DEREGULATION OF THE DOWNSTREAM SECTOR OF NIGERIAN OIL INDUSTRY: PROSPECTS, PROBLEMS AND CHALLENGES
Table of content
1:2 Background of the Study
1:3 Statements of Problems
1:4 Objectives of the Study
1:5 Research Question
1:6 Study of the Hypothesis
1:7 Significance of the Study
1:8 Justification of the Study
1:9 Scope of the Study
1:10 Definition of Terms
2:1 Conceptual Clarification
2:2 Theoretical Framework
2:3 Literatures on the Subject Matter
3:0 Area of Study
3:1 Source of Data
3:2 Sampling Techniques
3:3 Method Data Collection
3:4 Method of Data Analysis
3:5 Reliability of Instrument
3:6 Validity of Instrument
3:7 Limitations of the Study
4:1 Finding of the Study
4:2 Discussion of the Study
Summary, Conclusion and Recommendation
5:0 Summary of Findings
BACKGROUND OF THE STUDY
Petroleum products supplies have always been an acid test for successive Governments in Nigeria. With the new democratic dispensation, the supply and distribution of petroleum products improved but this was without a price – frequent increase in petroleum products prices. Virtually all administrations – both military and democratic administration have had cause to increase petroleum products prices in Nigeria. In his nine years in office as Head of State, General Yakubu Gowon took the price of petrol from 6 kobo to 9.5 kobo per litre. General Olusegun Obasanjo took fuel price by a leap moving it from 9.5 kobo to 15 kobo. The regimes of Shehu Shagari and General Muhammadu Buhari maintained the status quo as they never increased fuel price (Adagba et al, 2012).
Former military President Ibrahim Babangida moved the price of petrol from 15 kobo to 70 kobo in his eight years of governance. But by far the greatest leap of oil price in Nigeria was introduced by Chief Ernest Shonekan, an interim Head of State who took the price from 70kobo to N5.00 within the 87 days of his rule (Lawal, 2014; Adagba et al, 2012). Late General Sani Abacha moved price of petrol from N5 to N11 within his five years in office while General Abdulsalami Abubakar increased the price of petrol from N11 to N20 within the ten months he ruled Nigeria. President Olusegun Obasanjo under democratic regime raised the price of fuel from N20 to N70 within eight years he spent in office. However, late Umaru Yar’Adua reduced the price from N70 to N65, but President Jonathan increased the price N65 to N141 per litre. Negotiations between the Presidency and the Organised Labour led to the bringing down of the price from N141 to N97 per litre after eight days of strike and street protests (Adagba et al, 2012). The crash of international crude oil price due to economic slow down in most major economies forced the Jonathan administration to reduce the price from N97 to N87 per litre in early 2015. Under every democratic administration, the ugly incidence of petroleum scarcity surfaces, and one begins to wonder if there is any solution to the problem.
The contemporary passion and tension that usually characterise petroleum discourse is due to inexplicable deprivations and sufferings of Nigerians amidst plenty and abundance of these products. As the sixth largest oil exporter in OPEC (Balouga, 2012), Africa’s second largest producer of crude oil after Libya, eightieth largest exporter in the whole world (Ovaga, 2012) it is a paradox that in the past decade, supply of all products has been erratic and on sharp decline. Ironically, as supply declined, products’ prices have been on the increase as successive governments searched for “appropriate pricing”.
The combined impact of erratic and inadequate supply and unending price increases have brought untold hardship to the citizenry (George et al 2014; Ovaga, 2012) and worse too, prevented economic recovery as promised by the present democratically elected government given that capacity utilization in the manufacturing sector nose-dives due to shortages of industrial products. Indeed many industries have been compelled to close due to non-availability of some of these products.
In the bid to solve the problem in many developing countries, structural reform of petroleum markets has become a critical component of macroeconomic liberalization policies (Ojo and Adebusuyi, 1996). The role of the government in the petroleum sector is being redefined, and markets are being deregulated (i.e state interventions such as special treatments of state-owned oil companies, price controls and monopolies are being broken up). According to Ikponmwosa and Odogwu, (2012) the objective of deregulation and privatisation of the oil and gas industry is to enable private investors to invest in the sector in other to eliminate constant shortages of fuel and gas in the country. The arguments for this is that: subsidized pricing scares away investors, increased consumption and higher energy prices at the international market is weighing more on the government budget and denying infrastructural development, the rich benefit more from fuel subsidy, parts of the subsidy is being corned by “cabals” (Kalejaiye et al, 2013; Balouga, 2012).
But unexpectedly, the outcome of the deregulation has not been encouraging (Lawal, 2014). There has been continuous increase in petroleum prices with persistent scarcity of petroleum products, pipelines vandalisation, large scale smuggling, low capacity utilization at the nations local refineries (Ehinomen and Adepoju, 2012). The government posited that the prices would only rise in the interim. Comparing the situation to the development in the telecommunications industry, the government argues that the only way to arrest and correct the structural distortions in the sector is liberalization that would encourage businessmen to invest in building refineries and importing products to sell at prices dictated by the market (Onyishi et al, 2012). However, this is an argument not supported by empirical evidence. Diesel and engine oil prices have been deregulated for years. Yet, unlike the situation in the telecommunication industry, the prices have been going up. It was expected that deregulation would give room for competition which would transform to price reduction and excellent supply and distribution network (James, 2013). A number of factors have been cited to be responsible for the low investment and competition in the sector. The most crucial of the factors is the delay in the passage of the Petroleum Industry Bill (PIB). This study is devoted on the evaluation of the deregulation exercise; critically appraising its impact on petroleum pricing, consumption and the general living standard of the people.
