Energy and Nigeria’s Economic Development: A Troubled but Indispensable Marriage

Energy and Nigeria’s Economic Development: A Troubled but Indispensable Marriage

University of Ibadan 405th Inaugural Lecture

Preamble: This lecture addresses the role of energy in Nigeria’s economic development process. The relationship between energy and the Nigerian economy is aptly captured in the title of today’s lecture as that of a troubled but indispensable relationship. I will be using the institution of marriage to describe the nature of the relationship. Few couples have been fortunate to have flawless and great marriages; majority have experienced the ‘normal’ cycle of marriages—love at the beginning, the period of difficulties and challenges, but the outcome of such troubled marriages often produce varied results: divorce, separation, a continuous but joyless and unfaithful partnership. Yet others have weathered the challenges to rebuild their marriages into a fruitful one again. However, in a significant number of cases, the great potentials of marriage and the mutual expectations of both parties at the time of courtship and the day of wedding are largely unrealized—a sort of missed opportunity. If the parties are open enough to consult and obey the advice of a good marriage counsellor, the joy may return and the relationship may blossom yet again.

Why has the marriage between energy and economic development in many countries been so great and fruitful? How have the two partners in the relationship played their roles to produce a blissful mutually beneficial relationship?  Why has the relationship between energy and economic development in Nigeria been so much troubled? Is it really due to spiritual forces as a former Nigerian Minister of Power boldly claimed at a Conference in South Africa? There is no doubt that looking at most economic development indicators, the over a century relationship between energy and Nigeria cannot be said to be a totally rosy one. It has been for the most part a troubled relationship with patches of happiness, but it is an “inseparable union”, that is solemnized on the famed injunction, “till death do us part”. Energy Economists, of which I am privileged to be one, as trained marriage counsellors, have devoted their careers to exploring how the relationship can be turned around to make it what it ought to be.

Understanding the Nature of the Relationship: Energy and Economic Development Nexus

“In the twenty first century, we are so dependent on oil, and oil is so embedded in our daily doings, that we hardly stop to comprehend its pervasive significance. It is oil that makes possible where we live, how we live, how we commute to work, how we travel – even where we conduct our courtships. It is the lifeblood of suburban communities. Oil (and gas) are the essential components in the fertilizer on which world agriculture depends; oil makes it possible to transport food to the totally non-self- sufficient megacities of the world. Oil also provides the plastics and chemicals that are the bricks and mortars of contemporary civilization…” (Daniel Yergin 2008, cited in Oteh 2016).

The subject of the relationship between energy and economic development has been a fascinating subject to several Energy Economists. Energy has been a prominent factor in the match of human civilisation. The difference between an urban and rural dweller, or those in developed and developing countries can be partly reduced to the quantum of energy that is available to each of them (Omorogbe 2015).

However, economists, predictably have not agreed on the magnitude and the exact nature of the relation over time and across levels of economic development. Common areas of debates include but not limited to questions such as:

  1. Is energy consumption a prerequisite for economic growth or in more technical terms does energy consumption Granger cause economic growth? Or vice versa?
  2. Is the relationship bi-directional or statistically independent?
  3. Is the nature of the relationship, linear, or curvilinear or asymmetric?
  4. To what extent is the relationship influenced by temporal factors, level of economic development, governance and institutional factors, quality of political and economic policy, among others?

Energy and Economic Growth in Nigeria: The Great Debate

The debate on the impact of energy and economic growth process in Nigeria has also been quite intense. Perhaps, this debate was invigorated with an influential work by Olomola (2006) and Olomola and Adejumo (2006) which find that energy shock does not have any significant impact on the Nigerian economy. Several studies have since corroborated this finding (Iwayemi and Fowowe 2011a and b; Adeniyi 2010; Adeniyi et al. 2011; Babatunde and Adenikinju 2016). However, Aliyu (2009) and Olubusoye et al. (2016) report that Nigeria being an oil dependent economy is hugely vulnerable to shocks from oil price market. The conflicting results from these groups of studies show that the causal relationship as well as the channels of transmission between energy and economic growth in Nigeria may not be as simple as previously thought.

On the empirical front, evolving debates have looked at the issues of non-linearity and asymmetric relationships, which examines the differential effects of positive and negative price shocks and whether the effects of thresholds matter before significant relationships can be identified. More recent literature has explored the use of rolling windows technique to interrogate whether there is a shifting time varying effects of the relationships (see for example, Adenikinju, Adeyemi and Adewole 2016; Adenikinju and Olanrele 2016; Babatunde and Adenikinju 2016 and Olarenle 2017). Adenikinju and Olanrele (2016) as well as Olanrele (2017) show that in the pre-1984 period, the Nigerian economy was modestly affected by crude oil price shocks. However, the post-1984 period revealed more negligible effects of oil price shocks. Moreover, the longer the duration of the negative oil price shock, the more likely is its impacts on macroeconomic aggregates like GDP, investment, and money supply. This tendency is not replicated with positive oil price shocks (Olanrele 2017).  In summary, there is no doubt that economists will continue to refine their tools in order to provide a unifying theory of energy and economy relationship.