Nigerian economy, at first was based mainly on agriculture; it exported agricultural products like cocoa, rubber, palm products, cotton, groundnut, hides and skin etcetera. But then oil was discovered in the south-south of Nigeria i.e. Rivers, Bayelsa, Edo and Niger Delta states, and agric production was abandoned. The essay question is “What are the economic cost and benefits of oil industry in Delta, Nigeria?” The objective of this essay is to find out what the economy cost and benefits of the oil industry in Delta state, Nigeria, and also I will examine just how the state has put up with the production of oil and also the effects i.e. the cost and benefits.
1.1 State Background
Delta State is named after the delta region of the River Niger. Its capital is Asaba [1] . It is found in the south-south areas of Nigeria. Delta state consists of different ethnic groups like Urhobo, Igbo, Ezon, Isoko and Itsekiri but consist mainly of the Igbo people.Nigeria has a population of 151, 870, 000 people of which Delta state has a population of 4, 098, 291; the males are up to 2, 674, 306 while the females are up to 2, 024, 085 [2] . Delta state is the second oil producing state in Nigeria after Rivers State, of which this oil production tends to be the most dangerous business in this economy. The local governments that produce oil in the Delta state are Warri North and South, Burutu, Isoko North and South, Ughelli North and South, Okpe, Ethiope East and West, Sapele and Ndokwa East and West [3] . The biggest oil refinery is found in Warri, which is a local government in Delta.
1.2 Map showing the location of Delta state in Nigeria:
4Delta State.
1.3 Research Methodology
My process of research was divided into two methods; primary research and secondary research.
1.3.1 Primary Research
My primary research involved
The use of a questionnaire: The questionnaire was created addressing specific questions like; ‘what has the government put in place to help the economy?’ and also ‘what has the economy benefited from the oil production?
A survey was used to get more personal information like; Government share of income and income of Petroleum Company.
Interview was done; I interviewed the people living in the villages, the leaders of the town/villages. Asking them what the costs and benefits has been for oil production. I also interviewed employee’s from the Petroleum company (SHELL)
I took pictures of the benefits from the oil production.
1.3.2 Secondary Research
Secondary information was gained from the various websites, textbooks and articles. The information includes: a study of economic theory relating to externalities.
Textbooks were used to get definitions.
The internet was used to review other information that is relating to this topic. The reason for this is to see how this state is managing with its externalities.
Internet was used to get background information on the state
Internet was also used to get the cost of oil production in the state
Images of the cost of oil production in the villages were gotten form the internet.
The use of articles in the newspapers was used to get information on the current situation
Problems
Proposed Solutions
Interviews and with the people in villages and the leaders of villages
Language barrier
Finding someone to help in translating.
Interview with the employee’s of SHELL
Release of private company information
Use of other sources to get information like the radio, internet, newspapers etcetera
Sharing of questionnaire and survey on land
Riots in these areas were questionnaires were being distributed
Go to areas where there is no riot to distribute questionnaires and do a survey.1.3.3 Possible difficulties and proposed solutions.
2 PRIMARY DATA ANALYSIS
The employees and few people living in Delta were given questionnaires to find out certain information, about what the oil industries and the government have done with the economy from the benefit of oil production. The questionnaire was given to 20 employees at SHELL who were randomly selected from various departments and 20 people living in the economy. This section is showing the sets of results gotten from these individuals.
Table 1: Results concerning responsibility by individuals in the community
Issues
Number of people
Government
Politicians
Oil Industries
Who do you think is responsible for the pollution in Delta?
20
2
0
18
90% of the people living in the community believe that the oil industries are the cause of the pollution which is right, and it is good to know that only 20% believe that the government is responsible which is not true.
Table 2: Results concerning responsibility by SHELL employees
Issues
Number of people
Agree
Disagree
Unsure
Do you think it is your responsibility to make it right?
20
10
4
6
In the above pie chart 50% of the employees at Shell think it is their responsibilty to make things right in the economy that means they sould be able to stop the pollution the oil company is causing. This illustrates that half of the people in company are taking respnsibility for their actions.
Table 3: Results concerning responsibility by the individuals in the community
Issues
Number of people
Agree
Disagree
Unsure
Do you think it is your responsibility to make it right?
