THE PERFORMANCE OF THE OIL SECTOR ON ECONOMIC GROWTH IN NIGERIA

Abstract

Indeed, the oil industry plays a significant role in the recipient countries’ economic development. Therefore, for strategic reasons, the majority of oil-rich countries spend their oil sector profits in non-oil businesses. However, the realism of achieving this goal in the context of the Nigerian economy has become murky during the previous 50 years. The way that such oil wealth has been used in Nigeria so far has been highly inconsistent. Because of the massive oil money flows, countries often place less emphasis on income taxes as a source of government revenue, which tends to distort and discourage the government from obtaining cash from other sources. In addition, because of its reliance on petroleum revenue, the government pays little to no attention to infrastructure development, encouraging private sector investment, or mechanizing the agricultural and manufacturing sectors of the economy, which reinforce inflationary tendencies with regard to expenditure. The impact of oil revenue on Nigeria’s economic growth will be examined, although it should be emphasized that significant earnings from domestic sales and exports of petroleum products act as multipliers to other economic sectors through government spending. income taxes as a source of funding for the government. The study finds that the large-scale discovery of oil has increased the flow of foreign direct investment (FDI) into the nation, either through purchases or the construction of new production facilities (green field, investment). The flow of FDI contributes to capital formation, export revenues, technological advancement, and economic growth. It also indicates that, with the exception of government spending, which has a positive association with economic growth both in the long run and the short run, all factors showed their predicted sign in the short run but exhibited negative link with economic growth in the long run. According to the study’s findings, the government should spend petroleum money in other domestic industries like manufacturing and agriculture in order to diversify the economy’s sources of income and broaden its revenue base

Chapter one

Introduction

1. Background of the study

After crude oil was discovered in Nigeria in 1956 at Olobiri in its Niger Delta, the country began producing oil in 1958 when its first oil field started producing 5,100 barrels per day. The export of crude oil has historically been a major source of foreign exchange earnings and government revenue for the economy. Both positive and negative effects have resulted from this reliance on the oil industry. In fact, the oil and gas industry contributes almost 10% to the GDP, and nearly 86 percent of all exports’ earnings comes from the sale of petroleum (OPEC, 2018)

Nigeria’s main energy source is oil. Being the backbone of the Nigerian economy, oil is crucial in determining the country’s economic and political future. Although Nigeria’s oil industry was established at the turn of the century, it wasn’t until the end of the country’s civil war (1967–1970) that it really started to take center stage in terms of the economy of the nation (Odularu, 2008). According to the history of Nigeria’s petroleum sector, oil was found in the Niger Delta in Olobiri in 1958. Shell-BP is the one who made the finding. When Nigeria’s first oil field began producing 5,100 barrels per day in 1958, it became a producer of oil. Other foreign businesses were granted exploration rights in onshore and offshore regions adjacent to the Niger Delta after 1960. (Onwe, 2012). Oil remained the cornerstone of Nigeria’s economy from 1956, when the first oil well was dug in Oloibiri, to mid-2013, when the price of the commodity collapsed beyond comprehension and common reason, to this day. In Nigeria, policymaking always seems to be a reaction to or attempt to capitalize on the oil situation. Typically, this takes the shape of increasing spending when oil revenues rise, holding the line when revenues fall, and looking for a last-ditch solution when a crisis strikes (Biodun 2004).

It has become essential to evaluate the effect of oil money on the Nigerian economy. According to Alley, Asekomeh, Mobolaji, and Adeniran (2014), Nigeria earned $390 billion in fiscal revenue from oil between 1971 and 2005. With 173.6 million people, Nigeria is by far the most populated country in Africa as of 2014. With a Gross Domestic Product of $522.6 billion as of 2013, Nigeria also has the largest economy in Africa (www.populationaction.org). Nigeria also produces the most oil in Africa.  Since agriculture was displaced as the mainstay of the Nigerian economy by the petroleum industry fifty years ago, the Nigerian economy has seen remarkable transformations (Aigbedion &Iyayi, 2007).

