Petroleum and the Nigeria Economy

Abstract The study examines the impact of petroleum on economic growth of the Nigerian economy. Data covering the period 1980-2011 was collected from the Central Bank of Nigeria Statistical Bulletin, and transparency international Agency annual publications and analyzed using econometric approach. The stationary status of the time series data was examined using Augmented Dickey Fuller test. The regressand is Real Gross Domestic Product (RGDP), The regressors are Foreign direct investment (FDI), Oil revenue (OIL), Corruption index (CI), External debt (EXDEBT). The series attained stationary after differencing.

The Johansen cointegration test was conducted to ascertain the long run equilibrium condition of the variables in the model. The variables were cointegrated because four cointegrating equations were found. The Parsimonous model was established to account for the short run dynamic adjustments required for stable long run equilibrium. It was discovered that the variables: oil revenue and corruption index impacts negatively on Real GDP, while FDI and EXDEBT have positive impact on the growth of the economy. This means that the resource curse theory is proven to be true in Nigeria.

The study concludes that, if the petroleum industry bill is passed and implemented to the letters, there exists hope for the Nigerian nation. Keywords: petroleum, economic growth, Nigeria Citation: Baghebo, M. and Atima, T. O. (2013). The impact of petroleum on economic growth in Nigeria. Global Business and Economics Research Journal, 2(5): 102-115. 1. INTRODUCTION The petroleum industry in Nigeria is the largest industry. Oil provided approximately 90 percent of foreign exchange earnings and about 80 percent of Federal revenue and contributes to the growth rate of Gross domestic product (GDP).

Since the Royal Dutch Shell discovered oil in the Niger Delta in 1956, precisely in Oloibiri, in Bayelsa state, the oil industry has been marred by political and economic strife largely due to a long history of corrupt military regimes, civil rule and complicity of multinational corporations, notably Royal Dutch Shell. Six oil companies- Shell, Elf, Agip Mobil, Chevron and Texaco dominates the oil industry in the country. Together, they hold some 98% of the oil reserves and operating assets. A range of 50 others have minor interests, some of which were recently acquired. There are three major actors in the Nigeria oil industry.

They are: the ministry of petroleum resources, the Nigerian National Petroleum Corporation (NNPC) and its subsidiaries, the oil prospecting companies made up of the multinational companies and indigenous companies together with their subsidiaries (Baghebo, 2012). The operations and activities of petroleum are regulated by the Federal government of Nigeria; she does this through the enactment and implementation of bills and acts. Several bill and act have been passed to check petroleum exploration and exploitation, they include among others: the petroleum act of 1969 (CAP 350), the oil pipeline act 1966, the land use decree 1978 etc.

The recent 2012 petroleum industry bill is a comprehensive development blueprint, below are the objectives of the bill: ? Create a conducive business environment for petroleum operations; ? Enhance exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigeria people; ? Optimize domestic gas supplies, particularly for power generation and industrial development; ? Establish a progressive fiscal framework that encourages further investment in the petroleum industry while optimizing revenues accruing to the government; ?

Establish commercially oriented and profit driven oil and gas entities; ? Deregulate and liberalize the downstream sector; ? Create efficient and effective regulatory agencies; ? Promote transparency and openness in the administration of the petroleum resources of Nigeria; ? Promote the development of Nigeria content in the petroleum industry; © Global Business and Economics Research Journal. Available online at http://www. globejournal. org Global Business and Economics Research Journal ISSN: 2302-4593 ? Protect health, safety and the environment in the course of petroleum; and ?

Attain such other objectives to promote a viable and sustainable petroleum industry in Nigeria (The Petroleum Industry Bill, 2012). The elegant and robust objectives of the bill if taken at face value means hope for the Nigerian people. But past experience of the insincerity in achieving set objectives by the Nigeria government leave many in skepticism. The rest of the paper is organized as follows: section two is a review of related literature. Section three is theoretical framework underlying the study. Analytical technique is contained in section four.

Methodology is in section five. Section six is model estimation. Data presentation and Interpretation of results is in section seven while section eight contains policy recommendations and conclusion. 2. LITERATURE REVIEW Petroleum is no doubt a predominant source of Nigeria's revenue and foreign exchange. The petroleum industry in Nigeria is divided into two main segments. The upstream and the down stream sectors. The upstream refers to activities such as exploration, production and delivery to an export terminal of crude oil or gas.

The down stream on the other hand encompasses activities like loading of crude oil at the terminal and its user especially transportation, supply trading, refining distribution and marketing of petroleum (Dominic, 1999). Previous studies on the Nigeria economy in the last decade show that the petroleum industry has been playing a dominant role and occupies a strategic position in the economic development of Nigeria (Azaiki and Shagary, 2007). This is evidenced by the total oil revenue generated into the Federation Account from 2000 to 2009 which amounted to N34.

