May 26, 2024

Natural resources are endowments, not comparative advantage


Ademola Adegun (oped)

“Nigeria has a comparative advantage in oil” Other OPEC countries have cheaper fuel”

You read lines like this and you moan. What is a comparative advantage? Natural resources are not comparative advantages. Natural resources are endowments. Having a natural resource does not translate to a comparative advantage.

Comparative advantage is an advantage conferred from lower opportunity cost than trading partners.

Comparative advantage comes from value addition. If two countries have natural resources and your cost of production is higher, what is the comparative advantage? If you have to import the technology, what is the comparative advantage? If devaluation has made your currency below par, what is the comparative advantage?

Saudi Arabia produces 10m barrels per day. Has a population of 35m. Kuwait produces 3.4m barrels per day with a population of 4.5m.

A barrel in Saudi cost $10 to extract. A barrel in Kuwait cost $8 to extract.

Nigeria produces 1.4-1.7m barrels per day. Capacity is about 2.5mbpd. Population is 200m. Cost of extraction is between $18-$32 depending on terrain. Where is the comparative advantage?

The opportunity cost of a refined barrel relative to a sold barrel is $1850. Nigeria sells 90% of crude extracted. Look at the loss from lack of value addition?

Gas. Nigeria has the 8th largest gas reserves. Domestic utilization relative to reserves is less than 18%. Where is the advantage?

In the last 7 years before the passage of the PIA, investments in oil and gas were flat. Nobody invested. Our current rig counts less than 9. Why?

A natural resource endowment is just that. An endowment. It’s like latent skills. You must develop it for it to become an advantage.

Being an OPEC member gives you cartel advantage in price regulation. Nothing more.

Equatorial Guinea has a higher per capita income than Nigeria with less natural endowments. Gabon has a higher one as well.

Nigeria is a poor nation. Having resources does not make you wealthy. Wealth is from utilization and value addition.

I have explained this before in my cow story and who makes the most from a cow.

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