The Impact Of Deregulation On The Downstream Sector (Oil Industry) On The Nigeria Economy: A Critical Appraisal

Project and Seminar Material for Business Administration and Management BAM

Project and Seminar Material for Business Administration and Management BAM

Chapter One

1.0 Introduction

Since its discovery in Nigeria, in the early 1970s crude oil has remained the mainstay and the dominant export and foreign exchange earner of the Nigerian economy. Where as it contributes 2% to government revenue in 1970, it has risen to 81% by 1981 and it accounted for about 98% of our total export during the same year. This after 30 years of commercial exploitation of oil in the country, Nigeria remains largely an exporter of light and importer of heavy oil and refined petroleum products in general.

This implies that any disequilibrium in the world market with respect to the demand and pricing of oil will have a decisive effect on our domestic activities. The lopsidedness in the pattern of development of Nigeria oil resources, Nigeriacurrently depends largely on importers to supplement the output of both theKaduna and Port Harcourt refineries to meet the consumptions requirement of the populace.

The genesis of the present crisis in the oil sector is traceable to the deep rooted lopsidedness in the development of crude oil. The sporadic and lingering merger crises in the country, in recent time, which has assumed an alarming dimension with the attendant excruciating scarcity of petroleum products and commitant hardship on the citizenry definitely call for a strategic review of investment in the oil sectors.

In order to enhance an efficient and uninterrupted supply of petroleum products there is the need to attract more private sector in particular in the refinery products, which have been on exclusive preserve of government and its parastatals. It is as a result of this that the Nigerian down stream petroleum marketing sector was fully deregulated effective from 1st October, 2008.

1.1 Background Information Of The Study

Due to the problem associated with pricing and distribution of petroleum product nation wide, the government has resolved to deregulate the downstream sector of the oil industry to increase on the effectiveness and efficiency of the pricing and distribution system and curb the associated problems.

The policy of the government is necessitated by in-active and incapacitation of the refineries to meet the petroleum product requirements of the populace, coupled with mal-administration, misappropriate in and bad management practice that characterized all public corporations, the oil sector inclusive. To avoid excess spending of government on the subsidy of petroleum products, deregulation of downstream sector now become inevitable. As one will agree, there is no government in any part of the world that can survive by running a programme of subsidy in petroleum products.

Economic experts and policy markers, all over the world have since recognized the prime role and active present of private entrepreneurship in the development of most or all the sectors of the economy of which oil sector is no exception.

This, the federal government of Nigeria also came to realise after spending heavily on subsidy and resulting to persistence increase in the price of oil products all of which do not solve the lingering problems of supply and distribution of petroleum products in the country. It should be noted that by subsidizing petroleum product prices, the government is dipping hands into the federation account and utilizing money which, ordinary, would have been used to energizing both the micro and macro-economic activities of the nation.

Full deregulation will impact positively on Nigeria structure. The advantage of such will be free in economic activities enhance growth and development.

Deregulation has generated heated emotional reactions from outspoken organised group, which include labour, professional bodies etc. This is understandable, because the individuals and groups do not have sufficient information on the process between procurement and delivery of the petroleum product to the end users. The current government policy of deregulation is inevitable consequence of a collapsing down stream sector, arising from government inability to raise the required finance to sustain the importation of refined petroleum product. It is quite obvious that Nigerian oil industry has been plagued by serious ailment which can be likened to the dreaded Acquired Immune Deficiency Syndrome (AIDS), but unlike AIDS however, the problems in our oil industry are not incurable as there exist some well known solution and remedies. The government and the citizen, including the Nigerian Labour Congress (NLC) have been at logger head over the issue of price deregulation or removal of subsidy in petroleum industry. The government claims that this is necessary to arrest the scourge of perennial and incessant scarcity of petroleum products across the nation, which seems to have defiled previous solution. Government further asserts that the price deregulation would stamp out or least drastically reduces the incidence of smuggling of petroleum products across the borders of neighbouring countries. Where the products sell for much higher price on the parts, the NLC leadership become incurred over what it claimed is government gross insensitivity to the plight of the suffering workers and the masses as a whole. Furthermore, NLC is of the conviction that government cannot claim to be subsidizing the price of petroleum product in Nigeria with those countries, especially neighbouring countries that do not produce oil. It affirms that the problems in Nigeria oil industry are as a result of corrupt practice by NNPC official the ruling class some greedy traditional ruler, serving and retired military top brass, all of whom uses are one form or the other to suck the nation dry through NNPC and its subsidiaries. It will therefore, be quite unjust and inequitable for government to punish the masses by claim to be removing non-existing subsidy (Adams Oshiomole, 2001).

