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Creative destruction and the threat of the global energy transition to the Nigerian economy


Creative destruction, a term popularly associated with the Austrian economist Joseph Schumpeter is a concept that seems to be taken for granted by many economists and policymakers most especially in Nigeria. Creative destruction emphasizes how product, process, and system innovation lead to old frameworks being replaced by new ones in a significant and rapid way.

For context, an example today of creative destruction is how the innovation called the internet, enabled Amazon to become the market leader in commerce. The content of this article is aimed at showing how creative destruction is leading a global energy transition in world transport, industry, and power sectors away from fossil fuels like oil and gas and how this is sure to threaten the economic wellbeing of Nigeria.

What is the Global Energy Transition?

The Global Energy Transition is simply the structural transformation of the global energy sector from fossil-based to zero-carbon by 2050. It involves the existing and potential global demand and push to adopt renewable and low-carbon energy sources (i.e. wind, solar, lithium battery, hydrogen cells) over carbon-based energy sources (coal, oil, and natural gas). This will be made possible by advancement in technological innovation in combination with the societal, financial market, and political pressure to adopt zero-carbon energy sources to stem the effects of climate change.

Measures that are enabling the Global Energy Transition

Today our planet is experiencing temperature increases and climate change that is poised to affect various aspects of human life and in response to this global problem, over 190 countries worldwide, including Nigeria, are acting on the Paris Climate Accord in 2015 by enforcing policy and practical measures to limit the global temperature within 2-degrees Celsius by limiting greenhouse gases (GHGs) caused by fossil fuel usage.

Paris Agreement Signing Ceremony. Source: United Nations (2016).

Adding to political pressure on oil and gas is the technological innovation in renewable energy sources and it is here that creative destruction is making itself more evident. Over the past 15 years, innovation and investment have led to cheaper and increased energy capacity between 10-60% for renewable and clean energy sources especially with key sources such as wind and solar. According to the 2018 Bloomberg New Energy Finance Report, wind and solar power are expected to account for 50% of global energy needs by 2050 and as of 2020, both have installed capacity of 733GW and 714 GW respectively.

Source: International Renewable Energy Agency (2018).

Rapid technological innovation in battery technology especially lithium-ion powered batteries, has also led to supply growth in electric-powered vehicles such as Tesla. This will serve as an incentive for fossil fuel automobiles being replaced with electric-powered vehicles. To back the continuous progress in the energy transition the two largest economies the US and China are projected to make investments in wind and solar energy of about $2 trillion and $360 billion respectively over the next 10 years, making it clear that the future of energy is clean, renewable and low carbon.

Why the Global Energy Transition is a threat to the Nigerian economy.

Given the structure of the Nigerian economy and its high dependence fossil fuel (i.e. oil and gas) it is hard not to see the potential problems it will face due to the inevitable changes that would come with the global energy transition.

To put things in context oil and gas as a sector account for less than 10% of Nigeria’s GDP but yet account for more than 60% of federal government revenue, more than 70% of trade earnings, and more than 95% of foreign exchange earnings and according to the Nigerian Bureau of Statistics (NBS) out of ₦12.5 trillion in export revenue in 2020, fossil fuels accounted for ₦9.44 trillion (75.42%). That should tell anyone that fluctuations in global prices and demand for oil and gas pose problems to the Nigerian economy, but that inevitable structural changes to future demand for energy globally would spell disaster.

What can happen to the Nigerian economy if changes are not enacted.

A preview of what is to come if changes aren’t enacted to the Nigerian economy is what happened when it went into recession in 2016 due to falling oil prices caused by an increased supply of oil from shale-producing countries like the US, Canada, and China.

What happened in 2016 was simply this, oil prices which had been at record high prices of above $70 per barrel and had created a budget surplus for years in Nigeria, tanked to prices below oil production prices of about $30 per barrel. Such fall in prices triggered a couple of results such as low budget revenue for the government which has resulted in increased debt demand as well as low foreign exchange revenue which resulted in interest rate increases, food and commodity price increases, business closures, and limited dollar available for importation of goods into Nigeria.

Today in 2021 the economy of Nigeria seems to be in stable and barely functional condition only because oil prices have maintained a price level between $50-$60 per barrel, but that has not been enough to solve our revenue problem, and as thus why we have seen external debt levels increase in Nigeria from $10.6 billion to more than $30 billion in the space of 5 years.

Nigeria’s Debt: 2015 to H1 2020 (N’trn), Source: Proshare Research (2020).

If the recession of 2016 in Nigeria was bad, then imagine a scenario where even with our huge reserves of oil and gas, the prices of such fossil fuels drop to $15 per barrel or lower and stays there as forecasted by energy and consultancy firm Wood Mackenzie, because of the global energy transition and the need for clean and renewable energy sources. That potentially is the threat we face, one that inevitably will collapse the present existing structure of the Nigerian economy going forward if nothing is done about it, and one we need to create strategies and frameworks to tackle.

The way forward: Debt or Diversification.

It is inevitable in the next couple of years that we are going to see a lot of changes and innovations in renewables and clean energy sources such as more efficient battery technology to cheaper solar panels and wind turbines, and such are going to affect the Nigerian economy detrimentally.

The question now is that among the possible future outcomes out there which do we end up with. The way I see it we have two options and the first option we can take is one where we remain dull and stagnant in policymaking and take the easy way out by piling up debt from the IMF, the World Bank, or the Chinese to fund our economy and lose our sovereignty in the process while indebting future generations of Nigerians to come. This option is what seems to be the option of choice taken by the government since 2016, with all budgets from that time till now being heavily funded by internal and external borrowings to fund mainly recurrent expenditure which happens to be 70% of all government expenditure.

The second option we can take is the bright and dynamic policymaking option of diversifying our economy by adopting a Nigerian capitalist approach where the private sector runs key areas of the economy and the government regulates, as seen in the last 20 years in areas such as telecommunications, banking, and fintech. Such an approach would allow the private sector to make good use of the human, mineral, and agricultural resources across Nigeria, which would provide us with sustainable taxable revenue, improved export capacity, and better industrial and manufacturing infrastructure. The requirement from the government under this arrangement would simply be for it to create policies that make business easy to be conducted and formalized in Nigeria alongside reasonable regulation. Such an approach of market capitalism and government regulation across various economic sectors have been the bedrock for growth achieved by giant developing Asian economies such as China, Singapore, UAE, South Korea, etc., and should be the model Nigeria should copy and adopt today.

To conclude, I would say that given the fact that the global energy transition is an inevitability and renewables will replace most of the demand and need for fossil fuels, which would have a huge and potentially disastrous effect on the Nigerian economy, it is, therefore, the responsibility of every sane and well-meaning Nigeria to bring this potential issue to the forefront of the Nigerian public conversation so that solutions can be discussed and enacted for our collective growth and development.


Written by Frank Ebomah


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