to eradicate poverty but with no desired results. In other words, the more Nigeria tries to tackle poverty the more it persists”. The situation of Nigeria is comparable to the case of “acute and continuous deprivation and hunger in the midst of plenteous wealth”. Nigeria has also found it difficult to provide basic infrastructures that are believed to be useful in giving the citizenry a worthwhile living and alleviating their poverty, despite the huge amount of resources available at her disposal (Omadjohwoefe, 2011).

Empirical evidence

Several authors have written to examine and investigate how management of natural resources such as oil and gas has affected the level of poverty in different economies of the world especially in Nigeria. One of such study is the one carried out by Odularu (2008) where he used the Cobb-Douglas production function to analyze the relationship between the crude oil sector and the Nigerian economic performance using the Ordinary Least Square of multiple regression method and revealed that; “Capital, labour force and oil production can surely lead to economic growth. He suggested that in order for the government to improve people’s welfare with the various impacts of crude oil production (for domestic consumption and export), the government must participate by making policies that will encourage the private sector to participate actively in the economy”.

Meanwhile, Akinwale (2012) empirically examined the existence of resource curse in Nigeria using ordinary least square of regression analysis on primary data and“ established various factors that bring about the existence of resource curse in Nigeria, such as Dutch Disease, poor technological advancement, volatilities of oil price, high level of corruption, authoritarian regimes/poor democracies, high level of indebtedness, poor investment in education, weak and unaccountable institutions, as well as insurgency in the oil producing region”.

The study however, concludes “that weak institutions and poor technology are the greatest impediments to escaping resource curse”. Also, Manzano and Scrofina (2013) in their study on “the resource revenue management in Venezuela:

“A consumption-based poverty reduction strategy”, concluded that “the windfall in oil rent has been mostly appropriated by the government through different channels such as the national oil company, which is still the biggest producer in the country”.

They further revealed that “in terms of priorities, the main objective of Venezuela government has been to spend money to alleviate poverty, with mixed results. Venezuela has also made tremendous progress in poverty reduction. In addition, according to the authors, government has dedicated resources to bolstering the role of the state in the economy, such as expropriating or buying numerous private enterprises, which has great impact on the private sector investment”. Emerging from the reviewed studies, Nigeria has been identified as one of the few countries endowed with abundant mineral resources, especially petroleum, which ranked her as the sixth largest producer of oil in the world. But in spite of this, the country still maintained high level of poverty; and unable to utilize the opportunities of accrued oil revenue to improve the poverty  status of  the  citizenry. This negative  trend between the accrued revenue from oil and poverty level in Nigeria has provided a gap in the literature, which the study tends to fill.          

The model

In consonance with the Solow’s model of economic growth which is based on the premise that output in an economy is produced by a combination of labour (L) and capital (K) under constant return to scale hypothesis, so that doubling input results in doubling output. Contemporary versions distinguish between physical and human capital. Thus, the quantity of output (Y) is also determined by the efficiency (A) in which capital and labour is used. The model is quantitatively expressed as follows:

The model further assumed that the production function exhibits constant returns to scale, that is, if all inputs are increased by a certain multiple, output will increase by exactly the same multiple. In this case, Y is gross domestic product, K is stock of capital, L is labour and A represents the productivity of labour, assumed to grow at exogenous rates. In order to achieve the objective of this study, the model is thereby modified and therefore specified functionally as follows:

Explicitly, the model to examine how the management of petroleum resources, which has been in abundance in Nigeria, has been able to affect the poverty profile in the country is written as follows;

The growth rate of each of the explanatory variables was computed to enable it achieve the objective of the study; and the model is re-written as follows:

Where; POR= rate of poverty, proxy by poverty rate in Nigeria. Poverty has been described as scarcity, dearth, or the state of one who lacks certain amount of material possession or money. It is referred to as the state of which a person or group of persons are unable to provide the basic necessities of life for themselves.

ORV = Oil revenue

This is the total amount of money accruing from the sale of crude by the government of Nigeria. The value according to the data base was in line with the stated and predetermined Oil bench mark in the annual budget of the country.

CSG = Crude oil share of GDP

This is referred to as the total monetary value of GDP that petroleum products accounted for. The value of this  is  relatively high compared to the GDP mainly because the Nigerian Economy has widely been regarded as a mono economic one.