2 trillion while non-oil was N7. 3 trillion, representing 82. 36% and 17. 64% respectively. The mean value of oil revenue for the 10 year period is N3. 42 trillion compared to non-oil revenue at N732. 2 billion (Central Bank of Nigeria, 2011). Further evidence was ten year’s average crude oil and condensates production of 832,866,752. 1 barrels from 2000 to 2009. The importance of crude oil to the economic development of Nigeria cannot be over emphasized, Nigeria gained an extra $390 billion in oil-related fiscal revenue between 1971 and 2005 (Central Bank of Nigeria, 2011).

Unfortunately, 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 (Baghebo, 2012). Irrespective of Nigeria’s huge oil wealth, the country has remained © Global Business and Economics Research Journal. Available online at http://www. globejournal. org Global Business and Economics Research Journal ISSN: 2302-4593

one of the poorest in the world. In particular, the Niger Delta which produces the oil wealth that accounts for the bulk of Nigeria’s earnings has also emerged as one of the most environmentally degraded regions in the world evidenced from the World Wildlife Fund report released in 2006 (Ekaette, 2009). 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.

Over all, there has been poor performance of national institutions such as power, energy, road, transportation, politics, financial systems, and investment environment have been deteriorating and inefficient. Outside of the energy sector, Nigeria’s economy is highly inefficient. Moreover, human capital is underdeveloped. Nigeria’s economy is struggling to leverage the country’s vast wealth in fossil fuels in order to displace the devastating lack that affects about 57 percent of its population.

In 2009, persistent inflation and environmental degradation led to deprivation of means of livelihood and other socio-economic factors to the people of Niger Delta which is the major oil producing region in Nigeria. Despite the fact that crude oil has been the source of Nigerian economy, the economy is faced with high rate of unemployment, wide spread oil spillage, increasing poor standard of living, low per capita income and high rate of inflation which (Baghebo, 2012).

Bawa and Mohammed (2007) assert that “Nigeria with all its oil wealth has performed poorly, with GDP, per capita income today not higher than at independence in 1960”. This means that an average Nigerian was better off before independence in 1960. Bawa and Mohammed acknowledged poor performance of Nigeria’s economy but did not provide any empirical evidence or percentage figures by way of hypotheses testing and thereby confirming the fact that some of their works must have been based on assumptions that cannot be statistically verified and generalized (Baridam, 2008). 3.

THEORITICAL FRAMEWORK This section provides a succinct summary of the theoretical literature on the nature of the relationship between resource abundance and development. The purpose is to first present a theoretical account of the Benign perspective on the issue of resource abundance and economic progress. Then, the various channels through which oil may impact growth and development follow each perspective. The study test the null hypothesis that there is no significant positive relationship between petroleum and economic growth in Nigeria. 3. 1 The Benign Perspective:

Natural Resource Abundance Beneficial to Growth © Global Business and Economics Research Journal. Available online at http://www. globejournal. org Global Business and Economics Research Journal ISSN: 2302-4593 The conventional wisdom before the late 80s was that natural resources had positive effect on development (Baghebo, 2012 and Rosser, 2006). This view was shared by many development theorists and neo-liberal economists until the resurgence of new view in the 80s that claimed that natural resource abundant was not a blessing to the developing countries.

The basic argument of the benign perspective is that natural resource endowments would assist the developing countries to transit from the stage of underdevelopment to that of industrial ‘take-off’, as obtained in such countries as Britain, the United States and Australia. Essentially, the various channels through which abundance of natural resources like oil sector could contribute to the economies of the oil producers have been identified in the literature. One, the huge revenues from oil enables the governments of the oil producing countries to spend and invest massively without recourse to taxation.

Revenues from oil, if properly utilized, could serve as a “big push” for development. This channel is especially important for developing countries where paucity of capital often constitutes a major hindrance to growth and development. Moreover, the huge foreign exchange earnings from oil exports, apart from being used for importing raw material, intermediate and capital goods for production in the non oil sectors could equally assist in boosting the foreign reserves of the oil exporting countries.

The accumulation of foreign reserves can be seen as collateral which the oil producing economies can use in attracting foreign investment (Dooley et al. , 2003). Moreover, such holding can be seen as a costly self-insurance strategy to smoothen vulnerability impacts of domestic and foreign shocks and to intervene in the foreign exchange market. Oil sector can also contribute to development in the oil rich economies through provision of intermediate inputs to the rest of the economy.

These intermediate inputs include crude oil, gas and liquid feed stocks, as well as oil and gas into the refining, petrochemical and electricity and energy intensive industries respectively (Al-Moneef, 2006). This channel is critical to growth and development in the developing countries. For instance, many outputs of the petrochemical industries are crucial to the development of the manufacturing industries. Likewise, provision of electricity and other basic utilities at favourable prices is of considerable importance in the process of growing and nurturing the service and manufacturing sub sectors.

Growth and development in the oil rich economies could be enhanced through the market contribution from oil. The market contribution relates to the demand by oil sector for various inputs of goods and services provided by local sources. Generally, as a result of oil production, refining and distribution, there is tendency for oil sector-related services to spring up. These oil sector-related services will not only provide opportunity for employment but also serve as sources of earnings for the operators. Asides © Global Business and Economics Research Journal. Available online at http://www. globejournal. org