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AN ECONOMIC ANALYSIS OF THE IMPACT OF OIL SECTOR ON NIGERIAN ECONOMY (1980-2010)

ABSTRACT

This research work “An Economic Analysis of the Impact of Oil Sector on Nigeria Economy (1980-2010)” is set to find out the performance of oil sector in stimulating economic growth in Nigeria. The major objectives of this study is to examine the relationships between the oil sector and economic growth. This study is empirical in nature and the use of historical data become inevitable. We preferred econometric model using Ordinary Least Square Method (OLS), in estimation of the relationship between oil sector and economic growth and some macro-economic variables. Therefore, to examine the basis of analysis of the impact of oil sector in Nigeria economy, Hypothesis was formulated to guide the study. The Null Hypothesis (Ho) oil sector has no significant impact on economic growth in Nigeria, Alternative Hypothesis (H1) oil sector has significant impact on economic growth in Nigeria. From the findings made, Ho: there is no relationship between oil sector and economic growth and H1: there is a positive relationship between the oil sector and economic growth of Nigeria. From the result of the test carried out, it was observed that oil sector has positive impact on Nigeria economic growth. Based on the finding a major recommendation was made: since oil sector operations contribute a lot of investment, government ought to be given these sector preferences in her policies to make it attractive and viable.

CHAPTER ONE

INTRODUCTION

Background of the Study

Nigeria economy is basically on open economy with international transactions constituting on important proportion of her aggregate economic activities.  Over the years, the degree of openness of the economy has grown considerably. Before Nigeria gains her political independence in 1960, agriculture was the main stay of Nigeria economy, which provides both cash crops and food crops to the economy and accounted for the largest part of the foreign exchange of the country.

       However, the beginning of early 80s ushered in a new direction for overall economic activities.  The now ever-growing oil sector led to the new direction witnessed.  This led to the neglect of agricultural products, making the economy to depend heavily on the production of crude oil.

       In this study, we shall be using these terms to refer to oil sector, such as petroleum, crude oil, gas and so on.  Oil has been known to exist in the ancient time of Pharaohs and Babylonians.  It seeped from the earth in Persia, Iraq, Indonesia and other parts of the world.  Since it was discovered, it has been used in medicine and some places it created huge fires which people worshipped.  Oil usage was varied but limited and by the middle of the 17th century, a few street lumps in Bucharist were lit by oil extracted from coal.

       Oil is universally neither the first nor the only primary sources of energy.  The properties of oil shows that it possesses distinct advantages over other sources of energy, mainly coal.  Modern oil exploration began by the applications of those theories when “Colonel” Edwin Drake provides that oil does exist beneath the earth’s crust.  Drake discovered the first underground oil near Titusville in Pennsylvania on August 27th 1859, after drilling a well 70 feet deep.  Drake’s well produced about 30 barrels of crude oil.

       There are four technical methods for a less developed country like Nigeria to tap a potential extractive export reserve.  They are:

1.          To invite foreign concessionaries to form local industries and therefore supply management and technological, capital and markets.

2.          undertake, joint venture in which foreign investors supply management and technological and market as well as a portion of the capital furnished by the host country.

3.          Institute management contracts, whereby experienced foreign firms offer management and technology only.

4.          Do without foreign participation altogether and furnish management and technology.  Capital and market itself.

Basically, it could be argued that there was little real choice of discovering petroleum in Nigeria before the mid 1950s.  For example, L Dudley stamp, the noted British geographer wrote in 1953 that “Apart from the yard along the shores of the Gulf of Suez in Egypt and a small yard from three thing fields in Algeria and four in morocco, Africa has no oil.

The search of oil in Nigeria began in 1908, when a German company called Nigeria Bitumen Corporation (NBC) which was granted a license to exploit.  Bitumen deposits located at Ijabu Ode and Okitipupa the present Ondo State.  After the war 1914-1919, their work was terminated due to the colonial-entrepreneurship for legitimate commercial activities, which were meant to replace the oppressions and inhuman slave trade that reigned in the eighteen and early period of the nineteen century.

Geological research work conducted showed that Nigeria’s petroleum potential was towards the southern part of Nigeria.   After shifting focus to the tertiary area of Delta, shell BP, made Nigerian’s first discovery of oil in 1956 after 19 years search of petroleum at Oloibiri in Ogbia Local Government Area is now the present Bayelsa State.  There were other companies that joined the Nigeria petroleum, such as American Oversea Petroleum Company.  (TEXACO), Mobil Tennessee’s Nigeria incorporated (JENNECO), Gulf Oil, Satrap (ELF), Nigeria Agip Oil Company (NAOC), Philips Petroleum and ESSO exploration.  All these were joined latter, such as Japan petroleum, American occidental company, Deminex Nigeria Limited, Union Oil, etc.  However, not all these companies were successfully explored.