20
5
7
8
40% of the individuals in the community are not sure whose responsibility it is to stop the pollution in Delta, 35% of the individuals don’t think it is their responsibility to control pollution in the economy. This illustrates that most of the people in this community could be seen as ignorant since it is a few that are ready to take some responsibility to make things right.
Table 4: Results concerning government action by the individuals in the community
Issues
Number of people
Agree
Disagree
Unsure
Is the government doing anything about the situation?
20
5
12
3
From the pie chart it has been shown that government is not taking action from the negative externality taken place in the state which is not good.
From the primary data analysis it is seen that there are some problems Delta such as pollution etc and this is due to market failure. From the economic theory it is seen that if the marginal social benefits is > the marginal social costs or vice versa there would be market failure [5] . Market failure is due to the positive and negative externalities in the economy. The next section in this essay is going to state those economic cost and benefits of the oil production in Delta State.
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3 INDENTIFICATION OF ECONOMIC COSTS AND BENEFITS.
This section will contain the analysis of the economic costs and benefits in Delta state. There are a lot of problems in Delta state such as oil spills, waste dumping and gas flaring. The main problem in Delta is the oil spillage. The type of oil produced in the south-south is deep sea oil, which causes oil spillage and then leads to pollution; air, land and water pollution, the cause of this pollution has led to the damage of soil, water and air. The oil spills has caused farmers in the area not to fish and farm again because the pollution has spread in their sea and lands, thus thousands of people have been affected especially the poor people and those who rely on traditional way of living such as fishing and agriculture. But there are not only costs in the oil production there are also benefits in the fact that the state is making a lot of money in producing oil since oil is needed in a lot of countries.
Externality occurs when the production or consumption of a good or service has an effect upon a third party [6] . If this effect is dangerous it can therefore be called a negative externality but if the effect is advantageous it is said to be a positive externality. Negative externalities bring about external costs and positive externalities bring about external benefits. The production of oil in Delta state can bring about both external costs and external benefits.
3.1 External Costs from Oil Industries.
The people in the economy have endured oil spillage for years now. Oil spills are caused by corrosion of oil pipes, poor maintenance of infrastructure, and leaks during processing at refineries. [7] This oil spillage usually happens on the land and in the sea. The cause of oil spills in water is that, the oil has contaminated the water, so the fishes in the sea would die that means there wouldn’t be any fishing or it would become poisonous and if it is poisonous when it is eaten the people in the economy would get ill. It could also harm the plants; plants could die because of oil spills and also animals that drink from the water. Also some places in Delta are not yet developed; in those places the people that live there usually have their bath in the sea so if they do that where the water has been affected the people could get skin disease. The oil spills on land would destroy crops; damage the soil the farmers use in farming for their family. The production of oil is making the rich to get richer and the poor to stay poor and die of poverty.
Gas flaring is when gas is burnt unsteadily. Gas flaring occurs when oil is pumped from the ground, this oil burnt then produces gas and the gas produced is burnt as waste in enormous flares. Thus the burning of this gas results to the damage of the environment, especially the areas which are nearest to the oil industries. The government and the industries have done nothing to stop the people from burning the gases and also they haven’t given any solution to the situation. People in that area are now having health problems; there would be air pollution thus leading to people inhaling chemicals that are not good for their health and sanitation problems; there would be water pollution, chemicals from the gas flare would make water dirty, that is the water the people in the area used to take their bath is going to affect their hygiene because the water would very dirty. The people in this area do not have money for medical bills and they do not have health insurance. The farms of these people living in this area have been destroyed so there is no other source of getting money to pay medical bills so this leads to the increase in death rate in that area.
When oil is made from the industries, waste are also produced these waste are then dumped on the land and in the sea, thus destroying the environment and weakening the people’s right in their standard of living. The government have not tried anything to stop people from disposing this waste on the land and the sea, they have not realised that the sea has been contaminated by the various mixture of the oil and if they had they would have treated their water. These chemical substances in oil are very toxic and it can affect the people living in the area.