It seems that while looking out from the same window of deregulation, the government appears to be setting only optimism and hope, while the NLC on his part can only see more anguish and suffering for the Nigerian workers, their family and the masses as a whole. This could be linked to a situation where two prisoners looked out from the same window, one saw a cloud of dust, while the other saw a mass of shining bright sky.

With the oil sector deregulation on the horizon the issue now become more than an ordinary few between the government and the NLC, as various groups and individuals now joining in the debate, majority of whom are taking side with NLC. These groups and individuals are of the opinion that Nigerian being the world sixth largest oil producer should not have her citizen pay as much as the prices deregulation would bring about on petroleum products. It is believed that the higher prices of petroleum products in the world, causes incessant increment in the product prices in Nigeria as a result of massive importation which is due to improper functioning and incapacitation of the refineries could be cushioned by the windfall the country realizes from its exportation of her crude oil, so that Nigeria, a major producer of crude oil, will not be burdened by exorbitant price. Nigerians believers that the introduction of the policy of this part is ill-advised and ill-timed.

It is believed that the policy should have been introduced after the nation refineries, which have a combined refining capacity of 44,000 barrels per day will return to optimum production. It is opined that by deregulating the down stream sector of the oil industry without the refinery functioning properly is an attempt, which would not yield a good dividend.

The long running battle between labour and government, produce a case study on how not to conduct industrial relation petroleum product distribution has been a perennial problem, which started as far back as 1970, the problem has persisted till date. The problem stemmed from inadequate supply to inappropriate pricing of the world.

In the light of the foregoing, there is need to embark on a well-articulated media campaign to enlighten the populace on the policy and why it should be sustained in the overall interest of our country. It is imperative to engage public opinion with a view to overcome any objection to the deregulation in the down stream sectors of the oil industry.

The government should also make conscious effort to effect the repairs of refineries, the Turn Around Maintenance (TAM) of the refineries, which have been delayed for too long should be awarded to experienced contractors to handle, while a way to cushion the effect on workers should be fashioned out. Also the masses should be more empowered economically to face the incidence of capitalization which deregulation is all about.

1.2 Scope Of The Study

The oil sector is a sector that has effect on all other sectors of the economy any development in the oil sector affects other sectors in the economy, hence a study of this nature requires time, money and personnel.

1.3 Objective Of The Study

This study as carried out among others, to:

  1. Describe deregulation in the real sense of it
  2. Highlight the benefits of deregulation
  3. Determine it efficiency in procurement and distribution of petroleum product would increase with deregulation.
  4. Analyse the impact of deregulation on the Nigerian economy.

1.4 Purpose Of The Study

This study will adequately educate on deregulation to analyse the managerial control of the deregulated companies to show the benefit derivable from deregulation of the petroleum in improving deeply unconscious economy.

1.5 Limitation Of The Study

The petroleum (oil) sector is a sector that impact on all other sectors of the economy. Improvement on the petroleum (oil) sector affects other sectors in the economy, hence a study of this nature require the following time, money and resources person so as to curb the limitation of the oil sectors of the economy.

1.6 Definition Of Key Words

i. The Down Stream Sector:

This relates to all activities, which follow after crude oil or natural gas has been collected at the opening of a process plant such activities generally referred to as manufacturing and marketing, include refining, treating, conversion and marketing of petroleum products petrochemicals and all auxillary services related to it.

ii. Deregulation:

This is the process of removing or eliminating the monopolistic power of particular economic activities as a result of ineffectiveness and inefficiency in order to involve private sectors participation.

iii. Importation:

This is the process of bringing goods and services from other countries in order to increase the standard of oil sector industry on Nigeriaeconomy.

iv. Policies:

According to the advance learner dictionary. A place of action agree or chosen to guide the operation of a particular sector.

v. Petroleum:

It is also call crude oil, according to Ababio (1998) petroleum is defined as a mixture of gaseous, liquid and solid alkanes and others.

vi. Subsidy:

This is the amount of money (capital) provided by the government to reduce the cost of production of a particular product

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