Critical Survey on Fuel Price Changes and Its Effect on Nigeria Economy

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Crude oil is one of the world’s most basic energy sources, and it plays a critical role in the growth and development of many economies. Because of the demand for this commodity, the oil market is susceptible to market forces of supply and demand, which generate price fluctuations.

Changes in the price of oil, according to Blanchard and Gali (2007), are an important cause of economic volatility, with the resulting effect causing a worldwide shock that can disrupt numerous economic activity at once. This shock is thought to have a comparable effect as events like as a drop in growth rate, high unemployment rate, and high inflation rate, even if the size and sources of these shocks may differ. A rise in oil prices will cause an economic shock in an economy that is reliant on imports, and vice versa in an economy that is based on exports.

 Agriculture was the basis of the Nigerian economy until the early 1970s, according to Oyelami & Olomola (2016). The Kano groundnut pyramids, oil palm, and the quicker section of cocoa in the western part of the nation were formerly famous for their ability to produce groundnuts. The discovery of commercial quantities of oil in the country resulted in significant changes in the country’s economy. All other industries appeared to have faded into obscurity, if not outright abandonment, leaving the country completely reliant on oil for foreign exchange revenues, rather than agriculture. Every effort made since then to diversify the country’s economy has failed. Expectedly, restricting the economy to a single export commodity has its drawbacks, since oil has inevitably become a target of political manipulation due to its importance to national economies. The greatest problem for Nigeria is that oil is the country’s main commodity, and its inherent absolute reliance on it has caused the economy to revolve around it. It is at the heart of almost every critical service provided in the country. Oil is used in almost every other sector of the economy. Any consideration of a hypothetical scarcity or unavailability of the commodity will, without a doubt, spell disaster for the country’s economy (Sikkam, 2009).

According to Yemi (2012), complete scarcity has been plaguing the nation recently, and it looked to be getting worse at the start of these years, causing a lot of suffering, misery, and disruption of economic and other activity. In today’s Nigeria, there are few sectors, institutions, or organizations that have not been adversely impacted. According to Nwosu (2009), smuggling oil outside the nation would stay profitable as long as bad petroleum product pricing and high pricing in neighboring countries persist.

According to Arinze (2011), the fuel scarcity is a result of poor management. If the price of gasoline remains unchanged, according to Osogie (2012), real GDP growth would slow. Furthermore, the increase in the price of gasoline, as well as the certainty of varied pricing across the federation, will raise consumer price inflation by 3 to 5 percentage points in 2012. The hike in gasoline prices will have an impact on both household income and consumption. Inflation will cause the value of minimum wage compensation to fall more (if it eventually reaches N18, 000). Simultaneously, the average household’s yearly spending on energy items and services would increase by around N75, 000, and their savings rate will plummet. The decrease in the saving rate will erode nearly half of Nigeria’s current middle-class population, dampening the negative consequences of increasing prices on the economy in the short term. Over the next few years, consumer spending will be significantly reduced as citizens strive to adjust and create fresh savings.

1.2 Statement of the problem

Many empirical studies have been conducted on the macroeconomic impact of oil price shocks on net exporting nations. These studies are based on the relationship between oil price and the business cycle, which may be explained by the impact of oil price shocks on aggregate demand. According to Ftiti, Guesmi, and Teulon (2014), a rise in oil prices affects aggregate supply because high energy prices cause companies to buy less energy. As a result, the productivity of any given amount of capital and labor will fall, potentially resulting in a loss of production. This will always result in a decrease in production inputs and real wages.

To further explain the impact of oil price shocks on aggregate demand, Riaz et al.(2017) said that because oil is one of the most fundamental inputs in manufacturing, every positive oil price shock raises the cost of production. As manufacturing costs grow, investment profit margins decline, causing investors to postpone their irreversible investments. Reduced investment leads to lower production levels, which has a negative impact on the country’s exports and forces the economy to deal with a negative trade balance. Oil price fluctuations cause customers to rearrange their spending on durable items, which has a knock-on effect on households. According to Osagie (2015), oil price shocks are a major source of concern for all sorts of economies since aggregate demand is decreased on both the consumer and investment sides. Some market participants said the rise was due to the withdrawal of a gasoline subsidy, which resulted in higher fuel pump costs. They claimed that the cost of carrying materials and goods from the point of purchase to the site of business had grown, and that as a result of the rising prices, patronage had decreased. Furthermore, Arinze (2011) said that carriers have complained that getting their tanks filled in the face of gasoline scarcity is extremely difficult, since their cars are sometimes abandoned at filling stations for days. At other times, they are forced to use the illicit market at exorbitant prices, resulting in increased transportation costs. Furthermore, he stated that a rise in gasoline prices would have a negative impact on government officials, businesspeople, students, and lecturers, especially because it would boost the cost of living. It is therefore on this backdrop that the researcher wants to examine the impact of the above enumerated problems as a result of fuel price increase on Nigerian economy.

