The Impact Of Oil Sector On The Nigerian Economy (A Case Study Of Delta State) 

Project and Seminar Material for Economics

Project and Seminar Material for Economics


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 Therefore what the sector gives in one form is withdrawn from the economy in another forms, more – or – less, the economy remain stagnant, thus the irony of the impact of the oil sector on the Nigerian economy.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


Preliminary Page(s)

  • 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

Proposer


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

The oil sector or petroleum industry is used interchangeably to refer to the combination of firms dealing on commodities like 0crude oil, petrol, kerosine, gas, etc.

Hence the crude oil sector should not be seen generally as representing crude oil production alone, as used in this study, but as an all embracing industry bringing the firms dealing in all petroleum products together.

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 producers in OPEC according to synge (1988), no doubt, has considerable impact on Nigeria’s influential role in the continent.

Also, the expenditure of the Nigerian-government has been influenced to a great extent by the crude oil revenue.

Infact, it is the contribution of oil to the domestic economy of Nigeria that influences the nation’s role in the continent.

Crude oil has not been without its 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 from thus; is oil responsible for the boom or doom on the Nigerian economy?

As a young nation with oil wealth coming almost unexpectedly (immediately after independence), Nigeria no doubt had 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 or the Nigerian economy. Hence, while the opportunities represents the positive contributions of the sector, the problems stand for negative impact of the sector on the Nigerian economy.

The oil wealth contributed immensely to the Cross Domestic Product (GDP), Foreign Exchange Earning, Government revenue, etc. This effect of these and other variables reflected in the expenditure of government positively. This therefore indicates the positive impact of the oil industry on the Nigerian economy. Also, it is note worthy to mention the negative 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 spending, without adequate increase in productivity, 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 moral to the urban areas, resulting in the cities.

The oil sector being capital intensive contributed marginally to employment.


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).


Chapter Five


Conclusion And Recommendations

As revealed by this and other studies, the oil industry exerts significant impact on the Nigerian economy. It affects the economic life of Nigerians directly and indirectly; this effect of the industry is two-fold:

One is that it enhances the increasing standard of living as well as growth and development of the nation; and secondly, is the increasing cost of living which is negatively felt. The second impact hampers the successful attainment of the first objective.

However, the oil industry’s production and prices are externally determined both by the OPEC cartel and activities in the world oil industry, therefore, the importance of the external environment determining the extent to which oil industry contributed to the economy.

The nation’s oil is dependent on the outside world industry for the determination of prices which consequently influences revenue from oil.

Moreover, the technology used in the exploration and production of crude oil are not locally produced thereby widening the dependency gap of the nation on the outside world.

This scenario explains- therefore, the economic dependence of the nation since the oil industry is doubted the heart of the nation.


5.0 Findings

  1. All the hypothesis tested by the various models were significantly different from zero, except that of model 5 whose F-test proves otherwise. The various hypothesis were significant at 5 percent level; apart from model 7, the others were significant also at 1 percent level.
  2. Six of the models posses between (64.2 percent and 99.9 percent) however, three models possess low explanatory power between (32.2 to 42.5 percent). The explanatory power of model 5 is more or less zero as it reads negative.
  3. The predictive power of five of the models rabge between (67 percent and 97.3 percent) which could be termed as varying between high and very high. Form other models produces low predictability between (20 to 53 percent) while model 7 has a negative predictive ability.
  4. From the above statistic therefore, apart from model 5 and 7 that requires respecification. All other 8 models upheld the hypothesis upon which they have been tested therefore, the conspicuous revelation of the impact of the oil sector on national output, Government revenue and expenditure capital formation (investment) supply of money, foreign exchange earning, total imports, price level and per capital income.
  5. Summarily, the results have shown that the oil sector significantly contributes to G.D.P Government revenue and expenditure. Foreign exchange earning and per capital income. These represents the negative impact of the industry on the Nigerian economy since its contribution to these various indicators enhanced growth and development as indicated by table 4.5.1 below.
  6. The contributions of the petroleum sector to money supply, imports and prices have significant negative impact on the economy as both domestic and imported inflation enhanced by the economic objectives of the industrialization of the economy to enhance self valiance.
  7. Moreover, the industry’s low contribution to sowings and investment is detrimental to the attainment of the above national economic objectives.

