THE IMPACT OF THE OIL SECTOR ON THE NIGERIAN ECONOMY (A CASE STUDY OF DELTA STATE)


Content

ABSTRACT

This research was prompted by the obvious dominant role of the oil sector in the Nigerian economy. The urge to know the extent to which this sector affects the economic life of the people, led therefore to the analysis of the impact of the oil industry on the Nigeria economy.

The economic impact which was categorized into positive and Negative on the bases of their economic contribution was thus revealed by the result of the regression analysis.

The study discovers therefore that though oil contributes significantly to revenue, foreign exchange, production and per capital income, it also plays significant role in terms of its contribution to rising prices, imports and inflation. Therefore what the sector gives in one form is withdrawn from the economy in another forms, more – or – less, the economy remain stagnant, thus the irony of the impact of the oil sector on the Nigerian economy.

 

 

 

 

 

 

 

 

 

TABLE OF CONTENT

CONTENT                                                                                                     PAGE

TITLE PAGE

APPROVAL PAGE

DEDICATION

ACKNOWLEDGMENT

ABSTRACT

TABLE OF CONTENT

 

 CHAPTER ONE:

1.1             INTRODUCTION TO PROJECT TITLE

1.2             CONCEPTUAL CLARIFICATION

1.3             PROBLEM DEFINITION

1.4             OBJECTIVE OF STUDY

1.5             SCOPE OF STUDY

1.6             LIMITATION OF STUDY

1.7             HISTORICAL BACKGROUND OF THE OIL SECTOR IN NIGERIA

 

REFERENCES

CHAPTER TWO:

2.1             REVIEW OF THE RELATED LITERATURE

2.2             GENERAL STUDIES ON OIL

2.3             STUDIES ON OIL ON NIGERIAN ECONOMY

2.4             THE IMPACT OF OIL PRODUCTION IN DELTA STATE

 

REFERENCE:

CHAPTER THREE:

RESEARCH METHODOLOGY

REFERENCES

CHAPTER FOUR:

4.1             DATA PRESENTATION AND ANALYSIS

4.2             INTRODUCTION TO VARIABLES

4.3             HYPOTHESIS / MODEL SPECIFICATION & EXPETATION

4.4             SOURCE OF DATA

 

REFERENCES

CHAPTER FIVE:

5.0             FINDINGS

 

CONCLUSION AND RECOMMENDATIONS

5.1       RECOMMENDATIONS

5.2             CONCLUSION

BIBLIOGRAPHY

 

 

 

 

CHAPTER ONE

INTRODUCTION

 

1.1             INTRODUCTION TO PROJECT TITLE

Nigeria is a major of crude oil, and the importance of this commodity has been highly manifested in the nations economy. From the early 70s, the petroleum industry has become the dominant sector in the economy. Following quickly after agriculture (the dominant sector before the discovery of crude oil). It has dictated the pace of economic, political social and cultural progress in the country.

 

Despite the present travails of oil in the world Alli (1987) asserted that oil still holds the key to the nation’s economic future, and the prospects of any successful economic restructuring hands heavily on this all important commodity. Hence, its importance in the Nigerian economy.

 

The world’s oil industry is described as the only international industry that concerns every country of the world. It is infact said to concern virtually the world economy; oil has successfully divided the world geographically into regions of major production and regions of high consumption.

 

The oil industry is also the most important in its contribution to the world’s tonnage of international trade and shipping for these and other attribution of the oil industry it was ascerted, by Odell (1971), that a day sddom passed by without oil being in News. This confirms the importance of oil (which is the basis of this study) throughout the world.

 

It is in this respect that this study – analyses the impact of crude oil (the dominant product of the Nigerian oil sector) on the Nigerian economy with the use of econometric techniques. Econometrics – because of its richness as a measurement tool, as well as the obvious advantages it possesses over other measurement techniques. Hence, the econometric analysis of the impact of the oil sector on the Nigerian economy.

