ABSTRACT
This study therefore set out to investigate the impact of change in petroleum products prices on inflation in Nigeria. The study employed Autoregressive Distributed Lag model for the data analysis. The scope of the data used from the analysis of the study ranges from 1980 to 2016. The study found out that petroleum pump price has a positive impact on inflation and the result is statistically significant at 5% level of significance. Given the fact that virtually everyone is directly or indirectly connected to the usage of petroleum products, increase in the price of petroleum products is felt by everyone. The study also found out that Automative gas oil (AGO) and bonny light crude oil has a positive relationship with the level of inflation in Nigeria. Since we as a country depend heavily on imported goods, the price of those goods move with fluctuation in exchange rate. A good example is the price of cars. The study recommended that our refineries should be put in good shape so we can save the cost of having to export to other countries for refining as this contributed to the high cost of selling the product in Nigeria. The study also recommended diversification of the economy in favor of the real sectors as this will help provide more goods for exports thereby improving on the balance of payment.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Oil exploration began in Nigeria in 1908 although the documentation of occurrence of the minerals were reported some five (5) years earlier in 1903. The exploration efforts were punctuated by two world wars but eventually yielded results with discovery of oil in Oloibiri in 1956 by sheel Bp. Bayeri (1996:7)
Production increased from a more five thousand (5,000) barrels per day in 1957 to seventeen thousands ( 17,000) per day by independence in 1960 and leapfrogged to four hundred and fifty thousand (450,000) barrels a per day by 1966. Although, this upgrade trend was slowed down by the civil war, by 1970 daily production had reduced the level of one million barrels per day. A peak production level of two million four hundred thousand (2.4 million) barrel per day was achieved during the second quarter of 1979.
However, before 1990 production fell to one million. Six hundred and eleven million (1.611 million) per day both on technical grounds and adherence to OPEC, quota brought about by the need to control production, to support price in a globally avert supplied to the market. As at (1999) OPEC quota for Nigeria stands at 1.865 million per day as set in 1990
The first marketing of oil from Nigeria occurred in 1958. DETEGE (1996:9). As most multinational oil comprise operating in the country has 100% equity in their operations up till 1973, there was no active government on Nigeria oil until then.
Prior to 1973, all Nigeria oil was marketed by oil producing comprise through integrated system using their transfer price. Government’s interest in the oil industry was handled by a number of government departments including the hydro carbon section in 1963 and department of petroleum in the ministry of mines and power in 1970. Although the Nigeria national petroleum corporation (NNPC) was formed in 1971 and was primarily to market Nigeria oil, government direct involvement in the marketing of oil did not begin until 1973. That was when the government started having it’s own equity interest in the operation of the oil companies ( Bayero 1996:10)
It has been the policy of government to put in place proper facilities in the down stream sector like refinery, distribution and marketing of petroleum products so as to embrace the value added to our petroleum resources. Presently, Nigeria has four refineries with two at Port Harcourt while Warri and Kaduna has one each. All the refineries has the total production capacity of four hundred and forty five thousand (445,000) barrels per. To ensure the supply of available petroleum products through out Nigeria, the Nigerian National Petroleum Corporation ( NNPC) built about three hundred kilometers (300,000km) net work of pipeline covering all parts of the county, inter –connected to seventeen (17) petroleum product depot in Nigeria. This was aimed at eliminating the perennial storage’s of petroleum products in the country. Etefe (1997:8)
To aethalize this noble objective in Enugu, constitution of n oil depot began at Emene, and was completed and commissioned by the military administrator on 24th August, 1979. Enugu depot which was commissioned in 1979 has the storage capacity of about twelve million mi – cube (12,000,00m/3) at present. It has a stock only three bye products of petroleum products namely, premium motor spirit (PMS), otherwise called petrol, dual purpose kerosene (DPK) and Automobile Gas oil (AGO) or Diesel for onward distribution to her customers in the oil marketing companies.
The depot went to serve the states which are under it, which include the present Enugu, Anambra, Kogi, Ebonyi, and parts of Imo, Benue and Cross – River state.
Enugu depot sighted at Enugu East Local Government of Enugu state is at depot as well as a pumping station. As products and distributes same to the general public through oil marketing companies. But as a company station, it was meant to supply other depots in the Northern states which include Makurdi, Yola, Minna and Suleja directly from Port – Harcourt refinery through pipeline product distribution system.
It is the wish of the federal government to ensure steady and regular supply of petroleum products to this end, effort has been made to expand and inter connect all existing refineries. It will ensure that strategic stock of petroleum produce is well maintained in the country by allowing quick replenishment of stock in all product depot of which Enugu depot benefited. So therefore, my interest to study the problems of petroleum products distribution, allocation and marketing in Enugu.
1.2 STATEMENT OF PROBLEMS
Though Nigeria is the 11th oil producer in the world according to OPEC’s ranking, it was only 18.5 percent of the total crude oil that she produces that was made available for domestic consumption in 1994. 13.0 percent, 12.4 percent, 11.9 percent, 11.4 percent and 13.8 percent of the total crude oil were also available for domestic consumption in 1995, 1996, 1997, 1998 and 1999 respectively. There was a major increase to 25.1 percent in 2003, this drastically declined to 7.9 percent in 2005 but in 2006 it increased to 20.2 percent (CBN 2007).