5.1 Recommendations

  1. From the above synopsis, it is recommended that Government should pay more attention to the oil industry by adequately using its revenue for the development of the other sector of the economy such as; agriculture, manufacturing, etc. This becomes move important bearing in mind the devastation situating of the oil industry in the 80s and the foggy outlook expected in the 90s; as well as the 2000 era. This indicate that the oil industry is susceptible to falling prices and the sole reliance of the economy on the mono-product is dangerous. It is an indicator of vulnerability, a situation which is not good for the nation.
  2. The agriculture sector should therefore, be according priority attention and great importance, this will ensure the adequate production of food for the nations populace. It will also service the manufacturing industries which also require the materials; moreover, the agro-allied industries should be encouraged to its fullest.This will reduce the exploitative exportation of the nation’s raw materials at cheater prices for high priced finished products, for this to be possible, Government should intensify effort to encourage the manufacturing sector as well as others; at the same time.
  3. The political environment should be stable and peaceful enough to attract foreign investment. Apart from the above general recommendation there is the need to discourage excess consumption expenditure, this will favour and encourage savings and investment; both fiscal and monetary policy measures (such as imposition of taxation on luxurious goods, and increase rate of interest) could be adopted. The later is generally more only to luxurious goods.
  4. However, in adopting the above recommendations without reducing Government expenditure makes impossible the attainment of the stipulated objectives spending; therefore excessive Government spending on sectors of little economic significance (such as defence) should be discouraged to a great extent.
  5. Most of Nigeria’s woes are undoubtedly attributable to the dominance of the economy by the oil sector, this is because of its significant contribution to the nagging rising prices in the economy; crude oil discovery led to the neglect of agriculture, the main stay of the economy in the 60s. This was possible because of the upsurge in business activities in the cities that led to people’s migration from the rural to the urban areas; Nigeria therefore, soon became a net importer of food, having abandoned agriculture. Therefore, the upsurge in the prices of goods and services in the economy was undoubtedly due to the neglect of the agricultural sector; however, when oil could not sell at high prices again, it resulted in the down turn of business activities, hence, the inflationary spiral.
  6. There is the need therefore, to curb the inflationary impact of oil on the economy through monetary policy measures, this requires the control of money supply (among other indicators) in order to control prices. Moreover, there is the need to increase the production capacity of the nation by encouraging productive activities, in this line, the Government should intensify efforts in support of self – employment and small-scale industries through contacts with nervy-industrial countries such as South Korea, China, Japan, etc.
  7. There is need for a drastic population control to curb the situation of higher growth rate of population them economic growth rate, more so, the quality of labour force (provided by the population) should be improved through adequate education in technical areas specifically. This should support the acquisition of minimum level of education by the general populace; efforts in this direction will enhance skill and technological development of the nation. Also, imports should be drastically reduced to encourage an inward look that will enhance self-sufficient in production of present actions of Government in this direction (i.e, banning of wheat and rice importation) should be extended to other items that can be locally substituted. Effects should be intensified at sourcing Raw materials Research and Development Council.
  8. There is the need for a coherent; this is because the anticipated mechanism for industrial growth, the revolution of the transportation system and mechanization of agriculture as well as improving the living standard of the populace could all be understood and explained within the context of energy supply and consumption.
  9. In order to attain the ultimate goal of growth and development, there is the need for an effective and all-encompassing economic policy. This will link the various aspects of the economy towards the attainment of these objectives, it is recommended therefore that studies should be carried out to reveal the nature of the sectoral inter-relationship. Moreover, specific studies on the sole impact of each sector on predominant aspects of the economy will be of great importance. It is the results use in formulating a robust and practicable economic policy.

5.2 Conclusion

The economic impact of the oil-industry in Nigeria has been felt by all and sundry directly or indirectly for the past forty six years; when viewed from the impossible made possible (e.g. the Udoji Salary awards, infrastructural development, etc.) the discovery of oil in Nigeria will be summarily regarded as a “boom” to the nations economy.

On the other hand, a look at its devastating effects (like; increase in prices fall in purchasing power and standard of living, etc.) justifies the declaration of oil discovery in Nigeria, as responsible for the “doom” of the nation’s economy.

Without an iota of doubt therefore, the oil sector has brought a mixture of “boom and doom” to the Nigerian economy what oil gave in one form to the economy, it took back in another form, this is conspicuously revealed by the result of this study. The impact of the oil sector in Nigeria is, therefore, neither a blessing nor a curse (in isolation) but a “mix-blessing”. The industry gives life to the economy through its positive contributions to; revenue, foreign exchange earning, etc.


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