Oil Sector – Impact On The Development Of The Nigerian Economy

Oil Sector – Impact On The Development Of The Nigerian Economy

Oil Sector – Impact On The Development Of The Nigerian Economy

Before late 70s Agriculture was the main stay of the Nigerian economy. However, the beginning of early 80s gave way to a new direction witnessed then.

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Although, the first attempt to explore oil began in the first decade of this country, but started with exploration activities by the German Bitumen Co-operation. They are licensed and were responsible for exploring Bitumen deposit found in some parts of the country. The pre-independence era between 1914 to 1960 was characterized by colonial entrepreneurships for legitimate commercial activities which were meant to replace the oppressions and inhuman slave trade that reign in eighteen and early period of nineteen century.

However, the post-independence era saw different exploration activities in petroleum exploration. On securing her independence, the oil market was widened to accommodate countries other than Britain and United States of America to participate in petroleum exploration activities in the emergence of about nine international companies operating in Nigerian. These are shell BP which was granted license in 1937. TEXACO, MOBIL, Tennessee Nigeria Incorporated (TENNECO), Gulf Oil, SAFRAP (ELF) Nigeria Agip Oil Company (NAOC) Philips Petroleum and Esso exploration. Other companies like Japan Petroleum, Union Oil American Occidental Oil etc joined later. However, not all of the then were successful explorers. As government interest in oil industry continues to grow, a license was granted to Nigeria Agip Oil Company in 1962. This license was optimally in favour of the government to purchase about thirty percent (30%) of the share capital of the company if and when it discovers oil in commercial quantity.

In 1971, the Nigeria National Petroleum Co-operation (NNPC) formerly known as Nigeria National Oil Co-operation (NNOC) was established by act No. 18 which was charged with the responsibility of exploring and producing oil and gas transporting, refining, processing, marketing and converting petroleum products.

With the activities going on in this sector, the Nigeria government has been able to install about four refineries, which were located at Port Harcourt, Warri and Kaduna . these refineries were commissioned between 1965 and 1989 with installed capacity to produce over four hundred and forty-five thousand barrels of crude oil per day.

Hence, with its importance becoming more noticeable in terms of its massive revenue generation capability for national development as well as its spin off effects of its down stream activities “the spin sector has said to be a major contributor to the Gross Domestic Product (GDP) in the recent years”. As its contributions amounts to over sixty-five percent (65%) of the Gross Domestic Product, its spin off and over benefits can be largely seen in the areas of industrialization via the provision of industrial inputs energy for powering productive activities as well as employment generation revenue from crude oil has been used to finance major core industrial projects like the steel complexes fertilizer plants as well as social infrastructure.

With this ever growing contributions to the Gross Domestic Product (GDP) one should not consider it as an overstatement if said that the Nigerian economy is highly dependent on this very sector of the economy the oil industry and hence concludes that crude oil is now the main stay of the Nigerian economy.

1.2. STATEMENT OF PROBLEM

With the Nigerian Oil sector accounting for almost all the country’s export and government revenue, However, a nation which has earned billions of dollars from its oil export, it currently considered the fifth poorest country in the world out of the hundred and fifty-six nations of United Nations Organization (UNO.) Earnings from the oil sector alone in 1990 as a result of Gulf war was about $13.1 billion.

Yet many of her citizens above fifty-five percent (55%) are still living below the poverty line. There is lack of infrastructural facilities, her educational system is at the verge of collapse,. The health sector has nothing good to write home about, the cost of life and standard of living is becoming more difficult nowadays. Politics has taken over every place and industrial Agricultural sector have been neglected. Inefficiencies and operating problems in the down stream sectors are causing some financial losses in the sector to about ten percent (10%) of Gross Domestic Product (GDP) every year due to bribery and corruption (World Bank and Nigeria 1995).

These have helped sloe down the pace of growth and development in the economy. However, with these problems stated above as regards the lapses of the oil sector towards the development of the economy.

Three questions may be posed as follows:

Have the oil sector really enhanced economic development?

What has petroleum contributed in the development of the Nigerian economy since its inception and how did government politics influence the direction of development in the Nigeria economy?

