OIL REVENUE AND ECONOMIC GROWTH IN NIGERIA
The major aim of the study is to evaluate the impact of oil revenue on the economic growth of Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The economy is the backbone of any nation. Nigeria like other developing countries of the world that are paying more attention to how to accelerate the rate of development through the various sectors of the economy and measuring the growth of key sectors of an economy to ascertain it`s a contribution to the aggregate national economy has been adjudged as one way of determining vibrant sectors. The history of the oil industry in Nigeria dates to the early 1900s 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 Olobiri to the mid-1970 when the price of the commodity crashed beyond the imagination of common sense to 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 expanding expenditure when oil earning increase, maintain the position when there is a dip in earnings, and seek a desperate way out when there is a crisis (Biodun, 2004). The need to appraise the impact of oil revenue in the Nigerian economy has become imperative.
Alley, Asekomeh, Mobolaji & Adeniran (2014), states that Nigeria gained US$390 billion in oil-related fiscal revenue over the period 1997-2005. According to the world bank data, Nigeria has a population of about 173.6 million in 2014 is by far the most populous nation in Africa and also has the largest economy in Africa with a gross domestic product of $522.6 billion as at 2013. Moreover, Nigeria is Africa`s largest producer of oil but 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 brought unprecedented changes to the Nigeria economy, particularly in the past five decades when Nigeria neglected its strong agricultural and light manufacturing bases in the 1970’ due to the oil boom thereby making crude oil as the commanding heights of the Nigeria economy (Aigbedion & Iyayi, 2007). The oil industry has risen to the commanding heights of the Nigerian economy, contributing the lion share to Gross Domestic Product and according to 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 95% of Nigeria`s foreign exchange earnings and 83% of its GDP while in 2000, oil and gas accounted export for more than 98% of export earnings and 83% of federal government revenue. Nigeria`s proven oil reserves are estimated to be 35billion barrels and natural gas reserves are also over 100trillion (2,800km feet) (Gbadebo, 2008).
Nigeria, Africa`s largest crude oil exporter has continued to import refined petroleum products after over fifty years of crude oil extraction. 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 that 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 the refining of crude oil for domestic consumption (Odeh, 2011).
Despite Nigerian`s huge oil wealth, Nigeria has remained one of the poorest in the world. The problems with the Nigerian economy have traced to the 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 development 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 in 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 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 & Iyayi, 2007).
Crude oil became the dominant resource in the mid-1970s. On-shore oil exploration accounts for about 65% of the total production and it is found mainly in the swampy areas of the Niger delta, while the remaining 35% represents off-shore production and involves drilling for oil in the deep waters of the continental shelf. The massive increase in the 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 &fabayo, 2012).
Crude oil discovery has a major impact on the Nigerian economy both positively and adversely. On the negative side, this can be considered concerning 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 unquestionable. Also, given the fact that the oil sector is crucial in the Nigerian economy, there is a dire need for an appropriate and desirable production and export policy for the sector. In Nigeria, though crude oil has contributed largely to the economy, the revenue has not been properly utilized. Because 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 the problem
It is now obvious that crude oil production is as critical to Nigeria as oxygen is to life. Crude oil notwithstanding the current effort of government remains the driver of economic policies of the government. The overdependence on it has created vulnerability to every sector of the 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 Nigerian oil industry in 2003. Thus, the decline in crude oil production in Nigeria and the 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 Nigerian economy highly vulnerable and astronomically unstable. The monolithic nature of the Nigerian 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 multinational oil corporations in Nigeria have played great roles in the exploration, exploitation, refining, administration, servicing and maintenance, storage, and transportation as well as sales of crude oil in the country which has a great impact on the performance of Nigeria economy. Thus, it is often argued that multinational oil companies dominated the oil industry in Nigeria and are often driven by profit repatriation and expansion of other overseas markets to the detriment of Nigeria`s economy. It is on this backdrop that this study examined the impact of oil revenue on the economic growth of Nigeria from 1986-2016.
1.3 Aim and Objectives of the Study
The major aim of the study is to evaluate the impact of oil revenue on the economic growth of Nigeria. To achieve this, we shall be guided by the following specific objectives;
- To examine the impact of oil revenue (OILR) on the Gross Domestic Product (RGDP) of Nigeria.
- To examine the impact of government expenditure (GEX) on the Gross Domestic Product (RGDP) of Nigeria.
- To find out the long-run relationship between oil revenue and economic growth in Nigeria.
1.4 Research hypotheses
For this study, some relevant hypotheses shall be stated and tested for the study;
HO1: Oil revenue (OILR) has no significant effect on the economic growth of Nigeria.
HO2: Government expenditure (GEX) has no significant effect on the economic growth of Nigeria.
1.5 Significance of the study
The study is significant because it assesses the impact of Nigeria`s oil revenue on economic growth by identifying the strengths and weaknesses of the oil sector. it will serve as a source of information for the policymakers and stakeholders in the industry. Also, the study will help direct the attention of the federal government, its agencies, and the oil sector in regulating the industry and the need for diversification into other sources of revenue like agriculture for economic growth. It will also serve as a reference for future researchers in the academic field.
1.6 Scope/Limitations of the Study
The study is on assessing the impact of oil revenue on the economic growth of Nigeria`s economy. The study focuses on oil revenue, factors that will minimize the level overdependence on oil revenue on Nigeria`s economic growth, the level of importation of petroleum products in Nigeria, and problems encountered by the Nigerian oil sector.
1.7 Organization of the Study
The research follows a standard scientific procedure.
The first chapter incorporates the Introduction, Statement, Aim and Objectives, Research Hypotheses, Scope/limitation, Significance, and Organization of the entire analysis.
The second part of the analysis revealed the relevant literature included in the work.
Chapter three consider the method adopted for data gathering and analysis.
Chapter four comprises of results and data presentation carried out.
Chapter five is purely preoccupied with summary, conclusion, and policy recommendations.
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