1.3       Objective of the study

The broad objective of this study is to carry out a critical survey on fuel price changes and its effect on Nigeria economy. Specifically the study will:

  1. Ascertain if the   recent increases in fuel prices will have any effect on the economic growth in Nigeria?
  2. Determine  what extent fuel price hike will affect  purchasing power in Nigeria
  3. Investigate if  fuel subsidy removal will have an impact on Nigerian balance of payment.
  4. Examine if  increase in pump price of petroleum will have any implications  on food security in Nigeria?

1.4       Research Hypothesis

HO1:Recent increases in fuel prices will not have any significant effect on the economic growth in Nigeria

HO2:Fuel subsidy removal will not have any significant  impact on Nigerian balance of payment

HO3: Increase in pump price of petroleum will have any implications on purchasing power and food security

1.5       Significance of the study

Findings of the study will be relevant to government as it would provide with framework on making informed decisions concerning  the need to retain fuel subsidy while expediting the construction of the three proposed refineries, rehabilitate  the existing refineries and as well embark on full deregulation of fuel prices to ensure market competitiveness. More so it would enlighten private companies on investment opportunities as the result of the study would encourage them o start building refineries now with the assurance that subsidy would be removed before they start production. Empirically, thee study would add to the body of existing literature on this subject and serve as a reference material to both scholars and student who wishes to conduct further studies in related field.

1.6       Scope of the study

The scope of this study borders on a critical survey on fuel price changes and its effect on Nigeria economy. The study will find out if the   recent increases in fuel prices will have any effect on the economic growth in Nigeria. It establish what extent fuel price hike will affect  purchasing power and food security in Nigeria and reveal if  fuel subsidy removal will have an impact on Nigerian balance of payment. The study is however limited to Ministry of Petroluem Abuja.

1.7       Limitation of the study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing to the nature of the discourse thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. Additionally, the researcher will simultaneously engage in this study with other academic work. More so, the choice of the sample size was limited  as few respondent were selected to answer the research instrument hence findings of the studycannot be generalize. However, despite the constraint  encountered during the  research, all factors were downplayed in other to give the best and make the research successful.

1.8       Definition of terms

Price Hike:  a sudden or large increase in prices, rates, taxes, or quantities.

Transportation: transportation is the movement of humans, animals and goods from one location to another

Petrol:Petroleum is a versatile fossil fuel that can be refined into many different products. Common examples include gasoline, kerosene, fuel oil, and lubricating oil

REFERENCE

Arinze P. (2011): “The impact ofoil price on the Nigerian economy”www.transcampus.org/journals.www.ajol.info/journals/jorind JORIND (9)1

Blanchard, O. J., & Gali, J. (2007). The Macroeconomic Effect of Oil Shocks: Why Are 2000s Different from the 1970S? NBER Working Paper Series, 1–78.

Boheman H, Maxén J. (2015) Oil Price Shocks Effect on Economic Growth OPEC Versus Non-OPEC Economies. Lund: Lund University; 2015

Ftiti, Z., Guesmi, K., & Teulon, F. (2014). Oil shocks and economic growth in OPEC countries. Working paper, 1-17.Hamilton JD. Causes and Consequences of the Oil Shock of 2007–08. San Diego: Department of Economics, UC San Diego; 2009

Jean-Pierre, A., Valérie, M., & Audrey, A.-S. (2015). Oil price shocks and global imbalances: Lessons from a model with trade and financial interdependencies. Economic Modelling, Elsevier, 49, hal-01385980, 232–247.

Osagie. E (2015): Petroleum and moneypp. 22-28.

Osogie C. (2012). Nigeria LCC lists, effects of fuel subsidy removal. http://allatrica.co, retrieved 20, March, 2011 Sikkam B. S. 1999 “Inflationary Effects of the Petroleum Industry on the NigerianEconomy” pp 128-129 Yemi I. (2012). The political economy of fuel subsidy in Nigeria http://nigeriansabroadlive.com retrieved April 12, 2014

Oyelami, L. O., & Olomola, P. (2016). External shocks and macroeconomic responses in Nigeria: A global VAR approach. Cogent Economics and Finance 4: 1239317

Riaz, M. F., Sial, M., & Nasreen, S. (2016). Impact of oil Price volatility on manufacturing production of Pakistan. Bulletin of Energy Economics, 4(1), https://www.researchgate.net/publication/301558681, 23-34.

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