THE IMPACT OF THE OIL AND GAS SECTOR ON THE NIGERIAN ECONOMY

By

ODOGBE A. MARIAN

Presented To

Department of Accountancy

ABSTRACT

This research is proposed to put into verification, the obvious dominant role of the oil and gas sector in the Nigeria economy. This is an urge to know the extend to which this sector affects the economic life of the people. Led therefore, to the economic analysis of the impact of the oil and gas industry on the Nigerian economy. The economic impact which was categorized into positive and negative on the basis of their economic contribution was revealed by the result of regression analysis.

This study is to discover therefore, that oil and gas contribute significantly to revenue foreign exchange, production and per capita income, it will also play significant function in terms of its contribution to the rising prices, imports and inflation. Therefore, what the sector gives in one form is withdrawn from the economy in another form, the economy remains stagnant, thus the irony of the impact of the oil and gas sector on Nigeria economy.

Odogbe A. Marian

Accountancy Department

TABLE OF CONTENT

COVER PAGE I

TITLE PAGE II

APPROVAL III

DEDICATION IV

ABSTRACT V

ACKNOWLEDGEMENT V1

TABLE OF CONTENTS VIII

CHAPTER ONE

INTRODUCTION 1

PURPOSE OF STUDY 2

SIGNIFICANCE OF THE STUDY 4

SCOPE AND LIMITATION OF THE STUDY 6

CHAPTER TWO

DEFINITION OF OIL AND GAS SECTOR 11

ORIGIN OF OIL AND GAS SECTOR IN NIGERIA. 12

CHAPTER THREE

FINDINGS 22

CONCLUSION 24

RECOMMENDATION 25

CHAPTER ONE

1.1 INTRODUCTION TO PROJECT TITLE

Nigeria is a major producer of crude oil, and the importance of this commodity has been highly manifested in the nation's economy. From the early 70's, the petroleum industry has become the dominant sector in the economy. Following quickly after agriculture (the dominant sector before the discovery of oil and gas) it has directed the pace of economic, political, social and cultural progress in the nation.

Despite the present travails of the oil and gas in the world, Alli (1981) asserted that oil and gas still holds the key to the nation's economic pasture, and its prospects of nay successful economic restructuring hangs, heavily on this important commodity, hence its importance in the Nigeria economy.

The word oil and gas sectors described as the only international industries that concerns every country of the world. It is infact said to concern virtually the world economy; oil and gas have successfully divided the world geographically into regions of major production and region of high consumption.

The oil and gas industry is also the most important in its contribution to the worlds tonnage of international trade and shipping for these and other attribute of the oil industry. it was asserted by Odell (1971), that a day seldom pass by without oil and gas being in the news. This confirms the importance of oil and gas throughout the world.

It is in this respect that this study analyses the impact of oil and gas (the dominant product of the Nigeria oil and gas sector) on Nigeria economy with the use of econometric techniques. Econometrics - because of its richness as a measurement tool, as well as the obvious advantages it posses over other measurement techniques. Hence, the econometric analysis of the impact of the oil and gas sector on the Nigeria economy.

1.2 purpose of the study

The purpose of the study is to bring forth the time position of the impact of petroleum industry on the Nigeria economy as it has been highlighted by various researchers either generally or relating specifically to Nigeria.

Also, to educate the user on how petroleum has helped to develop the country and to cause economic instability as a result of mismanagement and inflationary functions i.e. how the explanation of the oil and gas sector has given rise to doom for the nation's economy.

Notwithstanding, the study shows investigations carried out on the impact of oil and gas export earning on the foreign exchange earning is measurable by the parameter estimated of oil and gas export income which reveals that a naira change in oil gas export earning will give rise or exert a change in total foreign earning in the same direction.

Finally, the study also brings out theory on monetisation and inflation i.e. an increase in money supply without adequate increase in level of production leads to rise in price level based on the monetalest, a view on the resultant effect is an inflationary impact.

1.3 SIGNIFICANCE OF THE STUDY

As a young nation with oil wealth coming almost unexpected (immediately after independence in 1960), Nigeria, no doubt had its developmental growth opportunities as well as problems for the nation (Quinlan 1980). It is these opportunities and problems that the study intends to figures out in terms of the impact of oil and gas sector on the Nigeria economy. Hence, while the opportunities represent the positive contributions of the sector, the problems stand for the negative impact of the sector on the Nigeria economy.