DOC = Domestic oil consumption

This is the country’s total consumption of refined petroleum products in barrels per day.

OXP = Crude oil export

This entry includes the total oil exported in barrels per day (bbl/day), including both crude oil and oil products in each year. This value is usually quoted in millions.

Analytical method

In order to establish the relationship among the variables in the established model used in this study, the Vector Auto Regressive method of Analysis (VAR) was employed. From the literature, different techniques have been adopted to capture the impact of various macro-economic indicators on particular variables. Odularu (2008) used ordinary least square method of regression (OLS) to establish the effects of Crude Oil on the Nigerian Economic performance which later failed to distribute the expected response of resources management effects on output growth. Gujarati (2007) also suggested that the vector Auto- regression (VAR) is a more realistic technique to capture Oil and energy resources effects since these are prone to external shocks and influences. Besides, the superiority of the VAR model over the OLS is quite clear. The OLS assumes a particular variable to be endogenous while the rest are exogenous. Vector Auto- regression (VAR) is a statistical model used to capture the linear interdependencies among multiple time series. All variables in VAR model are treated symmetrically in a structural sense; (although the estimated quantitative response coefficients will not in general be the same) each variable has an equation explaining its evolution based on its own lags and the lags of the other variables in the model.

Data requirement and source

The data for this study is mainly secondary, which include poverty rate as a percentage of the head count population (POR), the rate of change in oil revenue (GORV), crude oil share of the gross domestic products (GCSG), domestic consumption (GDOC) and oil export (GOXP), which encompasses the value that goes into excess crude account. The data for these variables specifically the poverty rate, were obtained from the World Development Index (WDI) as published on country basis by the World Bank. Other required data were obtained from CBN Statistical Bulletin and Annual Reports and Statement of Accounts specifically between 1981 and 2012.

Analysis of pre-estimation test

Table 1 presents the results of the Augmented Dickey Fuller (ADF) test statistics. The results indicate that all the variables were stationary at level, that is integrated order zero {I (0)}. This implies that none of the variables contain a unit root. In view of the above and considering the fact that the series are I(0) variables, the study therefore proceed further by specifying an unrestricted Vector Auto-Regression model with the post-estimation tests of Impulse-response, Cumulative Impulse-Response and Variance decomposition respectively.

Vector auto-regression (VAR) test

Table 2 presents the results of the unrestricted VAR model, and it shows the direction of causality of the endogenous variables. The VAR model treats all variables as endogenous. Table 2 thus portrays the endogenous level as well as simultaneous comparison of both the F-Statistics and the co-efficient of multiple determinations (R²). The VAR results show that Poverty level in  Nigeria, denoted as (POR) appeared to be more endogenous than being exogenous with the R² of about 99.2% and a correctly fitted F-statistics of 223.4812. The remaining variables such as the growth rates of Oil revenue (GORV), share of crude oil in the GDP (GCSG), Domestic oil consumption (GDOC) and Oil export (GOXP) were shown to be less endogenous with their respective R²  of 39.4%, 22.3%, 37.7% and 23.1%; and F-statistics of 0.943381, 0.517018, 1.087177 and 0.539464 respectively. In the result, growth rate of Oil revenue and the Crude oil share of the GDP both maintained positive relationship with one lagged value of the poverty level in the country while the growth rates of the domestic oil consumption and the oil export, both put up negative posture with the level of poverty in Nigeria. This estimate provides the evidence that as the country makes more income from the oil resources owing to increasing rate of production of the petroleum products; an average person on the street of Nigeria has not felt any impact of such and these alone has been responsible for the ever increasing level of poverty among the populace. However, this result corroborates the study of Odularu  (2008) despite its shortcomings. He concluded that “the production of crude oil  (domestic consumption and export) despite its positive effect on the growth of the Nigerian economy, has not significantly improved the welfare of Nigerians, due to many factors like misappropriation of public funds (corruption) and poor administration”.