Since early 1970, the majority of federal government revenue and foreign exchange gains have come from the oil sector, which has grown to dominate Nigeria’s economy and contribute the lion’s share to the country’s gross domestic product. For Nigeria’s growth and development as a nation, the oil and gas sector is crucial. About 90% of Nigeria’s foreign exchange revenues and 83% of its GDP come from oil and gas (Ogbeifun, 2008).

Despite having a vast oil fortune, Nigeria continues to be one of the world’s poorest countries. The insurgency in the North, the Niger-Delta Avengers in the South, ransom kidnappings, and the ravaging Fulani herdsmen have all significantly added to Nigeria’s problems. The inability of previous governments to efficiently utilise oil revenue and excess crude oil revenues in the growth of other sectors of the economy is blamed for the country’s economic problems (Yakub, 2008). Indicators of low human development and economic health, including as unequal income distribution, militancy and oil-related violence in the Niger Delta, pervasive corruption, unemployment, and relative poverty, show that the economy has been plagued by chronic underdevelopment (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

Nigerians have, however, received a relatively small portion of the oil wealth of the nation, and this tendency needs to be urgently reversed. Nigeria’s economy is experiencing structural problems as a result of its excessive reliance on the crude oil market, as crude oil revenues fluctuate with market conditions (Aigbedion and Iyayi, 2007). In the middle of the 1970s, crude oil took over as the main resource. About 65% of total oil production comes from on-shore oil exploration, which is mostly concentrated in the swampy regions of the Niger Delta. The remaining 35% comes from offshore oil production, which entails drilling for oil in the deep waters of the continental shelf. Nigeria experienced extraordinary, unanticipated, and unplanned prosperity as a result of the Middle East War in 1973, which led to a significant shift in policy from a comprehensive approach to benchmarking programs against the state of the oil sector (Oladipo and Fabayo, 2012). Nigeria’s petroleum industry has significantly altered the country’s economy, especially over the past 50 years, when it has taken the place of agriculture as the country’s economic backbone. Since the beginning of 1970, the oil industry has ascended to the untouchable heights of the Nigerian economy, contributing the lion’s share to the country’s gross domestic product and generating the majority of the federal government’s income and foreign exchange profits.

The finding of crude oil has had a significant impact on Nigeria’s economy, both favorably and unfavorably. On the down side, this can be thought about in relation to the neighborhood communities where the oil wells are exploited. Some of these communities experience environmental degradation, which results in a lack of resources for subsistence as well as other economic and social issues. Even if petroleum products are sold domestically and exported, it is still unclear how these activities will affect Nigeria’s economy’s expansion in terms of returns and productivity. Additionally, a suitable and desirable production and export policy for the sector is urgently needed considering the importance of the oil sector to Nigeria’s economy. Even though crude oil has made a significant economic contribution to Nigeria, the money has not been used effectively. Given the existence of other economic sectors, the surplus income generated by the oil industry can be invested in them to diversify the economy and raise GDP overall (Gbadebo, 2008). Therefore, this study seek to critically examine of the performance of the oil sector on economic growth in Nigeria 1980 – 2021

Statement of the problem

It is now clear that Nigeria’s dependence on crude oil output is equivalent to how vital oxygen is to life. In actuality, despite current efforts by the government, crude oil continues to be the principal driver of those programs. The over-reliance on it has made Nigeria’s economy vulnerable in all areas, especially given the current general hardship there. Since the ongoing liberalization of the downstream sector of the Nigerian oil industry began in 2003, in particular, the significance of oil in the minds of common Nigerians has grown. According to estimates, Nigeria had 37.2 billion barrels of oil reserves in 2011 and produced 2.13 million barrels per day on average (Igberaese, 2013). 82% of federal government revenue comes from the hydrocarbon industry (World Bank, 2013). This means that a significant portion of government spending, infrastructure investment, and the majority of economic growth efforts in Nigeria are dependent on the oil industry. Oil imports from Nigeria to significant economies like the United States have steadily fallen as a result of the rising volatility of oil prices, the discovery of oil in other parts of the world, and the instability of the global economy. Previously, the U.S. imported 9–11% of its crude oil from Nigeria, but in the first half of 2012, that percentage fell 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 deemphasize income taxes as a source of government revenue. Additionally, because of the government’s reliance on oil revenue, it pays little to no attention to infrastructure development, encouraging private sector investment, or mechanizing the agricultural and manufacturing sectors of the economy. Low tax ratios and high consumption expenditures (typically on imported goods) also contribute to inflationary tendencies with regard to spending. However, it should be highlighted that significant profits from domestic and international sales of petroleum products function as multipliers to other economic sectors through government spending, necessitating a thorough investigation of the link between oil revenue and Nigerian economic growth.

