THE IMPACT OF CRUDE OIL PRODUCTION ON ECONOMIC GROWTH IN NIGERIA (1960-2010)

Abstract

 The study examined the impact of crude oil production on the growth of the Nigerian economy between (1960-2010). Hence the specific objectives are to ascertain the extent of economic growth impacted by the oil proceeds and multinational oil companies in Nigeria. And also to establish the long run relationship between crude oil proceeds and Gross domestic product (GDP). The findings revealed the extent of economic growth impacted by the oil industries was significant based on the ordinary least square (OLS) regression analysis result where the calculated F-Statistics of (212.1293) is greater the tabulated F-statistics of (5.35147). The study also found the long run positive relationship between oil revenue and gross domestic product

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Economic growth from the time immemorial has been subject of debate in both academic and non – academic circles. Hence, measuring growth of key sectors of an economy to ascertain its contribution to the aggregate national economy has been adjudged as one way of determining vibrant sector(s). The history of oil industry in Nigeria dates to early 1900‟s when the British Colonial Government shortly after the creation of Nigeria as a legal entity started the first geological survey of the country. From 1956 when the first oil was drilled in Oloibiri to mid-2013 when the price of the commodity crashed beyond imagination of common sense till this day, oil remained the mainstay of Nigeria‟s economy. In Nigeria, policy formulation always appears to respond to the oil situation or attempt to take advantage of it. This usually takes the form of “expand expenditure when oil earnings increase, maintain the position when there is a dip in earnings and seek a desperate way out when there is crisis” (Biodun 2004). The need to appraise the impact of oil revenue in the Nigerian Economy has become imperative. Alley, Asekomeh, Mobolaji and Adeniran (2014), states that Nigeria gained US$390 billion in oil-related fiscal revenue over the period 1971-2005. Nigeria has a population of about 173.6 million in 2014 is by far the most populous nation in Africa. Nigeria also has the largest economy in Africa with a Gross Domestic Product of $522.6 billion as at 2013 (www.populationaction.org). Moreover, Nigeria is Africa‟s largest producer of oil. However, Nigeria‟s Oil Wealth has proved in many ways to be a blessing and curse at the same time. The petroleum industry in Nigeria has 2 brought unprecedented changes to the Nigerian economy, particularly in the past five decades when it replaced agriculture as the cornerstone of the Nigeria economy (Aigbedion and Iyayi, 2007). The oil industry has risen to the commanding heights of the Nigerian economy, contributing the lion share to gross domestic product and accounting for the bulk of federal government revenue and foreign exchange earnings since early 1970.

The oil and gas industry is strategic to national development and growth in Nigeria. Oil and gas constitute about 90% of Nigeria‟s foreign exchange earnings and 83% of its GDP (Ogbeifun, 2008). The oil and gas industry is strategic to national development and growth in Nigeria (ABu and Chidi, 2012). However, Adewumi and Adenugba (2010) believe that Nigeria is one of the world‟s largest producers of crude oil, the 10th largest producer and the 6th largest exporter among Organisation of Petroleum Exporting Countries

(OPEC) members. Nigeria, Africa‟s largest crude exporter has continued to import refined petroleum products after over fifty years of crude oil extraction (Nwanze, 2007). Nigeria joined the Organization of Petroleum Exporting Countries (OPEC) in 1971 and established the Nigerian National Petroleum Company (NNPC) in 1977; a state owned and controlled company which is a major player in both the upstream and downstream sectors. The Nigerian oil industry is divided into two sectors; the upstream sector (deals with Exploration and Production) and the downstream sector, which deals with refining of crude oil for domestic consumption (Odeh, 2011).

Despite Nigeria‟s huge oil wealth, Nigeria has remained one of the poorest in the world. In addition, the insurgency in the North, Niger-Delta Avengers in the South, kidnappings for ransomed and the rampaging Fulani herdsmen have all compounded Nigeria‟s problem in no small measure. The problems with Nigerian economy have been traced to failure of successive governments to use oil revenue and excess crude oil income effectively in the development of other sectors of the economy (Yakub, 2008). The economy has been bedeviled by sustained underdevelopment evidenced by poor human developmental and economic indices including poor income distribution, militancy and oil violence in the Niger Delta, endemic corruption, unemployment, relative poverty (Nwezeaku, 2010).

The oil industry in Nigeria plays a crucial role to the sustenance of the nation and fuels not only Nigeria‟s economic and development activities but also socio-political life. The industry has been widely described as the nation‟s live wire and this account for the literature that abounds on its role and significance in Nigeria. However, Nigerians have had very little share of the Country‟s 3 oil wealth and there was an urgent need to reverse this trend. Nigeria‟s extreme reliance on the crude oil market has triggered structural difficulties for the economy, as earnings from crude oil fluctuate along with market trends (Aigbedion and Iyayi, 2007).

