Impact Of Oil Dependence On The Nigeria’s Economic Growth
This study assesses the importance of oil in the development of the Nigerian economy in a multivariate VAR model over the period 1960-2009. Empirical evidence shows that the five subsectors are cointegrated and that the oil can cause other non oil sectors to grow. However, oil had adverse effect on the manufacturing sector. Granger causality test finds bidirectional causality between oil and manufacturing, oil and building & construction, manufacturing and building & construction, manufacturing and trade & services, and agriculture and building & construction. It also confirms unidirectional causality from manufacturing to agriculture and trade & services to oil. No causality was found between agriculture and oil, likewise between trade & services and building & construction. The paper recommends appropriate regulatory and pricing reforms in the oil sector to integrate it into the economy and reverse the negative impact of oil on the manufacturing sub sector.
1.1 Background of the Study
Crude oil, a commodity otherwise referred to as “black gold” is of strategic importance in the world, particularly since the second half of the twentieth century as noted by Mikelson (1972), Tugendhat and Hamilton (1975), Odell (1979), OPEC bulletin (1984). It is both the most important source of energy and the largest internationally traded commodity.
Thus, as Tugenhat and Hamillton (1975) have observed, out civilization depends on oil more than any other single commodity.
The search for oil in Nigeria was dated back to 1903 when the colonial government set up mineral survey corporation, No significant result was achieved.
In 1907, oil seeped was observed at Aruromi arsssound Abeokuta province which led to a German company, Nigerian Bitumen Company to obtain license to exploit oil deposits. The Nigerian oil industry is 105 years old this year because the very first attempt to find oil in Nigeria was made in 1908. Fifteen wells were drilled between 1908 and 1914 without success.
By 1937, the second attempt was made and this time by an Aglo-Dutch consortium called Shell D’Arey. Unfortunately, the outbreak of the Second World War interrupted the attempt. By 1947, Shell D’ Arey came back as Shell BP Petroleum Development Company of Nigeria and drilled two exploratory wells between 1951 and 1955. Commercial oil discovery was made at OLOIBIRI FIELD in 1956 and in 1958 Nigeria was exporting about 17,000 barrel of oil per day (BOPD). Between 1961 to 1962, the right to explore oil were granted to other companies like Texaco Tenneco, Gulf (Chevron), Satrap (Elf) and Agip.
Initially, all crude oil produced in Nigeria was exported without being processed. Most of the by-product of petroleum was imported because Nigeria had no refinery. By 1965, the first oil refinery was commissioned in Nigeria at Port-Harcourt. Nigeria joined organization of petroleum exporting countries (OPEC) in 1971. This same year, that Shell BP, GULF (Chevron), Mobile, Satrap (Elf) and Agipacquired 35% equity interest in commercial discovery.
In 1973, Nigerian National Oil Company (NNOC) was established and late in 1977, Nigerian National Petroleum Corporation (NNPC) was established by merging the activities of NNOC and department of petroleum inspectorate (DPI).
Thereafter, in 1978 Warri refinery was commissioned and the third refinery, the Kaduna refinery was established in 1980.
The Port-Harcourt refinery is the oldest refinery with capacity of 35,000 barrels of crude oil per day.
It produces petroleum gases (LPG), Gasoline (Petroleum) for cars dual purpose kerosene (DPK) for cooking, automotive gas oil (AGO) or lorries and fuel oil two grades which are low power point (LPPO) and high power point (APPO).
The warri refinery processes two domestic crude oil from Chevron Escravo crude oil and Shell’s Ughelli quality control center crude and produces the same type of products as Port-Harcourt. It has a capacity of 100,000 barrels of oil per day. It has been updated to about 200,000 barrels per day now.
A forth refinery was established in Eleme in Port-Harcourt in 1989 with about 150,000 capacity of barrels per day. It has been updated to about 300,000 barrels per day. Now Nigerian supplies about 1.9 million to 2.0 million barrels per day since 2009 to 2010, according to Network news from Radio Nigerian presented by the (OPEC).
In general development, there is nothing short of truism that there have rapid charges in the spheres of economic and social life of Nigeria due to the emergence of oil in national lives. This discovery of oil has systematically submerged agricultural sector which used to provide the bulk of our revenue. This sector has been neglected for oil sector. Today the oil sector contributes about 86 percent of the federal government revenue, accounts for about 90 percent of the country’s foreign exchange earnings and constitute over 25 percent of the nation’s Gross Domestic Products. Also the previous impact of the good work of the petroleum trust fund (PTF) cannot be over emphasized.
Structurally and otherwise, the oil boom of the 1970’s helped significantly in transforming Nigeria from an ordinary third world black country to an appreciate position both in term of development, infrastructure, international politics et cetera. It is the first and only producer in West Africa and the second most producer in West Africa, it is only to Libya. Among the major world producers with an output of 110 million tons in 1974. it was placed sixth. Because of its limited internal market, it exports largest proportion of its output. To facilitate exportation, pipelines have been laid to connect the major oil wells with the ports of Bonny and Escravos. Today, urban and rural development in parts of the country can be traced to the oil wells located in the remote villages of the country where oil continues to gush out day and night.