People in this areas are dying of hunger, because their farms have been destroyed so there is nowhere else to get food from, farmers are now unemployed because their plants are dying so they have nothing to plant and sell to make money, hunters are also unemployed because the animals are dying due to them drinking water from the sea or eating plants that were poisonous. The children of these hunters and farmers cannot go to school again because there is no money to pay their school fees. Poverty hits these innocent people who depend on livelihoods
Due to the negative impacts on the production of oil there have been a lot of complaints by the local communities, because of these complaints it has made some people from this community to become militants. Since the production of oil has caused poverty it has led some of these militants too undergo criminal acts like stealing the oil that has been produced; militants steal this to make money out of it, and also illegal bunkering of oil; that is shipping oil illegally to another country to make money without the consent of the government. Also another cause of militancy due to the production of oil is because the government, the industries and the politicians have refused to do something about the oil spillage, the government has not done anything to develop the state practically because they are gaining from the oil production and keeping the money to themselves; the people from the economy have watched these politicians, governments and the industries get richer so this now leads the militants among them in kidnapping the rich people’s children, there are also armed robberies; these militants rob the rich, and if people are being too aggressive when they are being robbed then the militants might kill them, so this could lead to death, they also take on fights with the Nigerian security forces; this makes the security force to fight back extremely and not considering the people in that area. Militants could go into fraud also known as ‘419’ in Nigeria, they could do business’ that could cheat people and by cheating them, they could get money from them. All negative things are done because of the government, the industries and the politician’s ignorance to the situation.
Picture below shows gas flare at Ughelli West, Delta State, Nigeria.
8
Picture below shows the militants with their guns
9
Picture below shows damage of crops because of oil spills.
10
Figure 1: Diagram showing external cost of oil production in Delta State.
Price of oil Welfare loss MSC MPC Negative externality
P* a
p1
Q* Q2
Quantity of oil.
In figure 1, it shows that the marginal private cost of the industry is lower than the marginal social costs because of the pollution that was brought about when oil was produced, this pollution might have caused breathing problems for people and also poisoned food like fish. The industry would just be concentrating on its own private costs; because of this the industry would produce at Q1. At Q* marginal social cost is equal to the marginal social benefit resulting to a market failure. Too much oil is being produced at too low a price; this causes the misallocation of the society’s resources. There is welfare loss i.e. where marginal social cost is greater than marginal social benefits.
There are also negative externalities of consumption i.e. the pollution that is caused and how it affects the consumers. Negative externalities would make marginal social benefits less than the marginal private benefits.
Figure 2: Diagram showing negative externality of consumption.
Price of oil Welfare loss MSC
P1
P* MPB Negative externality
MSB
Q* Q1
Quantity demanded.
In figure 2 it shows that the oil industry keep on producing oil, and there is still oil spillage, they pay no attention to the negative externality they are creating, Marginal social cost becomes equals to marginal private cost. There is over-use of oil from Q* to Q1, there is also a welfare loss because Marginal social cost is greater than Marginal social benefits.
It is difficult to reduce this pollution. First of all the costs of pollution are external in the sense that the cost of pollution are not paid for by the agents causing it, so there is no economic incentive in the market system to cause them to stop
Second of all the people benefiting from the activities; those are the people producing the oil, they are causing pollution and imposing some costs on others. So the pollution needs to be reduced although the victims are meant to be compensated.
3.2 External Benefits from Oil Industries.
The oil industries may have destroyed the communities in Delta but they have also made a lot of money for the state because of the production of their oil. As it is said above Delta state is the second oil producing state after Rivers state.
The economy has benefited from the oil production. The money used from the oil production has been used for the improvements of infrastructural facilities such as construction of roads, bridges and provision of pipe borne water which benefits the villagers, increased use of electricity, better transport facilities and usefulness of petroleum products.
The biggest oil company in the Delta state, The Shell Petroleum Development Company (Shell), a subsidiary of Royal Dutch Shell, is the main operator on land. Shell is located in Warri. Many Nigerians specifically those from Delta state are employees of Shell, working in an oil company means that those employees would be making a lot of money this means that there would be an increase in income per capita thus an increase in urbanization that means Delta would be more developed in the standard of living. Shell has provided a lot of benefits for the economy and for the workers. Such benefits is the provision of education for the children of the employees at the shell company, provision of houses, cars and also they pay for all the bills of the employees.
Shell has contributed money to the construction of new private and public schools, schools for people of low and high classes. There are also schools for the residents of the state that is for those who could not afford to go to school. This is thus increasing the literacy rate in the economy. Educational competitions are organised and also sports to promote academic and physical excellence which benefit the individuals in the state.
