Nigeria’s Oil Optimism Problem

Kemi Adeosun

Last week someone said to me, with visible relief, “This war is good for Nigeria. Oil will

reach $100..”

It was not a cynical remark. It was hopeful. In Nigeria, hope often arrives disguised as oil

prices.

One of the things I like about economics is that—unlike law, medicine, or engineering—

everyone can have a go. There is no licensing authority before you offer an opinion. No board

exams before you pronounce on inflation, interest rates, or the future of oil prices. Economics

invites participation. It is like answering those exam questions that say: “Critically discuss,

giving reasons for your answer.” Everyone has a view. Everyone has a theory.

But experience teaches you that the oil price conversation must always be anchored in reality.

When the Floor Fell Out

In 2016 I sat in a very uncomfortable seat when oil prices collapsed to about $28 per barrel.

At the time, Nigeria’s production costs were roughly $21 per barrel, and 33 states could not

pay salaries. Workers went months without pay. Government finances were stretched to the

limit. Every conversation about oil prices suddenly moved from theory to survival.

I say this not to elicit sympathy. It is simply context.

Even when prices later began to recover, the experience left a deep imprint. The crisis had

exposed how fragile the system was. The relief of higher prices did not erase the memory of

salary arrears, emergency meetings, and the constant fear that the federation might simply run

out of cash.

My team spent many nights with the Chairman of Governor’s Forum, H.E Abdulaziz Yari

trying to work out creative solutions to steer the nation through recession. Perhaps that is

why, when recovery came, many of us remained cautious—even slightly traumatised by the

scarcity we had just lived through.

Building the Buffers

The Excess Crude Account had been established in 2004 to manage exactly the type of

fluctuations we were seeing. At its height it held over $20bn and helped the nation through

the 2008 global crisis. By 2015 we inherited a balance of $2.04bn, and as soon as oil prices

recovered we resumed contributions. In addition to building it to $2.45bn by the time I exited,

we developed a system to smooth FAAC revenues.

The idea was simple: stability mattered more than windfalls.

In months when oil revenues exceeded expectations, we quietly saved a portion. In leaner

months, we released those buffers to keep FAAC allocations steady and ensure states could

meet their most basic obligations—especially salaries.

At one point, a Governor arrived armed with the constitution and proof that what we were

doing was not following the constitution strictly in the way the savings mechanism operated.

It was a fair legal observation.

We noted it but continued.

Not out of disregard for the law, but because we understood the alternative. The federation

had just experienced what happens when oil revenue collapses and there are no buffers.

Institutional perfection was less urgent than fiscal survival.

The governors understood that as well. Across political parties and regions, there was broad

agreement that stable allocations were better than volatile windfalls.

It is worth recalling that moment today.

Because discussions about oil prices in Nigeria often drift into fantasy. When prices rise, we

assume prosperity will follow. When prices fall, we assume disaster is inevitable. In reality,

the relationship between oil prices and Nigeria’s economic fortunes has always been far more

complicated.

The Fantasy We Keep Returning To

Today the optimism has returned.

The war in the Middle East has pushed crude prices upward again, and the familiar prediction

is back: If oil reaches $100 per barrel, Nigeria will finally breathe.

But that assumption deserves a more sober examination.

Higher oil prices can create opportunities for Nigeria, but they do not automatically translate

into prosperity. Revenue depends not just on price, but on production. Fiscal relief depends

not just on earnings, but on discipline. And in a fully deregulated energy market, rising crude

prices can just as easily translate into higher petrol prices for Nigerian households.

Reality One: Production

Nigeria’s budget assumptions often tell a more optimistic story than reality. Government

plans may assume output approaching two million barrels per day, but actual production has

struggled to reach those levels in recent years due to oil theft, pipeline vandalism, and years

of underinvestment in upstream infrastructure. If a country produces fewer barrels than

planned, higher prices cannot fully compensate for that shortfall.

Price multiplied by low output does not produce a windfall. It produces improvement.

Reality Two: The Refinery Changes the Equation — But Not Everything

For decades Nigeria lived with an extraordinary paradox: a major crude oil producer that

imported most of its refined petroleum products. That system meant that when global oil

prices rose, Nigeria paid twice—earning more from crude exports but spending heavily to

import expensive refined fuel.

The emergence of large-scale domestic refining, particularly the Dangote refinery, is

beginning to change that equation — and that deserves acknowledgement. Nigeria now has

the capacity to refine significant volumes of its own crude domestically, reducing dependence

on imported petrol and lowering the demand for scarce foreign exchange.

That is a major structural shift for the economy.

But it has also created a new misunderstanding. Many Nigerians assume that domestic

refining will shield them from global oil price shocks.

It will not.

In a deregulated market, the price of refined fuel still reflects the price of crude. If crude rises

sharply, the cost of producing petrol rises as well. Refineries—whether in Rotterdam,

Houston, or Lekki—must price their products based on replacement costs and global market

dynamics.

The removal of fuel subsidies means there is no longer a government buffer absorbing those

increases.

When crude prices rise, pump prices rise.

Domestic refining still delivers important benefits. It keeps more economic activity within the

country, reduces foreign exchange pressures from fuel imports, and strengthens parts of the

industrial base. But it does not disconnect Nigeria from global oil markets.

What the Realists Know

The realists understand this.

Oil may reach $100. It may even go higher depending on how geopolitical tensions evolve.

But Nigeria’s prosperity will still depend on the same fundamentals it always has: producing

more oil, managing revenue prudently, and resisting the temptation to treat every price spike

as permanent.

Because the real lesson of the $28 crisis was not how painful low prices can be.

It was how dangerous it is to build an economy that only works when oil is expensive.

PS

But if the windfall does come, I have a view about where it should go first: public

transport. The daily friction of commuting is an invisible tax on every working Nigerian,

falling hardest on those who can least afford it. A serious public transport investment,

using an oil windfall as seed capital for long-term infrastructure, connects workers to

jobs, reduces the cost of living for households without cars, and — unlike recurrent

spending — leaves something behind when the windfall is gone.

That is what discipline looks like. Not distributing the surplus. Building something with

it.

Kemi Adeosun – A former Minister for Finance writes from Lagos