 

1.2                   CONCEPTUAL CLARIFICATIONS

It is appropriate at this point to make certain clarifications as regards concepts such as, crude oil, oil sector or petroleum industry, gasoline or petrol, etc, that will from time to time be used in the course of this study.

The oil sector or petroleum industry is used interchangeably to refer to the combination of firms dealing on commodities like crude oil, petrol, kerosine, gas, etc.

 

Crude oil is a commodity produced from an under ground reservoir which has not been subjected to any refining or chemical process other than the separation at atmospheric pressure of any gasses which were dissolved in the oil at the greater pressure of the reservoir (ELLIS Jones, 1988).

 

Gasoline or petrol, and kerosine are refined petroleum distillates at different boiling points. Liquefied Natured Gas (LNG) are naturally occurring gas, either co-produced with oil or non-associated, which has been liquefied for ease of transportation and which is regasifined before use; just as these commodities are products of petroleum industry, so are other too which has not been mentioned in this study.

 

However, the essence of this section is to make clear the use to which terms mentioned in this study have been put. Hence the oil sector should not be seen generally as representing crude production alone, as used in this study (see section 1.6), but as an all embracing industry bringing the firms dealing in all petroleum products together.

 

1.3                   PROBLEM DEFINITION

One of the surest ways of justifying the comments which have been made on the position the oil sector has placed Nigeria in the international circle is to find out the extent to which crude oil has affected the Nigeria economy.

 

Nigeria’s position as Africa’s biggest oil producer in OPEC according to Synge (1986), no doubt, has considerable impact on Nigeria’s influential role in continent.

 

Crude oil has not been with his own side effects on the Nigerian economy these equally need to be considered to adequately show the “full impact” of crude oil in the Nigerian economy.

 

Therefore, the underlying problems of this study is stated in a question form thus, is oil responsible for the boom or doom of the Nigerian economy?   

 

 

 

1.4                                     OBJECTIVE OF STUDY

As a young nation with oil wealth coming almost unexpectedly (immediately after independence), Nigeria no doubt has its developmental growth problems to cope with; the oil wealth brought about growth opportunities as well as problems for the nation (Quinlan. 1980).

 

It is these opportunities and problems that the study intends to analyze in terms of the impact of the oil sector on the Nigerian economy. Hence while the opportunities represents the positive contributions of the sector, the problems stands for the negative impact of the sector on the Nigerian economy. The oil wealth contributed immensely to the Gross Domestic Product (GDP), foreign Exchange Earning Government Revenue, etc. The effect of these and other variables reflected in the expenditure of Government positively.

 

This therefore indicates the positive effect of oil in the economy; the oil wealth dramatically increased the country’s financial position, as stated above, and sub-sequently improved the individual spending, and general welfare. This upsurge in income and resulted in the rise in the general price level of the nation, hence increasing the rate of inflation.

The adverse effect of this is the fall in the real income which severely affected those on fixed income; more over, the oil wealth encouraged the drift from the rural to the urban areas, resulting in the cities.

 

The oil sector being highly capital – intensive contributed marginally to employment.

 

Apart from the above, Nigeria’s critical debt situation can also be attributed to the mismanagement of the oil wealth; specifically from 1974 oil boom, total Government – revenue rose to N4.537 million from the sum of N1,695.30 million in 1973 with oil contributing over 80 percent of it.

 

Nigeria therefore went on a spending spree with high taste for imported goods as total imports increased from N1,224.8 million in 1973 to N1,736.5 million in 1974, N3,721.5 million in 1975 etc. Crude oil was also the major source of foreign exchange contributing over 90 percent in 1974. (see Tables in Appendix 1).

 

The glut that followed the boom forced the Government into deficit financing just to meet up with its past level of expenditure. Therefore, total debt increased from N1,589 million in 1974 to N2,028.8 million in 1975. N3,004.6 million in 1976, N5,001.1 million in 1977, N13,776.7 million in 1981, N154,940.7 million in 1998 and by 1990 had rise to N381,986.4 million. This study on the basis of the above, therefore analifed the impact of the oil sector on both the “positive and negative” forces in the economy.