STATEMENT OF THE PROBLEM
Historically, major petroleum marketing companies were the main sources of petroleum product’s supply. The companies transported and distributed the products relying on their distribution and retail outlets (Ojo and Adebusuyi, 1996). This was an era of deregulation in which Nigerian paid market-determined prices for products. However, this arrangement was not sustainable given that it was dependent on the profit and market imperatives of the oil marketers.
The country’s economic activities expanded in the seventies such that private companies could no longer cope with increase demand for products. This resulted in erratic supply of petrol and kerosene and ultimately acute scarcity of the product. The shortage was endemic and created social and economic dislocation in the country. This market failure made government to venture into petroleum products marketing and distribution (Ozumba, 1996).
The concern by government to overcome this lack of policy and total dependency on oil companies led to policy shift towards regulations. Government therefore introduced uniform pricing to satisfy domestic demand, strengthen self-reliance and avoid a situation in which the oil companies could hold the country to ransom.
The nation witnessed adequate supply of petroleum products up till 1986. Thereafter, due to the sustained devaluation of the Naira on account of the implementation of the Structural Adjustment Programme (SAP) coupled with the non-maintenance of the refineries, domestic production was soon undermined making it imperative for demand to be met through imports. The shortages of petroleum products escalated in spite of increases in prices of products since 1990.
The Obasanjo administration on coming on board decided to gradually withdraw the subsidy on petroleum products to allow the mechanics of market forces to take its full course. This again, resulted to frequency increase in petroleum products prices and its consequential effects. Yekini (2011) attributed scarcity of Kerosene in Nigeria to inadequate importation of the product and its diversion from domestic uses to other areas. He therefore posits that subsidy is injurious to the Nigerian economy and therefore recommends the removal of all petroleum product subsidies and the liberalization of all the downstream activities in the petroleum industry.
Balouga (2012) notes that as far back as June, 2003 government figures indicated that for each litre of petroleum products, N12 was spent on subsidy. This implied a subsidy of N74 billion or 1.42% of GDP. He stated further that by the end of 2007 with subsidy shooting up to N450 billion, it went up to 3% of GDP. Balouga (2012) argues that there is no doubt that the country was really subsidizing inefficiencies, fraud and racketeering in the whole production and distribution chain and in that context, given the competing needs for scarce resources, government felt the need to do something. The government decided to deregulate the downstream oil sector (Gberevbie, 2015) through gradual subsidy withdrawal claiming that it will guarantee long term stability in product supply and price (Sabiu and Reza, 2014).
AIM AND OBJECTIVES OF STUDY
The aim of this study is to appraise the deregulation exercise that was carried out in the Nigerian downstream oil sector.
The specific objectives of this study are as follows:
(i) To evaluate the pattern of petroleum products prices in Nigeria;
(ii) To examine the consumption pattern of petroleum products before and after the deregulation;
(iii) To examine the impact of the deregulation of downstream oil sector on petroleum products pricing in Nigeria;
(iv) To investigate the effect of the deregulation of the downstream oil sector on the living standard of the people;
(v) To examine the pre- and post-deregulation era and make critical comparism;
(vi) To explore the reasons why deregulation has not yielded the desired result in terms of prices and supply.
The study would examine the following questions:
(i) What is the pattern of petroleum products pricing in Nigeria over the years?
(ii) How has the deregulation exercise impacted on the consumption pattern of petroleum products in Nigeria?
(iii) To what extent has the deregulation of the downstream oil sector impacted on petroleum products pricing in Nigeria?
(iv) How does the regulated downstream sector differ from the deregulated era?
(v) Why are we still witnessing petroleum products prices increases after deregulation?
RESEARCH METHODOLOGY AND SOURCES OF DATA
The method of data analysis to be used shall be a time series showing the pattern of the petroleum products prices before, after and during the deregulation exercise.
Secondary data shall be the basis of analysis in this research work. The data shall be sourced from the publications of Nigerian National Petroleum Corporation (NNPC), Petroleum Products Pricing Regulation Agency (PPPRA), Central Bank of Nigeria, and National Bureau of Statistics. The secondary data shall cover the period between 1986 and 2013.
SIGNIFICANCE OF THE STUDY
This study is significant in the followings ways:
a. It would use a market structure-conduct-performance framework to analyse the industry, both before and after deregulation, as a means of judging the impact of deregulation in terms of petroleum products prices.
b. The significance of this study also lies in the fact that it would contribute to existing literature on the subject matter by providing an expository analysis of the pattern of increase of petroleum products prices in Nigeria. This would enhance policy formulation in the downstream oil sector with the intention of alleviating the suffering of the masses.
c. It would also be an invaluable tool for students, academic, institutions and individuals that want to know more about the deregulation of the downstream sector of the Nigerian oil industry.
SCOPE OF THE STUDY
This study examines economic rationality behind deregulation of the downstream sector of the Nigerian oil industry. The study seeks to investigate the effect of the deregulation on the prices and consumption of petroleum products as well as its impact on the living standard of Nigeria. The empirical analysis is restricted to the period between 1986 and 2013 because it was during the period that policy was implemented.
One of the major limitations of this study is that the period of time given by the institution’s authority for the study would not allow for an in-depth coverage of all the issues connected with the topic under study, and collection of related information.
Also, certain information required in order to highlight and analyze some observation may not be accessible e.g. Independent oil marketers’ operation records may be regarded as strictly confidential and would not be divulged to the research. And lastly finance is another constraint to an indebt study of this topic.
ORGANISATION OF THE STUDY
This study shall contain five chapters. The first chapter shall contain the background of the study, the statement of the research problem, the objectives of the study, the research questions etc that would guide the study. Chapter two would present the literature review on the subject matter. The methodology to be adopted in the study would be stated in chapter three. Chapter four shall focus on the presentation and analysis of collected data. The last chapter – chapter five, would present the summary of the findings, conclusion and appropriate recommendations.
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