Nevertheless, I hope to provide some suggestions which would serve as a solution to these problems.

1.3. OBJECTIVES OF THE STUDY

Since oil is one of the factors that affect GDP growth.

The objective of the study is then directed towards the investigation of the impact of the oil sector on the development of the Nigerian economy.

The research would be based on if the effect on GDP, if positive or negative.

1.4. STATEMENT OF HYPOTHESIS

The hypothesis of this study shall stated as null-hypothesis (Ho).

The oil sector has no significant impact on the economic development of Nigeria.

Alternative Hypothesis (H1)

The oil sector has a significant impact on the economic development of Nigeria.

1.5. SCOPE/SIGNIFICANT OF THE STUDY

This research started from the commercial exploitative days of the oil in Nigeria to its discovery in commercial quantity it covers the impact of the revenue accruing from petroleum export on the general economy especially on the standard of living of Nigerians and its impact on the Nigerian Gross Domestic Product (GDP).

It would also analyse oil as a mono-cultural product of the economy and also its earning contribution to the economy. Then, the amount invested in other sectors of the economy and low it has boosted economic activities together with its resultant multiplier effects.

Again the advantages with the disadvantages of the oil sector would also be discussed. In spite of the burdens and problems associated with the economy towards its backwardness. It is believed that with good policies and implementation strategies, our oil sector can still lead the economy towards a greater economic development.

LITERATURE REVIEW

2.1. THEORETICAL REVIEW ON ECONOMIC DEVELOPMENT

The main objective of this part of the work is to delimit what constitutes the theoretical framework within which the entire work depends.

Hence, this study shall look at some of the theories of economic development and try to review them in relation with the oil industry in order to see how investment in the oil sector has aided the development of the Nigerian economy.

To this end, the theories that this study would cover are

The theory of big push which was propounded by Rosentien-Rodan. The idea was that a big push “or a large comprehensive investment to overcome the obstacle of development in an under-developed economy and to lunch it on the path to progress. To stress his argument, he said, “There is a minimum level of resource that must be devoted to a development programme if it is to have any chance of success. Launching a country into a self-sustaining growth is a little like an airplane off the ground for there is a critical ground speed which must be passed before the craft can become airborne “(JHINGAN, 2000).

The theory further states that proceeding bit by bit will not lunch the economy successfully on the economic development rather a minimum amount of investment is a prerequisite for launching it. Hence, investment in the economy is a necessary condition for a successful economic development.

Following the model of big push theory of economic development. It then stands that an investment into the oil sector is but a great deal towards a greater acceleration of economic development in the Nigerian economy.

The big push theory with its focus on investment can launch the economy into the path of economic development is however not free from certain criticism and defects. For instances the theory is said to generate inflationary pressures would prolong the process of building up social overhead capital thus making it highly difficult for less developed countries to achieve rapid economic development.

The concept of unbalanced growth is another theory to be looked upon in relation with the oil sector. According to the theory, investment should be made in selected sector of the economy rather than investing simultaneously. In all sector of the economy. This is because no underdeveloped country possesses all the capital and other resources in such quantities as to invest at the same time in all sectors of the economy. Therefore, investment should be made in a rapid development and the economics accruing from them can be utilized for the development of other sector. Thus, the economy would gradually move from the path of unbalanced to a balanced economic growth.

Hence, that is exactly what the relevance of the oil sector in Nigeria economy by using the resources generated from it to see to the development of other sub-economic sectors.

According to Hirchman who propounded the doctrine of unbalanced growth in a systematic manner said that “investment in strategically selected industries or sector of the economy will lead to new investment opportunities and so pave the way to further economic development. He also maintain that development has of course proceeded in this way with growth being communicated from the leading sectors of the economy to the following from one industry to another, from one firm to another, he also regards development as a chain of disequilibria” which must be kept achieved, and if the economy is to be kept moving ahead, the task of development policies must be maintained (ML Jhingan, 2000.P.189).