 

 

 

1.5                               SCOPE OF STUDY

The oil sector no doubt encountered certain disruptions during the civil war (1967 – 1970), Niger Delta crises (1998-1999) which has devastation effects on oil exploration in 1967, 1968, 1969, 1998 and 1999; by virtue of this fact, the study will cover a period of thirty three years sparing from 1970 to 2003. this period covers completely the boom and doom years of world crude oil trade: the boom years were the 1973/74 and 1977/80 eva when there were upsurge in oil prices; the doom years however started since 1981 till date.

 

The coverage of this study is therefore all embracing as the impact of oil on the following shall be adequately covered for the chosen period.

1.                  The impact of the oil sectorial output on GDP

2.                  The impact of the oil Revenue on Government expenditure.

3.                  The impact of the oil Revenue on domestic investment.       

4.                  The impact of oil export – Earnings on Total foreign exchange earnings and imports.

5.                  The impact of oil revenue on money supply and inflation.

6.                  The impact of oil revenue on the – intensity of Debt to GDP and the per capital income.

 

1.6                         LIMITATION OF STUDY

The dominance of crude oil sector, can not be over emphasize, it over shadows all other products of the industry. (Contributing an average of about to percent to Government revenue) in the period under consideration.

 

The study is therefore limited to crude oil’s impact alone, on the economy this is used in representing the impact of the sector (as a whole) on the economy.

 

This study has also been compelled to the use of data from secondary sources due to the time constraint that incapacitates the search for data via primary sources. But comparison would be made by the use of various secondary sources for the purpose of verification. The high financial requirement of this study also come into place here.

 

None the less, it is imperative to note that the above constraints will have no impact of any sort on the reliability of the results obtained from the research.

 

1.7             HISTORICAL BACKGROUND OF THE OIL SECTOR IN NIGERIA     

This dates back to 1908 when a German – company the Nigeria Bituman corporation was issued a license to exploit the deposit at the oil see pages in Araromi, some 200 lem east of Lagos. This bid was however aborted by the out break of the first world war between 1909-1914 (Raji, et al; 1980; page 301).

 

About three decades later, in 1938, an Archy continued the exploration process. This was also interrupted between1939-1945 by the second world war. (Afolayan, 1988; page15).

 

After the war, shell D’ Archy, now known a shell B.P perolum development company of Nigeria was given sole concession to continue exploration.

 

This yielded fruit when in 1956 the company struck Nigeria’s first crude oil find in commercial quantity from a well located at Oloibivi, Yenagoa province of the present day Rivers state (Nigeria oil Directory, 1987; p.52.

 

Therefore, commercial production commenced immediately; However, it was not until February 1958, when production had reached about 5,000 barrels per day, that the export of Nigerian crude oil to the outside world actually began. Then the pipe line to port-Harcourt had been completed.

 

Exclusive exploration rights was not made available to comprise of other nationalities until 1959. subsequently therefore, Mobil Gulf, Nigerian Agip, Safrap (NOWELF), Texaco / ccherron – pan ocean, and Ashland joined in the research for oil in Nigeria.

 

By 1960, shell – EP, was producing some 17,5000 barrels per day. With the completion of the tanker teruriual and related facilities at Bonny 1961. production increased to over 46,000 barrels per day. Then Mobil and other explorers were still unsuccessful in their search (Quinlan 1980; p. 271).

 

In 1965, the trans-Niger Pipeline was completed, allowing oil from fields in the mid west to flow to Bonny termind. In the same year, Gulf oil began lifting oil from the company’s first find; by this time, other comparies have discovered oil on-shore..

 

Gulf oil’s discovery was Nigeria’s first off shore oil field. These developments allowed production to rise to some 270,000 barrels per day (b/d) in 1965 and nearly 429,000 b/d in 1966 before the Nigeria civil war which dismpted production and impeded the flow of machinery to production sites.

 

Oil output by 1970 however, recovered from 1968 low levels to reach 1.08 million b/d in the following year; the 1974 daily production (as evident from Appendix Two) is due to a number of factors prominent among which is the global oil sector.             

