Impact of Crude Oil Revenue (COR) On Economic Growth in Nigeria (2000 -2015)

Impact of Crude Oil Revenue (COR) On Economic Growth in Nigeria (2000 -2015)

Abstract

The study examined the impact of crude oil revenue on the growth of the Nigerian economy between
(2000 -2015). 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

I. INTRODUCTION

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).

 

II. 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 1960-2015.

 

 

Objectives of the Study:
The objectives of this study are as follows;
i. To ascertain the extent of economic growth impacted by crude oil proceeds.
ii. To examine the extent of contribution made by multinational oil companies to the development of the
country.
iii. 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 Hypothesis
HO1: Crude oil revenue does not cause economic growth in Nigeria.

 

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