Although, the doctrine of the unbalanced growth is good for the underdeveloped economy like Nigeria. The theory is however not free from certain limitations and some of it are lack of factor of mobility in most of the underdeveloped countries it is difficult to shift resources from one sector to another. The theory cad also lead to emergence of inflationary pressures that bring about increase in demand due to heavy investment in the economy. Because of this shortages could arise and this bring about inflation.

However, we still look at the Harrod Domar model as it concerns economic growth. Emphasis was laid on the dual character of investment . Firstly , it create income and secondary it augments increasing its capital stock which bring about development in the economy.

Although, the Harrod-Domar model differs in detail yet they tend to arrive at a similar conclusion. The income investments created is regarded as the demand effect and the capital stock which it increases may be regarded as the supply effect of investment. Hence, as long as net investment is taking place real income and output will continue and treats it as an exogenous. Thus, he ignores the problem of inducing technical progress through the process of learning investment in research and capital accumulation.

With this theories of economic development highlighted above, it is also necessary to give a brief review on the history of crude oil.

According to Anyankwu,(1997 P.56) that the development of petroleum began in the first decade of this country which started with exporation activities by German Bitman Corporation. In 1937, oil license was granted to shell Darcy. In 1955,Mobil exporation Nigeria incorporated obtained concession over the whole of the former northern region of the country.

However, the first commercial discovery of crude oil in Nigeria was in 1959 by Shell. In 1958, the company started production. In 1961 the federal government issued ten oil-prospecting licenses on the contract shelf to five companies, with this full exploration began.

Oil was found in commercial quantity in Oloibiri in Niger-Delta, further discovery at Afam and Boma placed the nation as an oil-producing nation. By April, 1967, it has reached two (2) million barrel per day.

However, more wells was drilled by other companies like Elf, Mobil, Agip etc, this made production to rise steeply year after year, although the global oil glut of 1980s reduced the trends. In 1962, the federal government also awarded a contract to construct a refinery at Alesa Eleme Port Harcourt, Rivers State. This was to take care of foreign exchange as well as job opportunities in addition to other multiplier effects.

The country experienced an upsurge in the demand for petroleum products averaging a yearly increase of 23.4% between 1970 to 1978. in 1978, Warri refinery was officially opened with a refinery capacity of 160,000 barrels. More demands led to the building of a third refinery at Kaduna in 1980 and the fourth refinery near Port Harcourt. Indeed, the period, 1970 to 1980 could be seen to represent the oil boom period in Nigeria both in production, export and earnings. The highest output was recorded in 1979 at 845, 464,000 barrels at the highest level of production of 2.3 million barrel per day.

Furthermore, some of the impact of the petroleum sector on the economy would be highlighted. Petroleum has indisputably contributed positively towards the upliftement of the Nigeria economy. The prominent industry is a major provider of employment for the teaming population of Nigeria after agriculture. As stated by Egbuna (1989), the entire corporate workforce of NNPC has grown to about 18,000 people spanning through their major areas of activities nation-wide. Although this number is considered large for a single cooperation it is even infirmitesimal when one imagines the up to one million Nigerians who are directly or indirectly earnings then living from the activities in the petroleum sector of the economy from the upstream to the downstream sector. i.e. from exploration to drilling and refining down to distribution marking of the product.

The petroleum sectors have contributed immensely to Revenue generation in he country. Right from the 1970s to present, oil has been the major source of foreign exchange earnings and government revenue. In spite of the decline revenue from oil today counts for over 90% of the government revenue.

Again, the oil sector has helped in the case of foreign investment. There have been a remarkable increase in the foreign investment and this is made possible by the oil wealth. This foreign investment have however, provided employment for Nigerians created goods and services in the economy and stimulated the growth of subsidiary firms.

It have also helped in positive economic growth and development since the oil revenue constitutes the bulk of the government income right from 1970s noticeable projects and investments have been carried out successfully with the revenue. This is evident in the rapid increase in the economy’s wealth of infrastructural facilities and amenities within the period of oil boom. Revenue from the oil in the 1970s formed the catalytic substantially the height of development of the Nigeria economy. Thus, it was during the period that Nigeria was decorated with the accolade “The Giant of Africa”.