It is evident that petroleum and money are so important to modern living that shortages disrupt essential transactions. Indeed, the occasional petrol shortages experienced by Nigerian towns and villages due to inefficient distribution is as a result of incompetence and corruption on the part of bureaucrats and the business class (Onwioduokitanda and Adenuga, 2000). The links between petroleum and money are easily obvious. More important, a proper grasp of the relationship between the domestic and the world economy is essential to the identification of these relationships. The monetization of petro dollars shows how closely related petroleum is to money stock, which in essence has direct bearing on the inflationary pressures in the economy (Sikkam, 1999). This annual growth rate of money supply especially in 1974 and 1975 far outstrips those of all the developed industrial countries as well as the developing countries of the world. Even compared with other OPEC countries where the growth rate of the money supply has been generally high, the recent growth rates of money supply in Nigeria is alarming. The alarming rate of money supply is influenced by the earnings from petroleum (Osagie, 1981).
The petroleum industry is very important to the Nigerian economy. It provides among other things the greatest part of the foreign exchange earnings and total revenue needed for socio economic and political development of Nigeria. Upward adjustments of petroleum products price have resulted in inflation, high cost of living, and inequitable distribution of income in Nigeria (Nwosu, Chioma, 2009).
The 2012 subsidy removal saw the price of PMS at 141naira but the protest that ensued saw it reduced to 97naira. In 2015 the price settled at 145naira which is relatively high causing the prices of goods and services to rise. Transport fares have sky-rocketed and there have been general increase in cost of production of goods and services, and the prices of food stuff in the economy have always been increasing. (Gbadomosi, et al., 2007). Observation of the retail prices of petrol (PMS), diesel (AGO) and kerosene (DPK) in Nigeria overtime has shown great increase in their prices. In 1990 the prices per liter of PMS, AGO and DPK were 3.25kobo, 0.70kobo and 0.50kobo, but as at the beginning of 2017 the prices of the same product per liter were N145.00, N160.00 and N83.00. Government has often explained these increases as being necessary to reduce or remove the subsidy on petroleum products much of which has to be imported because of the inability to meet products demand domestically. The increases in the prices of these products have a chain effect on the prices of other goods and services in the economy. Between 1978 and 2007, the various Nigerian regimes increased fuel prices a total number of 18 times. Most of the increase occurred in the 1990-2007 period when petroleum products prices were adjusted upwards sometimes twice in one year. One major problem this has caused was the instability of the prices of goods and services in the country. Whenever there is an increase in prices of oil products, it affects transportation, cost of good and other services (Mba-Afolabi, 1999).
Arinze (2011) asserted that the causes of price instability is attributed to scarcity caused by refinery maintenance and rehabilitation problem, low capacity utilization, supply, and demand inequality. The political change that Nigeria went through, which turned over the administration and endured a lingering economic down turn is enough reason to cause price instability of oil products in Nigeria.
1.3 OBJECTIVE OF STUDY
The general objective of the study is to investigate impact of change in petroleum products prices on inflation in Nigeria while the specific objectives are:
- To examine the trend and pattern of change in petroleum products prices in Nigeria.
- To determine the causal relationship between change in price of petroleum products and inflation in Nigeria.
- To examine the relative effect of changes in the price of petroleum products and inflation in Nigeria
1.4 RESEARCH QUESTION
The research will attempt to retain answers to the question agitating the minds of the Government, petroleum products’ price regulatory agency, various petroleum products users (industrial/household), minister for trade and commerce, minister for petroleum and natural resources, minister for finance and other stake holders as to what to do to adequately reduce effects of change in petroleum products price on inflation. The study will answer the following research questions:
- What is the trend and pattern of change in petroleum products prices in Nigeria?
- What is the causal relationship between change in price of petroleum products and inflation in Nigeria?
- What is the relative effect of changes in the price of petroleum products and inflation in Nigeria
1.5 SCOPE OF STUDY
The research work centers on assessing impact of change in petroleum products prices on inflation in Nigeria. However, four petroleum products premium motor spirit (PMS), Dual Purpose Kerosene (DPK), Automotive Gas Oil (AGO) and Bonny Light Crude oil (BL) shall be selected for the sake of this study. These products unlike Low Pour Fuel Oil (LPFO), High Pour Fuel Oil (HPFO), Special Naphtha, Waxes etc. are considered because they constitute greater percentage of refined crude oil consumed by both the household and industries in Nigeria. Moreover, the time scope for the secondary data of this study shall cover a period of 37 years (1980 to 2016).
1.6 JUSTIFICATION OF THE STUDY
Most of the debates by scholars regard the causes of inflation in Nigeria are purely monetary in nature. Consequently, the major focus of monetary policy has been predicated on controlling the monetary aggregates, a policy stance which has largely been based on the belief that inflation is essentially a monetary phenomenon. Targeting inflation through monetary variables seems to have yielded protracted results. It becomes expedient to examine the persistent increase in the prices of petroleum products on the level of inflation in Nigeria. One area of value that strengthens justification for this study is its relevance to the Nigerian economy. The study recognizes the significance of the multiplier effect of increase on domestic petroleum product prices have on goods and services in the economy, then management of supply should be an option. This study adds value in both theoretical and empirical result. The innovations introduced are more likely to generate better empirical results. This study would serve as reference for future study. This study will also give insight to Central Bank of Nigeria (CBN) and policy makers that persistent increase in petroleum product prices serves as a major cause of inflation in Nigeria. Thus the need to carry out such a study on a continuous basis in an economy becomes topical as any other economic issue of national discourse.
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