 

Prior to Nigeria’s membership of organization of petroleum Exporting Countries (OPEC) (1) in 1971, royalty payments were increased from 12.5 percent to 20 percent and the petroleum profit tax from 55 percent to 85 percent (see Table 1.7.1 below).       

 

TABLE 1.7.1 PETROLEUM PROFIT TAX HISTORY TREND

FROM

TO

RATE OF TAX

Inception (1959)

19th March, 1971

50%

20th March, 1971

30th Sept, 1974

55%

18th Oct, 1974

30th Nov, 1974

60.78%

1st Dec, 1974

31st March, 1975

60.75%

1st April, 1975

31st March, 1977

85%

 

Source: NAPETCOR – QUARTERLY MAGAZINE  of (NNPC) Vol. 1. No. 1 Oct – Dec. 1980.

 

The Nigerian National oil corporation (NNOC) which was established as a state oil corporation in 1971 ended up in crisis in 1975. the situation took two years to reesify – with the emergence of Nigerian National Petroleum Corporation (NNPC) in 1977 (Raji, et al; 1980; p. 303). This was as a result of the aural gumation of (NNOC) with the ministry of petroleum Resources.

 

NNPC therefore performed dual functions. According to Quinlan (1980). It performs one, as a state – owned company, active in its own right as well as in partnership with the international oil companies, it is playing a part and leaping the rewards for Nigeria’s oil: two, as an arm of Government it acts in a regulatory capereity to ensure that the oil is being exploited in the best interest.

 

TABLE 1.7.1 PETROLEUM PROFIT TAX HISTORY TREND

FROM

TO

RATE OF TAX

Inception (1959)

19th March, 1971

50%

20th March 1971

30th Sept, 1974

55%

18th Oct, 1974

30th Nov, 1974

60.78%

1st Dec, 1974

31st March 1975

60.75%

1st April, 1975

31st March 1977

85%

1st Jan, 1990

31st Dec 1990

11

1st Jan, 1993

31st Dec 1993

11

1st Jan, 1995

31st Dec 1995

11

1st Jan, 1999

31st Dec 1999

11

 

Source: NAPETCOR – QUARTERLY MAGAZINE  of (NNPC) Vol. 1. No. 1 Oct – Dec. 1980.

            Federal Ministry of Finance

            Central Bank of Nigeria

CBN Annual Reports and Statements of Accounts, 1998.

 

The Nigerian National oil Corporation (NNOC) which was established as a state oil corporation in1971ended up in crisis in 1975. The situation hole two years to rectify – with the emergence of Nigerian National Petroleum Corporation (NNPC) in 1977 (Raji, et al; 1980; 0. 303). This was as a result of the amalgamation of (NNOC) with the Ministry of Petroleum Resources.

 

NNPC therefore performed dual functions according to Quinlan (1980), it performs one, as a state-owned company, active in its own right as well as in partnership with the international oil companies, it is playing a part and reaping the reward  for Nigeria’s oil. As a result of the economic transformation of the country through the Structural Adjustment Programme (SAP) which was imposed by the Federal Government in 1986, the NNPC, according to Akinnusi (1990), adopted a new mission in January 1987, that was intended to be realized by April1, 1989.

 

This according to Egbuji (1987) is the shive by NNPC, to be a commercially in managed, integrated international oil  company, whose mission is to profitably explore, develop, produce, process and market crude and refined petroleum and their by products and clerivatives, at international competitive prices, both at home and abroad.

 

Also, the NNPC “seek to fuel the development of Nigeria’s  domestic and industrial sector by providing gas to consumers throughout Nigeria and abroad by fostering the start-up of new petroleum – based industries.

 

With the above new mission, NNPC become commercial (profit oriented) and autonomous.

It is therefore no longer supported by Government subsidy. Rather, it is expected to render dividend to the federal Government from time to time.

 

As far as their ultimate goal is concerned, NNPC is therefore not different from the other private oil companies in Nigeria (all numbering ten with NNPC as the eleventh).