2.2. AN OVERVIEW OF THE PETROLEUM (OIL) SECTOR

The Nigerian petroleum industry is no more a new sector in the nation’s industrial scenario. However, it has become a major factor in the recent years. The oil sector is the leading sectors in the Nigerian economy because it accounts for over eight percent (80%) of the nations total export earnings and about seventy percent (70%) of total government revenue (NNPC, point of view 1988).

The petroleum industry has a lot of empirical literature to its own credit. Nevertheless, most of the early and notable works on the subject have been devoted to an optimistic appraisal of the future of the industry. Thus

According to Okeke (1988) who possess a good opinion for the petroleum industry in Nigeria, the rapid expansion of the crude petroleum found in the country has made the Nigeria economy one of the fastest growing among the developing world. He however, commented that this is a necessary but insufficient condition for economic development. Although, he did not state the reason from the fact that the country has depended on this sector for its revenue generation.

Again, Obinna (1990:4) took cognizance of the present sharp decline in oil revenue which has been troubling the Nigeria economy. However, he expressed optimism on the prospect of the petroleum industry pointing out the possibility of the occurrence of another oil boom in the 1990s. he based his argument on his analysis of the proposed European common market by 1992 and its impact on energy consumption. According to him, this merger would lead to industrial expansion and a subsequent increase in the demand for Nigerian petroleum since Nigeria is the major energy supplier to Europe.

Discussing the impact of petroleum on the Nigerian economy Kayode (1988:16) though noted the inverse revenue that expressed discontent with the impact of the fact that crude oil right from the period of early 1970s has remained the country’s main foreign exchange earners has made Nigerian neglect other non-oil product and left them untapped.

Expressing a similar view Chizea (1986:7) in his article entitled “Nigeria a future without oil” pointed out the present predicament of the country’s economy as a result of the unprecedented slide on the revenue from oil to low levels. He that contended that whether revenue slide or not recent development should have jetted our collective conscience to contemplate future without oil and look for alternative sources of revenue for the country. He based his suggestion on the fact it has been reportedly confirmed that by the end of 1996 the country had produced about 50% of its known total crude oil reserve.

Luksman (1989:4) a one-time minister of petroleum resources lamentedly expressed a regret that Nigeria has come to depend excessively on petroleum exports for foreign exchange earnings and correspondingly agricultural exports have lagged. According to him, the over dependence has resulted in immediate transmission of external shocks such as fluctuations in crude oil price to Nigeria in the economic and financial spheres, this notwithstanding he predicted an increase within the next five years. In the world petroleum consumption then added that there will not be pronounced fluctuation in our earnings from crude oil in the next few years.

Making his own contribution Dele (1985:26) pointed out that Nigerians in ability to consume its petroleum which amounts to gross under-utilization of resources through an uncontrolled export of cruse oil should be considered a big problem. He added that since oil is not only a domestic commodity but also a foreign exchange earners as well as a weapon of international politics conservation should be deemed a necessity. Dele also regretted to mention the facts that natural gas of which Nigeria has between 85 to 100 proven recoverable resources is currently wasted through flaring. In his own view in order to conserve oil reserve he called for:

1. A revival of the use of coal as a source of fuel in homes and industries and

2. Application of natural gas in productive use such as industrial feed back, domestic use of fertilizer plants.

In the same vein Njoku (1983:3) cited the case of industrialization Europe and America who were hard hit by the skyrocketed crude oil price resulting from the manipulation of output by the petroleum producing countries in the early 1970s. “…………..these countries were able to devise alternative sources of energy and energy conservation method and within a couple of years turned round to tell OPEC to drink their oil or sell to them at reasonable price. Even though he noted the present phenomenon of oil glut, he expressed his conviction that Nigeria can still turn the misfortune into good by ensuring that it does not rely only on the same of crude oil for her economic survival Njoku, also suggested that natural gas which is presently burnt to the time of 400,000 barrels equivalent daily is another product that will readily find market both at home and abroad.

However, we should be concerned on how far the oil sectors have gone following the theory of unbalanced growth and big push it has preferred implication for investment in Nigeria. This was verified following the statement made by Kayode and Teriba “By comparism with other sectors, crude petroleum has short up into a position of dominance as the principal earners of foreign exchange with highest investment made so far in this sector of the economy. It was hoped that the economies generated from it will assist in the acceleration of other sectors” (Kayode and Teriba 1977 p. 158).

