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CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Nigeria is a major of crude oil, and the importance of this commodity has been highly manifested in the nations economy. From the early 70s, the petroleum industry has become the dominant sector in the economy. Following quickly after agriculture (the dominant sector before the discovery of crude oil). It has dictated the pace of economic, political social and cultural progress in the country.   Despite the present travails of oil in the world Alli (1987) asserted that oil still holds the key to the nation’s economic future, and the prospects of any successful economic restructuring hands heavily on this all important commodity. Hence, its importance in the Nigerian economy. The world’s oil industry is described as the only international industry that concerns every country of the world. It is infact said to concern virtually the world economy; oil has successfully divided the world geographically into regions of major production and regions of high consumption.   The oil industry is also the most important in its contribution to the world’s tonnage of international trade and shipping for these and other attribution of the oil industry it was asserted, by Odell (1971), that a day sddom passed by without oil being in News. This confirms the importance of oil (which is the basis of this study) throughout the world.   It is in this respect that this study – analyses the impact of crude oil (the dominant product of the Nigerian oil sector) on the Nigerian economy with the use of econometric techniques. Econometrics – because of its richness as a measurement tool, as well as the obvious advantages it possesses over other measurement techniques. Hence, the econometric analysis of the impact of the oil sector on the Nigerian economy.  
1.2     CONCEPTUAL CLARIFICATIONS
It is appropriate at this point to make certain clarifications as regards concepts such as, crude oil, oil sector or petroleum industry, gasoline or petrol, etc, that will from time to time be used in the course of this study. The oil sector or petroleum industry is used interchangeably to refer to the combination of firms dealing on commodities like crude oil, petrol, kerosine, gas, etc.   Crude oil is a commodity produced from an under ground reservoir which has not been subjected to any refining or chemical process other than the separation at atmospheric pressure of any gasses which were dissolved in the oil at the greater pressure of the reservoir (ELLIS Jones, 1988).   Gasoline or petrol, and kerosine are refined petroleum distillates at different boiling points. Liquefied Natured Gas (LNG) are naturally occurring gas, either co-produced with oil or non-associated, which has been liquefied for ease of transportation and which is regasifined before use; just as these commodities are products of petroleum industry, so are other too which has not been mentioned in this study.   However, the essence of this section is to make clear the use to which terms mentioned in this study have been put. Hence the oil sector should not be seen generally as representing crude production alone, as used in this study (see section 1.6), but as an all embracing industry bringing the firms dealing in all petroleum products together.  
1.3      PROBLEM DEFINITION
One of the surest ways of justifying the comments which have been made on the position the oil sector has placed Nigeria in the international circle is to find out the extent to which crude oil has affected the Nigeria economy.   Nigeria’s position as Africa’s biggest oil producer in OPEC according to Synge (1986), no doubt, has considerable impact on Nigeria’s influential role in continent.   Crude oil has not been with his own side effects on the Nigerian economy these equally need to be considered to adequately show the “full impact” of crude oil in the Nigerian economy.   Therefore, the underlying problems of this study is stated in a question form thus, is oil responsible for the boom or doom of the Nigerian economy?         
1.4       OBJECTIVE OF STUDY
As a young nation with oil wealth coming almost unexpectedly (immediately after 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).   It is these opportunities and problems that the study intends to analyze in terms of the impact of the oil sector on the Nigerian economy. Hence while the opportunities represents the positive contributions of the sector, the problems stands for the negative impact of the sector on the Nigerian economy. The oil wealth contributed immensely to the Gross Domestic Product (GDP), foreign Exchange Earning Government Revenue, etc. The effect of these and other variables reflected in the expenditure of Government positively.   This therefore indicates the positive effect of oil in the economy; the oil wealth dramatically increased the country’s financial position, as stated above, and sub-sequently improved the individual spending, and general welfare. This upsurge in income and resulted in the rise in the general price level of the nation, hence increasing the rate of inflation. The adverse effect of this is the fall in the real income which severely affected those on fixed income; more over, the oil wealth encouraged the drift from the rural to the urban areas, resulting in the cities.  
The oil sector being highly capital – intensive contributed marginally to employment.   Apart from the above, Nigeria’s critical debt situation can also be attributed to the mismanagement of the oil wealth; specifically from 1974 oil boom, total Government – revenue rose to N4.537 million from the sum of N1,695.30 million in 1973 with oil contributing over 80 percent of it.   Nigeria therefore went on a spending spree with high taste for imported goods as total imports increased from N1,224.8 million in 1973 to N1,736.5 million in 1974, N3,721.5 million in 1975 etc. Crude oil was also the major source of foreign exchange contributing over 90 percent in 1974. (see Tables in Appendix 1).   The glut that followed the boom forced the Government into deficit financing just to meet up with its past level of expenditure. Therefore, total debt increased from N1,589 million in 1974 to N2,028.8 million in 1975. N3,004.6 million in 1976, N5,001.1 million in 1977, N13,776.7 million in 1981, N154,940.7 million in 1998 and by 1990 had rise to N381,986.4 million. This study on the basis of the above, therefore analifed the impact of the oil sector on both the “positive and negative” forces in the economy.      