The oil wealth contributed immensely to the Gross Domestic Prodcut (GDP), foreign Exchange Earnings, Government's Revenue etc. the effect of these and other variables reflected in the expenditure of government positively. This therefore indicates the positive impact of the oil and gas industry on the Nigeria economy.

Also, it is not worthy to state the negative effect of oil and gas in the economy; the oil wealth dramatically increased the country's financial position as mentioned above and subsequently improve the individual spending and general price level of the nation, hence, increasing rate of inflation.

The adverse effect of this is the fall in the real income which severely affected those fixed income, moreover, the oil and gas wealth encouraged the drift from the rural to the urban areas, resulting in the cities. The oil and gas sector being highly capital intensive contributed marginally to employment.

Apart from the above, Nigeria's critical debt situation can be attributed to the mismanagement of the oil and gas wealth; specifically from the 1974 oil boom, total government revenue rose to N4,537 million from the sum of it N1,675.30m in 1973 with oil contributing over 80% of it. Nigeria, therefore went on a spending space with high taste for imported goods as a total imports increased from N1,224.8m in 1973 to N1,736.5m in 1974, N3,721.5m in 1975 etc. oil and gas were the major source of foreign exchange contributing over 90% in 1974.

The glut that followed the boom forced the government into difficult financing just to meet up with its past level of expenditure. Therefore, total debt increases from N1,589m in 1974 to N2,028.8m in 1975, N3,004.6m in 1976, N5,001.1m in 1977, N13.776.7m in 1981, N154,940.7m in 1988, N381,986.4m in 1990.

This study, on the basis of the above significant, therefore, analysed the impact of oil and gas sector both the "positive and negative" force in the economy.

1.4 SCOPE AND LIMITATIONS

1 SCOPE OF STUDY

The oil and gas sector no doubt encountered certain disruption during the civil war (1967-1970) which had devastating effect on oil and gas exploration, in 1967, 1968 and 1969, by virtue of this fact, the study will cover a period of twenty(20) years spanning from 1970 - 1990.

The period covers completely the boom and doom years of world crude oil trade the boom years were the 1973/74 and 1977/80 era when there were upsurge in oil and gas prices. The doom of that study is therefore all embracing as their impact on oil and gas on the following shall be adequately covered for the chosen period.

i. The impact of oil and gas sectorial output on GDP

ii. The impact on the oil and gas revenue on government's expenditure.

iii. The impact of oil and gas revenue on domestic investment

iv. The impact of oil and gas export - earnings on total foreign exchange and imports.

v. The impact of oil and gas on money supply and inflation

vi. The impact of oil and gas revenue on the intensity of debt to GDP and per capita income.

II LIMITATION OF THE STUDY

The dormant of crude oil trade in the oil and gas sector cannot be over emphasized. It over shadows all other products of the industry (contributing an average of about 70 percent to government revenue) in the period under consideration. The study is therefore limited to crude oil's impact alone, on the economy this is used in representing the impact of the sector (as a whole) economy. This study has also been compelled to the use of data from secondary sources due to the time constraint that incapacitates the search for data via primary sources.

The comparison would be made by the use of various secondary sources for the purpose of verification. The high financial requirement of this study also came into place here nonetheless, it is imperative to note that the above constraints will no impact of any sort on the reliability of the result obtained from the research.

1.5 DEFINITION OF TERMS

It is appropriate at the juncture to make certain definitions in regards to concepts such as crude oil, oil and gas sector or petroleum industry, gasoline or petrol etc. that will from time to time be used in the course of the study.

A. The Oil sector or petroleum Industry: These terms are used interchangeable to refer to the combination of firms dealing on commodities like crude, petrol, kerosene, gas etc.

B. Crude oil: Crude oil is a commodity produced from an underground research which has not been subjected to a refining or chemical process other than the separation at atmospheric pressure of any gas which were dissolved in the oil at a greater pressure of the reservoir (Ellis Jones 1988).

C. Gasoline or petrol and kerosene: There are refined petroleum distillated at different boiling points. Liquefied natural gas (LNG) are naturally occurring gas, either co-produced with oil or non-associated, which has been liquefied for ease of transportation and which is degasified before use just as these commodities are product of the petroleum industry, so are others too much which have not been mentioned in this study.

In any case, the essence of these definitions of terms is to make clear the use to which term stated in this study have been put. Hence, the oil and gas sector should not be seen generally as representing crude oil production alone as used in this study but as an all embracing industry bringing the firms dealing in all petroleum products together.