It is the oil of these villages that has brought sky crappers, express roads, development of federal capital territory (FCT) fly over and other physical structures to cities and towns, which are from the gushing wells.
But the villagers from whose ancestral land and territorial waters the black gold oil is mined, there is a sad tale full of sound and lury signifying something neglect.
Furthermore, with the over growing contribution to Gross Domestic product, one should not consider it as an over statement by saying that the Nigerian economy is highly dependent on the oil sector for its economic activities and hence concluded that crude oil is now the mainstay or power of the Nigeria economy. Now as a result crude oil being the mainstay or power of the Nigerian economy it haveinfluence its expenditure profit outlined by the president in the proposal of its budgeting which #841 billion is for recurrent expenditure while #540 billion would go for capital projects.
About 48 percent of the proposal expenditure would go to priority sector such as education (11%), health (7%), Power (5%), water (2%) and security (15%). The provision of 2 percent for agriculture and agriculture research institutes. (The leader 2005-130) Christmas Edition.
1.2 Statement of the Problem
Nigeria’s position as Africa’s biggest oil producer in the OPEC according to Syngn(1986) no doubt which makes Nigeria oil sector accounting for almost all the countries exports have earned billions of dollars from its oil export is currently considered as the thirty six poorest country in the world, out of the hundred and fifty six nations as reported by radio Nigerian through theress network news at 7am on 4th sep. 2012. (FRCON…2012). Earnings from oil sector alone in 1974 and 1990 as a result of Arab League was between Israel and Palestine and gulf war about 17 billion Nigeria were relies over then.
Yet, many of the citizens above fifty five percent (55%) are living still below poverty line. There is lack of infrastructural facilities; her educational system is at the verge of collapse because of underfunding and mismanagement. The health sector has nothing good to write home about, the cost of life and standard of living are becoming more difficult nowadays, policies has taken over every place and industrial and agricultural sector were neglected “inefficiencies” and operating problems in the downstream sector are causing a financial looses of equipment to above ten percent (10%) of Gross Domestic product (GDP) every year due to “bribery and corruption” (world bank and Nigeria 1995).
Therefore, even in the oil sector and its associate revenue, a question is then asked, where are we going? What will be our future and how will I look with all the potentials of the oil sector or revenue, is oil responsible for the boom or doom of the Nigeria economy, how are we going to turnover present curses to better our situations.
In this work, I hope to meet the challenges of providing some successions as a solution to these problems.
1.3 Objective of the Study
The objectives of this work are
- To examine the impact of oil sector on Nigeria economy.
- To examine the relative contribution of oil revenue on total government income and government capital expenditure.
- To evaluate the findings and make a necessary recommendation.
1.4 Research Questions
- What is the impact of oil dependence on the Nigeria’s economic growth?
- Would Nigeria achieve sustainable growth with a resource based growth policy?
- What has been the reason behind Nigeria’s volatile growth?
1.5 Significance of the Study
These will also analyze oil sector as a mono-cultural product base of the Nigeria economy, knowing how much have being earned, the amount invested in other sector of the economy to boost the economic activities and its resultant multiplier effect. Again the advantages as well as the disadvantages of the oil sector will also be discussed.
Finally, in our bid to find a way of bearing in mind the burdens of the backwardness of our economy, there is still believes that with a good policies and implementation strategies, what remains of our oil sector is for he castile to transform it technologically and economically for a better tomorrow and towards greater Nigeria.
1.6 Definition of Terms
Economic growth may be expressed as the expansion of real Gross National Product (GDP) or real per capital income (GNP). R.M Harven 1960 P.36).
Economic growth as the real income in GNP or NNP which occur over a period of time. (Dr. S.I Udabah 2002 P.70) economic growth as a long term rise in capacity based on advancing technology and the institutional and ideologically adjustment that it demands. (Prof. Simon K. 1973 and Dr. Sil Ndabah 2002 P.66).
Ihingah, in his definition of economic growth he relates it to a quantitative sustained increase in the countries per capital output or income, accompanied by expansion in its labour force, consumption, capital and volume of trade. (Ihingah2002).
Finally, economic growth is all about raising the production capacity of a country and expansion of its Gross Domestic Product (GDP).
Gross Domestic Product (GDP) is the total income earned by national domestically, it includes income earned domestically, b foreigners, but it does not include income earned by domestic residents on the foreign ground.
Gross National Product (GNP) is the total income earned by nationals (i.e. by residents of a nation), it includes the income that national earns abroad but it does not include the income earned within a country by foreigners.
Now from the above statement, it shows that there are various impact of the oil sector both in development and economic growth within the country and outside the country.
1.7 Organization of the Study
There are six chapters in this thesis. Chapter one is the introduction which includes: Nigeria’s economic structure, the research questions, research methodology, objectives of the study and work coordination.
Chapter two covers the theoretical literature review. Chapter three is the empirical aspect of the literature.
Chapter four will discuss the methodology used throughout the research including: research design, sources of data, model specification and method of analysis.
Chapter five is composed of empirical results and interpretation. Chapter six contains the conclusion remarks and policy recommendations.