1.5    SCOPE OF STUDY
The oil sector no doubt encountered certain disruptions during the civil war (1967 – 1970), Niger Delta crises (1998-1999) which has devastation effects on oil exploration in 1967, 1968, 1969, 1998 and 1999; by virtue of this fact, the study will cover a period of thirty three years sparing from 1970 to 2003. this period covers completely the boom and doom years of world crude oil trade: the boom years were the 1973/74 and 1977/80 eva when there were upsurge in oil prices; the doom years however started since 1981 till date.   The coverage of this study is therefore all embracing as the impact of oil on the following shall be adequately covered for the chosen period.
1.                  The impact of the oil sectorial output on GDP
2.                  The impact of the oil Revenue on Government expenditure.
3.                  The impact of the oil Revenue on domestic investment.       
4.                  The impact of oil export – Earnings on Total foreign exchange earnings and imports.
5.                  The impact of oil revenue on money supply and inflation.
6.                  The impact of oil revenue on the – intensity of Debt to GDP and the per capital income.  
1.6   LIMITATION OF STUDY
The dominance of crude oil sector, can not be over emphasize, it over shadows all other products of the industry. (Contributing an average of about to percent to Government revenue) in the period under consideration.   The study is therefore limited to crude oil’s impact alone, on the economy this is used in representing the impact of the sector (as a whole) on the economy.   This study has also been compelled to the use of data from secondary sources due to the time constraint that incapacitates the search for data via primary sources. But comparison would be made by the use of various secondary sources for the purpose of verification. The high financial requirement of this study also come into place here.   None the less, it is imperative to note that the above constraints will have no impact of any sort on the reliability of the results obtained from the research.  
1.7  HISTORICAL BACKGROUND OF THE OIL SECTOR IN NIGERIA     
This dates back to 1908 when a German – company the Nigeria Bituman corporation was issued a license to exploit the deposit at the oil see pages in Araromi, some 200 lem east of Lagos. This bid was however aborted by the out break of the first world war between 1909-1914 (Raji, et al; 1980; page 301).   About three decades later, in 1938, an Archy continued the exploration process. This was also interrupted between1939-1945 by the second world war. (Afolayan, 1988; page15).   After the war, shell D’ Archy, now known a shell B.P perolum development company of Nigeria was given sole concession to continue exploration.   This yielded fruit when in 1956 the company struck Nigeria’s first crude oil find in commercial quantity from a well located at Oloibivi, Yenagoa province of the present day Rivers state (Nigeria oil Directory, 1987; p.52.   Therefore, commercial production commenced immediately; However, it was not until February 1958, when production had reached about 5,000 barrels per day, that the export of Nigerian crude oil to the outside world actually began. Then the pipe line to port-Harcourt had been completed.  
Exclusive exploration rights was not made available to comprise of other nationalities until 1959. subsequently therefore, Mobil Gulf, Nigerian Agip, Safrap (NOWELF), Texaco / ccherron – pan ocean, and Ashland joined in the research for oil in Nigeria.   By 1960, shell – EP, was producing some 17,5000 barrels per day. With the completion of the tanker teruriual and related facilities at Bonny 1961. production increased to over 46,000 barrels per day. Then Mobil and other explorers were still unsuccessful in their search (Quinlan 1980; p. 271).   In 1965, the trans-Niger Pipeline was completed, allowing oil from fields in the mid west to flow to Bonny termind. In the same year, Gulf oil began lifting oil from the company’s first find; by this time, other comparies have discovered oil on-shore..   Gulf oil’s discovery was Nigeria’s first off shore oil field. These developments allowed production to rise to some 270,000 barrels per day (b/d) in 1965 and nearly 429,000 b/d in 1966 before the Nigeria civil war which dismpted production and impeded the flow of machinery to production sites.   Oil output by 1970 however, recovered from 1968 low levels to reach 1.08 million b/d in the following year; the 1974 daily production (as evident from Appendix Two) is due to a number of factors prominent among which is the global oil sector. Prior to Nigeria’s membership of organization of petroleum Exporting Countries (OPEC) (1) in 1971, royalty payments were increased from 12.5 percent to 20 percent and the petroleum profit tax from 55 percent to 85 percent (see Table 1.7.1 below). 

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