 

Since NNPC has shared in most of the other oil comparies and with her new role, there is bound to be kind of linkage that will spread NNPC’S interest an influence throughout the whole industry. The eventual result is the acquisition of what is termed “a dictation voice” in the oil sector by NNPC. Hence NNPC is regarded by Akinnusi (1990) as “ dominant firm with dominant practices in Nigeria’s Petroleum industry.”

 

From a modest production of 5,000 b/d in 1958 by shell EP, the volume of production in the country has multiplied impressively over the years. The total crude oil production in Nigeria is dominated by shell petroleum Development company with about 50% (percent) of the total production by it (see Table 1.7.2 below).

 

 

0

TABLE 1.7.2 COMPANIES CONTRIBUTION TO TOTAL ANNUAL PRODUCTION OF CRUDE OIL IN NIGERIA 

NAME OF COMPANY

SHARE OF PRODUCTION

1.     SHELL

49.26

2.     GULF

15.95

3.     MOBIL

12.30

4.     AGIP

8.83

5.     ELF

6.18

6.     TEXACO

4.38

7.      ASHLAND

2.56

8.      PAN OCEAN

0.26

9.     TENNECO

0.20

10.    PHILLIP / DUPRI

0.08

TOTAL

100.00

Source:

            NIGERIAN OIL DIRECTORY 1987 P. 60

 

The company of a joint  venture of the Royal./Dutch shell group and the NNPC. At present, NNPC has to percent – participatory interest shares in shell and 60 percent in each of the following oil companies; Gulf, Elf, Mobil, Texaco, Phillip’s and Pan Ocean (Nigeria oil Directory, 1987; p. 58). This historical trend of Nigeria’s oil sector reveals that though oil was discovered in 1956, it was not unit the 1970’s that the tremendous influence of the sector as the priune mover of Nigerian economy because apparent through a combination of circumstance, particularly the rise in Nigeria’s oil prices (a remarleable achievement of OPEC). Nigeria suddenly become a wealthy nation.

 

The problem of Nigeria therefore, according to Olorufemi (1986), became one of “how to manage this sudden wealth to transform the economy and build industrial structure with emphasis on a self reliant economy.

 

PAST HIKES

Early 80s

20k

1987

39.5k

1988

42k/60k

1989

60k

1991

70k

1994

N3.25k

1996

NILL

1998

N20

2000

N22

 

 

 

 

 

 

 

 

 REFERENCES

1.   Afolayan J.K. (1988)     “Oil as a prop. and problem in the      Nigerian economy“ management an economic studies. Vol.5 No. 1. 1988, pp. 15-20.

 

2. Akinnusi, a. (1990) “ Nigeria’s petroleum industry and the dominant firm theory” OPEC Bulletin, Vol. 21. No. 3. March 1990, pp. 9-12.

 

3. Alli, A. L. (1981) “The Role of oil in Nigerian Economy” in   Jakande, L. K. (ed) Nigerian oil Directory,

      

4.   Egbuji, G. C (1987) “Organisation Adaptation to changes. The NNPC case,” An unpublished MBA (Executive) thesis, faculty of Bus. Admini University of Lagos, 1987.

 

5.   Ellis Jones, P. J. (1988) “Oil a practical guide to the economics of world petroleum” .Nichols pub. Company. New York, U.S.A, 1988.

 

5.   Odell, P. I (1979) Oil and world power penguin Broke, Hanimond Swotth. 1979.

 

7.  Olovumfemi M. S. (1986)Managing Nigeria’s petroleum Resources,” OPEC Bulletin, Vol. 16, No. 10, Dec / Jan. 1986, pp. 24 to pp. 27.

 

8.    Quinlan, M. (1980) “Nigeria’s oil industry” in smile, V. and know land, W. E. (ed) Energy in the developing world, Oxford university press, 1980, pp. 270 – 276.

9.    Raji, Y. A. (et. al) (1980) ”The Management of our oil Resources,” proceedings of the seminars on selected National policy matters of the senior Executive course, NIPSS, No. 2 Nov., 1080. pp. 299-338.

 

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