Objective of the study

The objectives of the study are;

1. To examine the long-run relationship between oil revenue, oil price volatility and economic growth in Nigeria.
2. To find out the impact of oil revenue, Oil price volatility on gross domestic product (GDP).
3. To examine the impact of non-oil revenue on economic growth and development of the country.
4. 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.

Research Question

The following research question are formulated to guide the study;

1. What is the impact of oil revenue, oil price volatility on gross domestic product (GDP)?
2. What is the relationship between oil revenue, oil price volatility and economic growth?
3. What are the impact of non-oil revenue on economic growth and development of the country?
4. What are the functional long-run relationship between crude oil revenue and increase/ decrease of our GDP within the period under study?

Research Hypotheses

The following research hypotheses are formulated;

H1: Oil revenue and oil price volatility has no significant impact on Gross Domestic Product of Nigeria.

H2: Oil revenue and oil price volatility has no significant impact on Gross National Product of Nigeria

H3 Oil revenue and oil price volatility has no significant impact on Per Capita Income in Nigeria.

H3: There is no long-run impact of oil revenue, oil price volatility on real economic growth in Nigeria.

Significance of the study

The significance of this entire research, is to determine the overall impact of the oil sector to the growth and development of the Nigeria economy. Given the fact that the oil sector is very crucial sector in the Nigeria economy. Oil wealth is a major source of government revenue in most oil producing countries in the world especially in Nigeria. This major source of government revenue has however led to both positive and negative effect on economic growth in these countries as submitted by different researchers at different times. Generally speaking, a unanimous stand as never been taken by these researchers on the impact oil wealth has on economic growth. The study will also serve as a reference to other researcher that will embark on the related topic

Scope of the study

This research work centers on an investigation into the performance of the oil sector on economic growth in Nigeria 1980 – 2021, likewise examine oil price volatility with the same period. This period also showed substantive empirical evidence about how Nigeria have managed it oil revenue to achieve economic growth. This period was also considered adequate to examine regime change(s), political choices, and institutional quality used for managing oil revenue as they affect economic growth in Nigeria. Several proxies have been identified for managing‘ oil revenue in this study which include: (i) saving of oil revenue in a transparently and accountably operated sovereign (oil) wealth fund for future generation; (ii) investment of oil revenue in recognized and diversified portfolios abroad to ensure that real return on investment is added to the capital in (i) above and development of infrastructure and other sectors of the economy; (iii) smoothing out budget imbalances or deficits due to global oil price volatility or non-oil revenue shortfalls; and (iv) control of capital flight from oil revenues due to heavy expatriate involvement in the oil sector

Definition of Operational terms

Economic growth: This is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

Oil sector: This is also known as the oil industry or the oil patch, includes the global processes of exploration, extraction, refining, transporting, and marketing of petroleum products. The largest volume products of the industry are fuel oil and gasoline.

Oil Price Volatility: This is the measure of the tendency of oil price to rise or fall sharply within a period of time, such as a day, a month or a year. Lee (1998) as cited in Mgbame, Donwa and Onyeokweni (2015) defines volatility as the standard deviation in a given period and noted that volatility has a negative and significant impact on economic growth instantly, while the impact of oil price changes delays until a year.

Gross Domestic Product: This implies the market value of all officially recognized final goods and services produced within a country in a given period. GDP per capita is often considered as an indicator of a country‘s standard of living. GDP is related to national account, a subject in macro -economics. It is customarily reported on an annual basis. It is defined to include all final goods and services, that is, those that are produced by economics resources located in that nation regardless of their ownership and are not resold in form

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