Relationship Between Electricity Consumption And The Economic Growth In Nigeria

Project and Seminar Material for Economics

Relationship Between Electricity Consumption And The Economic Growth In Nigeria


Abstract


The study examined the energy consumption and economic growth in Nigeria, using the time frame of thirty (30) years period from 1986-2016. It was established in the study that before the introduction of appropriate energy consumption, energy sector funds were grossly mismanaged, contracts were awarded based on ‘connections’ rather than on merit and high occurrence of corruption in Nigerian power sector.

Since power sector has been seen as an important instrument tool to be used by the government to improve the economy, the appropriate growth from power supply have strengthened all sectors in Nigeria economy and minimize the incidence of economic retardation. The result of the study reviewed that: Energy consumption has significant relationship with economic growth in Nigeria. The study suggested that energy conservation policies could be effectively implemented without having any negative effect on economic growth in Nigeria and energy growth policy should be adopted in such a way that, growth in the energy sector could stimulates economic growth and thus expands employment opportunities in the country.


Chapter One


Introduction

1.1 Background to the Study

Globalization has brought about changes in the entire world and this is known to everyone, however, it emerged with many challenges but energy received major attention from researchers. The demand for energy is increasing quickly in this globalizing world. Most countries in world including Nigeria are facing scarcity of energy and consequently it is brutally affecting the economic growth. Now, the search for alternative and renewable sources of energy has become the need of hour for countries (Chaudhry, Safdar and Farooq, 2012). Energy has remained one of the main inputs to production. Therefore energy is vital for both developed and developing countries. The oil crises during the 1970’s and the abnormal increases in oil prices in 1990’s and 2000’s verified the importance of energy also making energy as a fundamental resource in the economy. Consequently, economic growth is directly related to energy consumption.

The relationship between use of energy and economic growth has been a subject of greater investigation as energy is one of the important driving forces of economic growth in all economies (Pokharel, 2006). Though India is the world’s third largest producer and fourth largest consumer of electricity, the power sector is considered as one of the ignored sectors in the Indian economy. The relationship between energy consumption and economic growth has undergone extensive investigation. For the last two decades, the debate has been focussed on whether energy consumption stimulates economic growth or vice versa. Consequently, the relationship between energy and economic growth has been a subject of intense research in finding its causal relationship. But no consensus has been reached from these studies (Soytas& Sari, 2003). The major findings of the research studies can be grouped into three. (i) no causality, (ii) unidirectional causality and (iii) bi-directional causality between energy consumption and economic growth.

As Alam (2006) puts it, “energy is the indispensable force driving all economic activities”. Energy is one of the most imperative resources used in all production processes and this has increased the foreign income of countries that export energy products. Most countries especially the less developed countries have benefited from transfer of technology in the process of exploration, production and marketing. The energy industries have also provided jobs to a good number of people who were unemployed. There have been improvements in infrastructure and socioeconomic activities of communities in the process of energy resource exploitation. Base on the above arguments, consistence supply of energy, thus becomes central to economic and infrastructural transformation of the most nations’ economy (Sama and Tah, 2016). Thus, various studies have been conducted on the relationship between economic growth and energy consumption (Yilmaz and Hasan, 2014; Sama and Tah, 2016). According to Ojinnaka (2008) energy consumption runs hand in hand with the national product. His study revealed that energy consumption per capita is an important indicator of economic growth. Continuous increase in production in the world has increased the need of energy, but the insufficiency of oil and natural gas resources in the world poses an obstruction for the sustainable economic growth.

However, Electricity power is a secondary energy resource obtained from the conversion of the primary energy resources such as fossil fuels (natural gas, oil, coal) and wind energy. Coal has been the fuel mostly used in electricity generation, the share of nuclear power and natural gas in electricity consumption has increased in recent years, while the use of oil in electricity generation has declined since the late 1970s due to sharp increases in oil prices. World net electricity generation was 20.2 trillion kilowatt-hours in 2010 and was expected to rise 39.0 trillion kilowatt-hours by 2040 which represent an increase of 93%. The growth of electricity demand in the OECD countries is slower than in the non-OECD countries (U.S. Energy Information Administration, 2013; Yilmaz and Hasan, 2014). Evidences have shown that Nigeria is primarily an energy store house accommodating resources such as coal and lignite, natural gas, crude oil, solar, hydro, nuclear, wood fuel, geothermal, tide, biogas and biomass. In spite of the available vast resources, only four sources (coal, crude oil, natural gas and hydro) are currently utilized in processed forms while two others (wood fuel and solar) are used in their crude forms for heating, cooking and lighting (Ogundipe and Apata, 2013).

The average power per capita (in watts)in USA, Japan,South Africa, China, India and Nigeria were 1,363, 774, 496, 397, 85, and 12 respectively. These roughly correlate with the GDP per capita of the countries in 2008 (The World fact book, 2008). Ironically, while Nigerian energy resources, particularly oil, are exported to other countries; itspeople and economy suffer from severe shortages of the same product. This is manifested by the epileptic supply of electricity and perennial shortage of most petroleum products.

The survey of literature shows that most empirical studies focus on either testing the role of energy in stimulating economic growth or examining the direction of causality between these two variables. Although the positive role of energy infrastructure on economic growth has become a stylized fact, there are some methodological reservations about the results from these empirical studies. Some authors have used the autoregressive distributed lags bounds test, two-regime threshold co-integration models, panel data approach and multivariate models.