As government interest in oil industry continues to grow, a license was granted to Nigeria Agip Oil Company in 1962.   This license was optionally in favour of the government to purchase about thirty percent (30%) of the share capital of the company if and when discovered oil in commercial quantity.

In 1977, the Nigeria National Petroleum Corporation (NNPC) formerly known as Nigeria National Oil Corporation (NNOC) was established by Act of No 18 which was charged with the responsibility of exploring and producing oil and gas, transporting, refining, processing, marketing and converting petroleum products into useful products (Attamah; 2000 p. 25).  NNPC therefore, performed dual functions according to Quinlan (1980), it performs one as a state-owned right as well as in partnership with International Oil Companies, it is playing a part and reaping the reward for Nigeria Oil.  As a result of economic transformation of the country through the Structural Adjustment Program (SAP) which was imposed by the Federal Government in 1986, the NNPC, according to Akinnusi (1990).  Adopted a new mission in January 1987  that was intended to be realized by April 1st 1989.      

From modest production of 5000 barrels per day (b/d) in 1958 by shell BP, the volume of the production in the country has multiplied impressively over years (Nigeria Oil Directory 1987 p. 60).         

Statement of the Problem

With Nigeria’s oil sector, accounting for almost all the country’s exports, she has earned billions of dollars from this sector in years back.  As a young nation, with oil wealth, coming almost unexpectedly immediately after her independence.  Nigeria no doubt has its developmental growth problems to cope with.  The oil wealth brought about growth opportunities as well as problems for the nation (Quinlan; 1980).  There is lack of infrastructural facilities; her educational system is at the verge of collapse because of under findings.  The health sector has nothing good to write home about; the cost of life and standard of living are becoming more difficult nowadays in Nigeria.  Industrial and Agricultural sector were neglected.  Inefficiencies and operating problems in the oil sector are causing financial looses.

Owing to both external and internal factors, the growth performance of Nigeria economy has been less than satisfactory during the past three decades.  Since 1970, Nigeria per capita income has fallen by about 4% in constant dollars.  More over, since then the government has annually received over half of its revenues from oil sector which were about 85%.  These oil revenues are not only largely but highly volatile and causing the size of government programs to fluctuate accordingly.

From 1972 to 1975, government spending rose from 8.4% to 22.6% of GDP, by 1978, it dropped back to 14.2% of the economy.  This fluctuation has made the government unable to adhere to wise fiscal policies.

Although large sales are obtained from oil sector but it’s effect on the growth of Nigerian economy as regards to returns and productivity is still questionable, hence there is a need to evaluate an economic analysis of the impact of oil sector on Nigeria economy.

Objectives of the Study

The objectives of the study are split in to two that is, the general objectives and specific objectives.  The general objective of this study is to examine the impact of oil sector on economic growth of Nigeria.  While the specific objectives are as follows:             

1.          To evaluate the impact of oil sector on economic growth in Nigeria.

2.          To examine the relationships between oil sector and economic growth.

3.          To proffer policy recommendations based on the result of the study.

Hypothesis of the Study

This study is designed to investigate and analyze the impact of oil sector on economic growth.  The hypothesis is therefore postulated as follows:   

Ho:  Oil sector has no significant impact on economic growth in Nigeria.

H1:  Oil sector has significant impact on economic growth in Nigeria.

Significance of the Study

In fact, this research is very significant in the developmental pace of any economy.  This is more so in developing countries such as Nigeria where the public sector appears to be more or less concerned with mere policy formulation, infrastructural development and servicing of both.

The significance of this research, believing that the resultant findings and recommendations would be duly considered cannot be over emphasized specifically, the project will be of great benefit to the following groups:

1.          Policy makers of the various governmental organs in Nigeria who formulate and issue the regulatory economic guidelines.

2.          It will also help government to access the extent to which the oil sector has impact on the economy of Nigeria within the given time frame and thus, providing ground for future policy measures.

3.          It will be of help to real and potential private industrialists and or investors, especially with regard to sourcing of raw materials and cost.

4.          Students particularly of the business/Engineering school who might be future research in a related field on the ground already established or covered.

5.          The general public particularly the stakeholders (suppliers and consumers) who stand to benefit from the informal knowledge of the performance of oil sector.  The researcher holds the strong belief that the findings of this study will reasonably serve the respective interest of these groups mentioned above.

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