In spite of the fact the oil sector enjoys more attention, has it been able to enhance development in other sectors? To see the contribution of petroleum to income and to the development of other sectors and above all the general well being of the Nigerians. A logical way of beginning the calculation of Gross value added is to review the production and export performance of the crude petroleum.

The crude oil production in Nigeria totaled 759710 million barrels, showing an increase of 3.7 percent in 1999. The total export was about 673340 million barrels and total consumption was also about 8670 barrels. Since the magnitude of the oil sectors gross value depends on the value of crude oil exports and local sales. It was shown that the annual gross domestic product (GDP) of 1999 was at the growth rate of 2.9% with the total revenue at $111,050 million. The non-oil sector made a total contribution of $110,720 million which are about 88.4 percent of the total Gross Domestic Product (GDP). While the oil sector alone accounted for about $794,670 million which is about 11.6 percent of the total Gross Domestic Product when compared with other sectors that make up the economy.

(CBN annual report 1998 p. 102).

Despite the attention that crude oil commends in the socio-political and economic spheres of the nation “the new Nigeria government is still working seriously to improve the Nigerian struggling economy Shell 2000 (p.25).

Although Nigerian oil industry has contributed to the development effort in the country and has provided enhanced revenue to the government the full benefits of the oil industry have not been operated with minimum linkages with the rest of the economy (Amu 1981 p.20) sequel to this, the Nigerians government should emulate the Russian economy, which was the first to adopt the doctrine of the balance growth and has been successful till date. No wonder in their speeches Christopher and Hamulton in 1975 said oil means money and P. Chikelu in 1990 maintained that oil is literally the main fuel for the national development and growth which we pray would lea us to economic growth and development that we all desire (NNPC 1990 p.3).

It appears that the Nigerian oil industry today has witnessed a remarkable growth and development as well as expansion in various areas, yet it is still obvious from the foregoing that a lot of work is still need to be done and it is being done to put the economy into right path of economic development bearing the linkage effect in mind with other sectors of the economy which is the common features highlighted by the four theories of economic development.

However, if investment in the oil sector is well carried out and the economy generated is properly administered to link other sub-sectors of the economic then the future prospects of the Nigeria oil industry and Nigerian economy looks certainly bright.

4.3 INTERPRETATIONS OF THE RESULT

The standardized coefficients of the model or the standardized value of the parameters of the model show the degree of reaction or the elasticity of the dependent variable with respect to a unit change in the independent variable. From the values obtained from the regression result, the standardized value of the parameter of the model is given as 0.486 for b1 which is the parameter for difference Petroleum Sector Revenue, -0.174 for Difference Social Service Sector Revenue, 0.446 for Difference Agricultural Sector Revenue, and 0.234 for Difference Wholesale and Retail Trade Revenue.

This means that a unit change in the value of the independent variable, Difference Petroleum Sector Revenue, will cause a 0.486 change in the value of the dependent variable, DRGDP, a unit change in the value of the independent variable, Difference Social Service Sector Revenue, will cause a -0.174 change in the value of the dependent variable, DRGDP, a unit change in the value of the independent variable, Difference Agricultural Sector Revenue, will cause a 0.446 change in the value of the dependent variable, DRGDP, and a unit change in the value of the independent variable, Difference Wholesale and Retail Trade Revenue, will cause a 0.234 change in the value of the dependent variable, DRGDP.

The explanatory power of the regression model is given by coefficient of determination (adjusted R2). From the regression result, we obtain the value of the coefficient of multiple determination of the model as 0.956. This implies that about 95.6 percent of the variations in the dependent variable are attributable to variations in the explanatory variables. While the remaining 4.4 percent variations may be caused by any other factor apart from the ones listed in the model.

From the model, the explanatory variables (DPETR and DASER) were found to be statistically significant, while DSSER and DWRTR are statistically insignificant, and the overall models are also statistically significant at 5 percent level of significance.