SHELL has also benefited from its own production of oil such as increased revenue from sales; their increase in production brings about huge profits to the company. There is also an increase in development in the SHELL Company; there is now advance technology like drilling equipment in which they can use to prevent or stop the oil spills. There is also an improvement in International relations such as an increase in production which has led to an agreement with oil consuming economies such as the United States and China.
The oil company shell has tried to do its best in developing the economy but because of the corruption problems in Nigeria it affects the economy. The money used for infrastructure development has been taking by the government or the politicians for their own benefits. Pipe borne water that has been installed for the villagers has broken and the government take the money that has been giving to use it to fix it. Oil spills caused by the production of oil has spoilt the road, the money contributed by the economy to fix the roads has been stolen by the government. The public schools where children are meant to be going for free the government waste time in paying teachers their salaries, so these teachers go on strike and refuse to teachers these children, thus making the literacy rate unstable.
There are benefits from the production of oil, but because of corruption by the government all the benefits are not taking place.
If the benefits take place, there would be positive externalities because of the oil produced. Since there are positive externalities it means that the there would be welfare gain i.e. the marginal social benefit is greater than marginal social cost. The diagram below illustrates where the welfare gain is and that is between Q1 and Q*, it also shows that oil is produced at Q1 , if the production of oil is increased to Q* more welfare would be gained.
Figure 3: Diagram showing positive externality.
Price Welfare gain MPC
P1 MSC
P*
MSB
Q1 Q* quantity.
Picture below shows an over-head bridge in Delta.
Picture below shows house of a shell employee in Delta
Picture showing a factory in Delta
Picture below shows one of the good roads in Delta.
4 THE FUTURE
This section is going to impose ways the government can control the negative externalities in the state. There are different ways the government can control these negative externalities but first of all the government should stop being ignorant and help the economy. If government stops being ignorant they can enforce laws to control and monitor pollution in the villages; introduce more national and marine; ensure that forestry companies re-plant trees; regulate use of contaminated land.
Government can impose tax on oil companies to increase the private costs, if the government should do that the Marginal private would move upwards, there might still be welfare loss but it would be less than before. There should also be subsidies that is the amount of money paid by the government to a producer, it lowers the firms cost, these subsidies could be inform of grants, reduced taxation etcetera.
With the money gotten from oil production government can use it to compensate victim of the negative externalities of oil production so that victims would not sue the offending firms. The government can pay damages to victims through free health coverage.
Also since oil has now taking over the agricultural production which has caused the farmers and fishermen their jobs cause of the pollution, the government should build centers where they bring in professionals to teach them skills like mechanics, welding, painting, etcetera. If government can’t find professionals they can encourage companies there to teach them the skills. If the government does this there would be fewer crises because those people would no longer be unemployed and there would now be less kidnapping, armed robbery, fraud etcetera.
But if the oil industry continues with its act of polluting the environment the government should control their output in some way because it will not be possible to ban, if that doesn’t work out the government could make new environmental laws and if the oil industry don’t follow it then they would have to pay some amount of money since they have disobeyed the law, paying the money would increase their private costs. The diagram below shows the result if the oil industry has to pay tax.
Figure 4: Diagram showing negative externality. MSC
Price P* welfare loss MPC + tax
P2 MPC
P1
Q* Q2 Q1
Quantity of oil.
Firms should also be able to help, at the moment in Delta state the oil industry that is really helping in the negative externalities in the economy is SHELL. Other firms should take part in helping and do things like changing its production of its techniques and operation like economizing on the amount of waste disposal from the oil production. Changing the materials used in packaging the oil, something that can be recycled should be used that it would be used again thus prevent burning of waste disposal.
If government does this for the state there would a short term effect of pollution but in long term there will be no pollution. Therefore there would be less cost on the production of oil and also an increase in economy growth. But if government takes no action there would be a long term effect of oil production, and also a decrease in economy growth and an increase in the negative externalities of the economy.
In conclusion it is only the government that has the power in stopping the increase of negative externalities in the economy especially if the industries do no take action, but if government takes no action and continues taking bribes or being corrupt the economy would therefore be suffering for the costs of oil production.
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