Project Materials

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Prior to the discovery of oil in Nigeria, agricultural sector was the main stay of Nigeria economy, contributing about 95% to her foreign exchange earnings, generating over 60% of her employment capacity and approximately 56% to her gross domestic earnings (World Bank, 2013).

The major exportable crops were cocoa, palm products, cotton, ground nut, timber and rubber, with these products contributing most of Nigeria’s export, Agriculture was the leading growth sector of the Nigerian economy while oil export was very poor.

Infact, available literature on the Nigerian economy has it that Nigeria was primarily an agrarian economy, whose revenue generation was based on agriculture; statistics from the federal Bureau of statistic indicates that between 1958 and 1969, the contribution of petroleum (GDP) at current factor was just 0.007 percent. While agriculture formed the mainstay of the country’s economy accounting for higher percentage of Gross Domestic Product (GDP).

Meanwhile, with the discovery of oil at Oloibiri area of Bayelsa State in 1956 by Shell BP, oil has remained a major source of energy and income in Nigeria. Although Nigeria’s oil industry was founded at the beginning of the century, it was not until the end of the Nigeria civil war (1967-1970) that the oil industry began to play a prominent role in the economic life of the country.

Oil being the mainstay of the Nigerian economy plays a vital role in shaping the economic and political destiny of the country. The petroleum industry has been seen as the engine that drives the economic wheel of Nigerian economy.

Its contribution can be viewed from the angle of employment generation, foreign exchange earnings, government revenue and gross domestic product. After the discovery of oil in commercial quantity, petroleum industry in Nigeria became the largest industry.

Oil provided approximately 90 percent of foreign exchange earnings and about 80 percent of Federal revenue and contributes to the growth rate of Gross domestic product (GDP) of the Nigerian economy.

The oil boom of the 1970s led to Nigeria’s neglect of its strong agricultural and light manufacturing bases in favour of an unhealthy dependence on crude oil. In 2012 oil and gas exports accounted for more than 98% of export earnings and about 83% of federal government revenue.

In 2011, fuel exports were 89 per cent of all merchandise exports. New oil wealth, the concurrent decline of other economic sectors, and a lurch toward a statist economic model fueled massive migration to the cities and led to increasingly widespread poverty, especially in rural areas.

A collapse of basic infrastructure and social services since the early 1980s accompanied this trend. By 2012 Nigerian’s per capita income had plunged to about one – quarter of its mid – 1970s high, below the level at independence. Along with the endemic malaise of Nigeria’s non – oil sectors, the economy continues to witness massive growth of “informal sector” economic activities (Igberaese, 2013).

Nigeria being one of OPEC member countries and the second largest producer of oil in Africa was said to have high consumption of petroleum products. The high demand for petroleum products could be as a result of rising incomes (Akinlo, 2012).

The major sources of oil revenue are sale of crude oil and gas, Petroleum profits tax and royalties, licensing fees and other incidentals as shown in CBN Statistical Bulletin (2002 and 2009).

The main focus of Petroleum Profits Tax (PPT) is the upstream sector of the Petroleum industry, which deals with oil exploration, prospecting, development and production (EPDP). In 2009, Petroleum Profits Tax attracted 85% tax rate on export and 65.75% on domestic sale of oil and gas.

From the statistics provided by the world fact book (2015; Akinlo, 2012), Nigeria is said to have an oil production of about 2.451 million bbI/day, while she consumes about 310,000 bbI/day (2015 EST.). As at 2016, the level of consumption increased to 312,000 bbI/day with production level of 2.352 million bbI/day (2016 EST). Nigeria, as at 2010 ranked 38th position in the world with respect to oil consumption.

From these facts, it is quite obvious that Nigeria, despite the decrease in oil production in 2016, still has an increase oil consumption rate. With Nigeria’s rapid growth currently becoming stagnant at around 7 per cent and oil prices which continue to be volatile, there is much discussion on the topic of what can be done to ensure continuous growth regardless of the global market.

This volatility has come from international shocks caused by financial crises, strikes, wars and decreased oil production. It is because of this volatility in oil prices and Nigeria’s dependence on oil that many economists raise concern about the future of the economy.

As alternative fuels become more popular and oil importing countries continue to discover oil deposits, there is a need for the Nigerian economy to look to other, more manageable sources of foreign exchange and government revenue to spur economic growth (Igberaese, 2013).

Oil- exporting countries of the developing world depend heavily on oil revenue for foreign exchange earnings and for the government budget in most cases reaching 90 percent or above. The petroleum industry covers the exploration and production of crude oil as well as petroleum refining, marketing and servicing.