This then show that the regression model can be used to forecast the future value of the dependent variables. From our apriori analysis, a strong link between our specified independent variable and our dependent variables has been established.

We can infer from the estimated model that the variables, DPETR and DASER have a strong influence on the DRGDP of the Nigerian economy.

SUMMARY CONCLUSION AND RECOMMENDATION

5.1. SUMMARY

The study impact of oil (petroleum) sector on the economic development of Nigeria held the general view that Nigeria is a petroleum economy. The problem addressed was to see the extent of contribution of the very sector to the economic development of our ration.

The variable used are (DRGDP) Difference real gross Domestic product (DPETR) Difference petroleum sector revenue (DASER) Difference social service sector revenue (DWRTR) Difference whole side and retail trade revenue. Econometric techniques of ordinary least square (OLS) and statistical package of Pc-give was employed in the evaluation. The summary of the whole finding is that the oil industry as a sector of the economics had a positive impact on the Nigeria economics development.

This work started by introducing the topic under study. Comprising all that is expected of the work under study, and was followed by chapter two the literature were extensively reviewed. It was divided into two the theoretical aspect which looks into some development models, a brief, history of oil and positive & negative impact of petroleum which the empirical review looked at some on the some topic.

The third chapter articulated the method of study being wholly statistical and econometric in nature.

Chapter four saw the display of table of data used in the course of this study in the same chapter, the result of our analysis were presented formally and the interpretation given as well.

5.2. CONCLUSION

This study has attempted to analysis empirically the impact of the oil sector on the Nigeria economy. In the course of this study it was recognized that other variable could also have a positive impact on the Nigeria economy.

However based on the strength of evidence amazed from the literature reviewed and our analysis of the available data we uphold the result in the chapter four of this study which shows that petroleum sector accounts for about ninety-one percent of variations in the Gross Domestic Product under the (1981-2002) period reviewed.

The question now should be how would the linkage effects between this sector and other sectors of the economy be liberalized so as to help articulate and facilitate the interflow of economic advantages associated with such relationships which was confirmed by the big push theory.

However, Nigeria with her vast resources base, large market and vibrant people can still be a major development pole and could become the first “African Tiger”. Hence, the missing links “road blocks” which stand between these economics sectors has prevented us and achievement of our dream of a great society and a strong economic power must have to be addressed in a serious and consistent manner.

Unless this linkage effects between the oil sector and other economic sectors are observed in congruent with the big-push theory (since the oil sector commands a reasonable percent variations of the Gross Domestic Products) then the achievement of a powerful and sustainable economic development in the next decade will be a mere illusion.

Note that the conclusion reached here has been based on statistical purpose. They must be weighted against real life evidence and literary opinion.

5.3. RECOMMENDATION

In the height of our conclusion and in fairness to the criticism articulated in it, hereby present some recommendation if effectively implemented world help to accelerate the nations economic performance.

First the government being at the forefront of nations development should articulate a viable policy which should encourage the co-operation of the different sectors that makes up the economy in such areas like technical assistance between the sectors, supply of basic raw materials most especially in the agricultural sector.

Secondly, the government should come up with a policy that will help in diversification of her economic output. Hence, depending only on the oil sector of her revenue will make the nations economy a monotype of economy.

Again, the government should come up with a policy that will encourage the establishment of small-scale industries whose input should come from the oil sector in order to help create more markets for the economy in the international environment more so, there should be instituted a reparation to the agricultural sector for inflicting a devastating set back on it.

Finally, the government should come up with a consistent economic programme and policies. This will help create a positive impact on investment flow into every sectors of the economy more likely in the areas of agriculture, manufacturing etc. Hence, the stability of such policies and programme will strengthen investor’s confidence and this increases their participation as well as encourages the return of economic greatness in the diversification of her output thereby increasing the welfare of the entire citizens.

Oil Sector – Impact On The Development Of The Nigerian Economy

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Comments

  1. OIL IN NIGERIA HAS SERVED AS A SOURCE OF REVENUE IN NIGERIA OF TODAY SO I SEE NO REASON WHY WE SHOULD NOT BE THANKFUL

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