Crude oil became the dominant resource in the mid-1970s. On – shore oil exploration accounts for about 65% of total production and it is found mainly in the swampy areas of the Niger Delta, while the remaining 35% represents offshore production and involves drilling for oil in the deep waters of the continental shelf. The massive increase in oil revenue as an aftermath of the Middle – East war of 1973 created unprecedented, unexpected and unplanned wealth for Nigeria, and then began the dramatic shift of policies from a holistic approach to benchmarking them against the State of the oil sector (Oladipo and Fabayo, 2012).

The Petroleum Industry in Nigeria has brought exceptional changes to the Nigerian economy, particularly in the past five decades when it replaced Agriculture as the base of the Nigeria economy. The Oil Industry has risen to the unassailable loftiness of the Nigerian economy, contributing the lion share to gross domestic product and accounting for the bulk of federal government revenue and foreign exchange earnings since early 1970 (Apata).

The oil boom of the 1970s led Nigeria to neglect its strong agricultural and light manufacturing bases in favour of an unhealthy dependence on crude oil. In 2000 oil and gas exports accounted for more than 98% of export earnings and about 83% of federal government revenue. Nigeria’s proven oil reserves are estimated to be 35 billion barrels; natural gas reserves are well over 100 trillion ft (2,800 km) (Gbadebo, 2008). Nigeria is a member of the Organization of Petroleum Exporting Countries (OPEC), and in mid – 2001 its crude oil production was averaging around 2.2 million barrels (350,000mі) per day (Gbadebo, 2008).

Crude oil discovery has had a major impact on the Nigeria economy both positively and adversely. On the negative side, this can be considered with respect to the surrounding communities within which the Oil Wells are exploited. Some of these communities suffer environmental degradation, which leads to deprivation of means of livelihood and other economic and social factors. Although large proceeds are obtained from the domestic sales and export of petroleum products, its effect on the growth of the Nigerian economy as regards returns and productivity is still questionable. Also, given the fact that the oil sector is a very crucial sector in the Nigeria economy, there is the dire need for an appropriate and desirable production and export policy for 4 the sector. In Nigeria, though crude oil has contributed largely to the economy, the revenue has not been properly utilized. Considering the fact that there are other sectors in the economy, the excess revenue made from the oil sector can be invested in them to diversify and also increase the total GDP of the economy (Gbadebo, 2008).

1.2 STATEMENT OF PROBLEM

It is now obvious that crude oil production is as critical to Nigeria as oxygen is to life. In fact, crude oil notwithstanding current effort of government remains the driver of economic policies of government. The overdependence on it has created vulnerability to the every sector of the Nigeria economy particularly the general hardship in the country now. In particular, the place of oil in the mind of the average Nigerian has become more profound since the continuous deregulation of the downstream sector of the Nigeria oil industry in 2003. Thus, the decline in crude oil production in Nigeria and fall in prices at the global markets meant more decreased earnings for Nigeria, but increased expense burden on imported refined petroleum products. It is such contradictions that make the Nigeria economy highly vulnerable and astronomically unstable. Monolithic nature of Nigeria economy is evident now without contradiction. It is indeed on this over dependence on oil that many of the socio-economic and political problems ravaging Nigeria today took its root. It is worthy of note that that multinational oil corporations in Nigeria have played great roles in the discovery (exploration), exploitation, refining (processing), administration, servicing and maintenance, storage and transportation as well as sales of crude oil in the country has great impact on the performance of Nigerian economy. Thus, it is often argued that multinationals oil companies dominated the oil industry in Nigeria and are often driven by the profit repatriation and expansion of other overseas market to the detriment of Nigeria‟s economy. It is on this backdrop that this study examined the impact of crude oil contribution to economic growth in Nigeria from 1960-2010.

1.3 Objectives of the Study: 

The objectives of this study are as follows;

• To ascertain the extent of economic growth impacted by crude oil proceeds.
• To examine the extent of contribution made by multinational oil companies to the development of the country.
• To determine empirically whether there is any functional long-run relationship between crude oil revenue and increase/decrease of our GDP within the period under study.

1.4 Research Question  

• To what the extent does the economic growth impacted by crude oil proceeds?
• What is the contribution made by multinational oil companies to the development of the country?
• What is the functional long-run relationship between crude oil revenue and increase/decrease of our GDP within the period under study?

1.5 Research Hypothesis

HO₁: Crude oil revenue does not cause economic growth in Nigeria.

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