1.2 STATEMENT TO THE PROBLEM

Since the discovery of oil, petroleum industry has played significant role towards the development of Nigerian economy, the impacts are both positive and negative. Various scholars have advocated for the development of other sectors owing to their belief in the negative falconets of the oil industry.

While others argued that the sector should be promoted and developed for its benefits. Nigeria is estimated to has 37.2 billion barrels of oil reserves in 2011 and produces an average of 2.13 million barrels per day (Igberaese, 2013). The hydrocarbon sector also accounts for 82 per cent of the federal government’s revenue (World Bank, 2013).

This suggests that Nigeria is heavily dependent on the oil sector for the majority of government spending, infrastructure and most economic development activities. With the increasing volatility of oil prices, the discovery of oil in other parts of the world and the instability of the global economy, oil imports from Nigeria to major economies such as the United States has steadily decreased.

The U.S once imported 9-11% of its crude oil from Nigeria but in the first half of 2012, the share of imported oil from Nigeria to the U.S has dropped to 5% (Igberaese, 2013). Over dependence on oil revenue tends to distort and discourage sourcing of funds from other source by the government, for example, as a result of huge oil revenue flows; countries tend to de-emphasize income taxes as a source of government revenue.

Besides, low tax ratios and high consumption expenditures (typically on imported goods) reinforce inflationary tendencies with regard to expenditure; government pay less or no attention to infrastructural development, encouragement of private sector investment, mechanizing the agricultural and manufacturing sector of the economy because of reliance on petroleum revenue.

However, it is noted that large proceeds obtain form the domestic sales and exports of petroleum products, acts like a multipliers to other sector of the economy through government expenditure; this has generated the needs to properly investigate the relationship between oil revenue and Nigeria economic growth.

1.3 RESEARCH QUESTIONS

1. 1. To what extent has oil revenue impacted on the economic growth of Nigeria?

1. 1. What is the relationship between oil revenue and economic growth in Nigeria?

1. 1. What is the relative contribution of oil revenue on total government income and government capital expenditure?

1. 1. What are the findings and necessary recommendations to the study?

1.4 RESEARCH OBJECTIVES OF THE STUDY

The major aim of the study is to evaluate the oil sector revenue and the growth of Nigerian economy. Other specific objectives are as follows;

1. 1. To determine the extent to which oil revenue impacted on the economic growth of Nigeria

1. 1. To examine the relationship between oil revenue and economic growth in Nigeria

1. 1. To examine the relative contribution of oil revenue on total government income and government capital expenditure.

1. 1. To evaluate the findings and make a necessary recommendations

1.5 RESEARCH HYPOTHESIS

Hypothesis 1

H0: There is no significant impact of oil revenue on the growth of Nigerian economy

1. 1. : There is a significant impact of oil revenue on the growth of Nigerian economy

Hypothesis 2

H0: There is no significant relationship between oil revenue and the growth of Nigerian economy.

H1: There is a significant relationship between oil revenue and the growth of Nigerian economy.

1.6 RESEARCH METHODOLOGY

This study will employ the Ordinary Least Square analysis (OLS) to investigate the relationship between oil sector revenue and Nigerian economy growth. The data used in this study are quantitative secondary data collected from three very important organizations in Nigeria namely the Central Bank of Nigeria (CBN), the National Bureau of Statistics (NBS), and the Nigerian National Petroleum Corporation (NNPC).

From CBN statistical bulletins and NNPC statistical bulletins, we collected petroleum income (the explainer variables – oil revenue, petroleum profit tax/royalties, and licensing fees) data for the period 2008 to 2018. From the CBN and the National Bureau of Statistics (NBS), we collected the economic indicators (explained variables – gross domestic product, per capita income, and inflation).

We made use of the unit root test to determine the statistical properties of the variables and to determine if they are stationarity, this is done in order to avoid spurious regression and misleading judgment. The unit root and the co-integration test were employed to examine whether the variables exhibit both the short and long run relationship within the variables in the model.

1.7 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 the castle to transform it technologically and economically for a better tomorrow and towards greater Nigeria.

1.8 SCOPE OF THE STUDY

The study is restricted to examine the oil sector revenue and the growth of Nigerian economy: an empirical investigation

1.9 LIMITATION OF THE STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.10 ORGANIZATION OF THE STUDY

This research work is classified into five main sections. chapter one contains the introduction of the study, chapter two contains the literature review, chapter three contains the methodology, chapter four covers analysis of data and interpretation of result, and chapter five covers the summary, recommendations and conclusion of the study.