Similarly, economic growth has continues to be a key macroeconomic concept of interest among most researchers and policy makers around the world (Abaidoo, 2015). The sustain interest in this macroeconomic indicator stems from its pivotal role in impacting other integral segment of an economy and livelihoods. Today, Nigeria is seen as one of the greatest developing nations in Africa with highly endowed natural resources including potential energy resources. However, increasing access to energy in Nigeria has proved to be not only a continuous challenge but also a pressing issue with the international community (Ogundipe and Apata, 2013). Economic growth is a requirement for a nation to move from a third world country to a developed country. For a developing country like Nigeria, the greater the economic growth, the better its chances to become more developed; with adequate use of energy potentials to meet the demand, the nation would experience high levels of economic growth (Ogundipe and Apata, 2013).


1.2 Statement of Problem

Energy plays a vital role in the aspect of a developed country or a developing one. In Nigeria electricity has contributed to the total gross domestic product but still the country is facing several problems of electricity supply. The electricity subsector has not been able to meet the demand for electricity in the country and this has caused many problems which if affecting the economic growth. Energy effectiveness and consumption does not just predict a decrease in utility cost but it involves increasing income through greater output. Majority of Nigerian are needy on fossil fuel and fuel wood (firewood). The over dependence on fossils and fuel wood (used mainly by poor rural commuters) have not yielded enough capacity to meet increasing demands. Since energy has become the key function for economic growth of any country, it improves the efficiency and productivity of the country. The extensive industrialization, urbanization and increasing population size has increased the use of more energy, especially in the developing countries like Nigeria (Chaudhry, Safdar and Farooq, 2012). The relationship between energy consumption and economic growth has been extensively investigated in the last decade and received increasing attention in Sub Saharan Africa. Nevertheless, there is no agreement about the relationship between energy consumption and economic development particularly in Nigeria. Moreover, this issue is not been examined thoroughly for all sources of energy in Nigeria.


1.3 Aim and Objectives of the Study

The main Aim of the study is to examine the effect of energy consumption and economic growth in Nigeria. Hence the following are specific objectives

  1. To study the trend analysis of energy consumption in Nigeria
  2. To examine the relationship between energy (Electricity) consumption and the Nigerian economic growth.
  3. To make policy recommendations based on the analysis from the study.

1.4 Research Questions

The study seeks to answer the following research questions;

  1. What is the trend analysis of energy consumption in Nigeria?
  2. What is the relationship between energy (Electricity) consumption and the Nigerian economic growth?

1.5 Research Hypotheses

In the course of the study, the following hypotheses would be tested:

Hypothesis One
  • HO: There is no significant relationship between Electricity Consumption and economic growth in Nigeria
  • H1: There is a significant relationship between Electricity Consumption and economic growth in Nigeria

1.6 Significance of the Study

The significance of energy to any country economy cannot be over emphasized. Energy is used in almost all sectors of the economy ranging from mining, transport, agriculture, manufacturing industry, electricity generation and so on.

The establishment of a relationship between energy consumption and growth which this study hope to investigate will go a long way in checking the level of different energy consumptions and how it helps in performance of the different sectors of the economy and the achievement of sustainable growth and development.

The study will prove a valuable contribution to available literature on the discourse. The scope of study as well as the method of analysis makes the research work a reliable reference material for students and researchers in Economics who may want to get on a similar study.


1.7 Justification of the Study

Energy consumption plays a vital role in economic growth of Nigeria. It is, therefore important to identify the relationship between energy consumption and economic output and also the direction of causality in order to get a better understanding of the vital related issues and also determine if the results are ideal for policy formulation.

The impact of energy consumption on economic growth in Nigeria has however being studied in several existing literatures (Abaidoo, 2015; Chaudhry et al., 2012; Gbadebo and Okonkwo, 2009) but in relationship with variables ranging from foreign direct investment to energy use and so on. Hence fewer studies have analyze the influence of other variable like electricity, crude oil and coal and economic growth. Therefore the study will examine based on the variables also with recent estimation period.


1.8 Scope and Limitation of the Study

This study covers the period 1986 to 2016, a sample size of 30. The sample size was chosen for adequate robust economic analysis and healthy result from a regression analysis. Thus, the study might be limited by inadequate of required data. But tremendous effort will be made to get data on electricity, crude oil and coal consumption in Nigeria from Central Bank of Nigeria (CBN), World Bank, International Monetary Fund (IMF) and OPEC.


1.9 Organization of Study

The study is divided into five chapters. Chapter one deals with the study’s introduction and gives a background to the study. Chapter two reviews related and relevant literature. The chapter three gives the research methodology while the chapter four gives the study’s analysis and interpretation of data. The study concludes with chapter five which deals on the summary, conclusion and recommendation.


Chapter Five


Conclusion and Recommendation

5.1 Conclusion

It is concluded that the relationship between energy consumption and economic growth is important for all developing economies like Nigeria, most of which have experienced increasing level of government spending and have achieved low level of economic development overtime. Since independence, the revenues accruing to the Nigeria Government has been on the increase annually in power sector. The study further concluded that; Issues pertaining to energy consumption and economic development should be given adequate attention especially in the budget schemes and because of this, substantial amount should be allocated to the power sector in order to resolve its challenges and keep the sector in good shape for it to make meaningful impact in economic growth.
This study concluded that Energy consumption has significant relationship with economic growth in Nigeria based on our study


5.2 Recommendations

Based on the findings enumerated above, this study therefore, recommends that energy conservation policies should be effectively implemented without having any negative effect on economic growth in Nigeria and energy growth policy should be adopted in such a way that, growth in the energy sector stimulates economic growth and thus expands employment opportunities in the country.


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