Analysis of post-estimation tests

Impulse-response test

Table 3 presents the results of the Impulse- Response analysis of the Vector Auto- regression (VAR), which traces the effect of one standard deviation shock to one of the innovations on current and future values of the endogenous variables. The impulse- response is used to forecast the pattern of the endogenous variable to a standard deviation shock on the level of poverty, based on the head count of the population of Nigeria. It is apparent from the Impulse- response estimates that a standard deviation shock on the poverty level brings about a sharp increase in poverty rate (POR) per population from the first period to the second period and later showed a gradual reduction from the third period to the tenth period under consideration. Meanwhile, the response of the poverty rate also revealed innovation in the level of poverty, as the oil revenue grows slowly and steadily from the second period to the tenth period. This innovation also showed a decrease in the growth of crude oil share of the GDP, whereas the growth of Domestic oil consumption and oil exports fluctuated from second period to the tenth period under consideration. The implication of the above is that holding all other factors constant, the poverty level in Nigeria may record a gradual but insignificant reduction owing to the fact that the more the oil revenue grows, the higher the level of wastage, maladministration and misallocation of the resources in the country. In like manner, this revelation follows the study of Akinwale (2012) where he concluded that “weak institutions and poor technology are the greatest impediments to escaping resource curse”.

Cumulative impulse- response test

Table 4 presents the results of the Cumulative Impulse-response estimates which revealed that the poverty level grows cumulatively from 0.825427 in the first period to 7.729320 in the tenth period under review. This implies that the rate at which the poverty rate increases in Nigeria despite the level of revenue that accrues to the country from oil resources, had been so alarming and devastating. Even as the share of crude oil in GDP and domestic oil consumption increases cumulatively. This outcome may be as a result of the fact that Nigeria’s domestic oil consumption is characterized by heavy importation and shrouded in high level secrecy and unabated corruption which has cost Nigerians huge amount of resources that could have been used to better their lives. This unquantifiable level of wastage as revealed in the recently publicized fuel importation subsidy fraud led to the popular resource curse syndrome effect on the Nigerian populace. On the other hand, the cumulative decrease in the growth of oil revenue and oil exports may be attributed to the instability in the global oil market which had dwindled the revenue base of the oil exporting economies of the world. This particular situation has gravely affected Nigerian economy being a mono-economic one, solely dependent on oil.

Variance decomposition test

Table 5 also presents the results of the Variance decomposition estimates of the poverty rates (POR) in Nigeria. The variance decomposition measures the proportion of forecast error variance in one variable explained by the innovation in it and other variables. The results  revealed  that the variation in the rate of poverty (POR) explained by the growth in Oil revenue assumed a peak in the third period and thereafter declined towards the tenth period. The oil export on the other hand revealed an increase in the variation explained on the poverty level from the third period towards the tenth period. The results also showed the evidence that the rate of poverty in Nigeria may record a slow and gradual decline over time if the petroleum resources available at her disposal are properly and duly harnessed by the political authority as well as the relevant agencies saddled with operations and management of petroleum resources in the country are alive to their responsibilities. The variance decomposition estimates also showed the level of variation in the poverty rate due to the growth rate of oil export. This situation has portrayed Nigeria as a net exporter of petroleum resources.

The emerging conclusion from various analyses  of  the study is that oil resources which ought to serve as an icing on the cake for many Nigerians turn out to be the bane of development, which is a panacea to poverty alleviation among the teaming population. The country has realized a lot of income including windfalls on several occasions from exploration and sales of oil resources but little or nothing has been shown for that due to massive and uncontrollable level of corruption, mismanagement and misallocation of oil proceed, which has been accruing to coffers of the country since the discovery of oil. Specifically during the period under consideration and for the purpose of this study, the country has really witnessed a high and persistent increase in the demand for petroleum products in the international and local markets. Summarily, the study concludes that the level of poverty among the populace has not been any better despite the continuous increase in the demand for domestic consumption of oil in the country, but for the fact that the country only export crude and not refined products and import refined products for local consumption thereby creating employment and wealth for the foreign economy. It’s a known fact that any economy that sells its products too close to nature will earn meager in return, this study therefore recommends that Nigeria should look inward, build and expand capacity to ensure the country refines her domestic oil needs to be able to create adequate employment and wealth for the system and by implication alleviating poverty in the country. The country should also be more transparent and sincerely make judicious and proactive use of the revenue accruing to her through the exploration and sales of petroleum resources to enable it impact significantly on the lives of the citizenry.

The author has not declared any conflict of interests.