The Impact of Oil Price Instability on the Growth Process of the Nigerian Economy

Abstract

The oil sector has not always been of importance as it is now. Moreover, beginning with the twentieth century, the importance of oil has increase tremendously a decade or two ago it over took coal as the major source of energy in the world. Petroleum crude oil as we all know today is a dark, evil smelling, vicious liquid composed of a mixture of a number of chemical product mainly carbon and hydrogen hence he name hydrocarbon. There are other minerals such as oxygen and sulphur. Nigeria was not depending on the oil sector as the major source of revenue. Prior to its advent, agriculture has been the backbone of the Nigeria economy. in fact between 1960 and 1966, agriculture contributed about 58.9% of the GDP while it was providing employment for more than 90% of the nation’s labour force. However, following the discovering of oil and the sub-sequent oil boom in 1970s agriculture lost its pre-eminent position to mining and specifically petroleum. In terms of export earnings, oil contributed 509.6 million (about 57.6%) to the Nigeria economy in 1970. Production also grew from over 3 billion barrels in 1956 to about 823.3 billion in 1974.

Within the last 50 years, while total consumption has risen fourfold, world consumption of oil has risen by a factor of 16, currently gas and oil accounts for almost 70% of the world energy consumption. The energy transition from coal to oil was partly a response to technological development but even more significant was the steady decline in the real prices of oil. Nigeria has a very large reserve of crude oil and mineral gas. Oil was first found in commercial quantities at Oloibiri in the Niger Delta. There were further discoveries at Afam and Boma which established the country as an oil producing nation. Its oil fields are located in a territory south of a line that can be drawn through Benin City in Edo State, Owerri in Imo State and Calabar in Cross River State. The highly concentrated drilling areas and the greatest oil producing areas are around Port-Harcourt in Rivers State, and Ughelli and Escravos in Delta State.

The analysis of oil exploration in Nigeria dates back to 1908 with the coming of a German firm called the Nigeria Bitumen Corporation whose activities terminated with the outbreak of the first World War in 1914, Shell D’ Archy which in 1956 was transformed into Shell-BP resumed prospecting activities in Nigeria, and was covering the entire country. On 4^th November, 1938, until 1955, Shell-BP was the only company that had a license to serach for oil in many parts of the country. With time more companies have joined in prospecting for oil and among them are: Mobil oil, Chevron oil, America Oversea Petroelum Company, Agip Oil, Esso Oil, Tennesse, Ashland, and Phillips, Nigeria owned National Oil Co-operation and Henry Stephens which is a joint venture between Nigeria and Japan. The output of crude oil in Nigeria since its discovery by Shell-Bp has risen from 229,629 million barrel of a record of 815 million barrel in 1974. The dramatic rate of increase in production has been the result of a higher success rate in the oil companies’ search for new oil fields particularly after 1965, and the increased output rate from the existing oil wells. In 1958, estimated resources given by Shell-BP stood at 22.23 million barrel with a life span of 12 years. Since then with increased production of crude as a result of prospecting, drilling and exploration by some other companies estimates of reserves have been increasing yearly and by 1989 production had hit 625,456,000 barrel while export stood at 525,869,000 barrel.

It is important to point out that because of the need to conserve foreign exchange, job opportunities were created to some extent, in addition to other multiplier effects derivable from setting refineries locally, the federal government in 1962 in awarded a contract for the construction of a refinery at Alesa Eleme, Port-Harcourt, River State. Prior to the construction of oil refinery in Port-Harcourt in 1964 all oil produced was exported. However, after completion of the refinery, part of it was retained to be refined domestically and the other part exported. Between 1970 and 1978, the nation experienced an upsurge in demand for petroleum product averaging a yearly increase of 23.4 percent. Thus in 1978, the Warri refinery was officially opened with a total capacity standing at 100,000 barrels per day. Continued demand pressures led to the building of a third refinery at Kaduna in 1980 with initial capacity of 100,000 Bd but with a potential capacity of 260,000Bd. A fourth refinery has been constructed near Port Harcourt.

Since the first discovery in 1956, with initial production of about 6,000Bd Nigeria’s oil production had been on steady increase from 0.55 million Bd in 1966 to 0.96 million Bd in 1970 and to 2.0 million Bd in 1972 till it reach a peak of 2.4 million Bd in 1979. This steady increase in oil production corresponded with the rise in the importance of petroleum in the Nigeria economy. Today, petroleum provides more than 90% of our export earnings and Nigeria has grown to become the sixth largest oil producing country within the Organization of petroleum countries (OPEC). Hence, Nigeria like other oil exporting countries, using the traditional national accounts framework has confused oil proceeds as income against the correct interpretation of being as asset and a component of wealth. This conceptual confusion is a serious issue embodied with implications and signals for making policies and taking decisions that affect several important variables that have national and international significance Anyanwu (1993).

Since the arrival of oil in Nigeria, petroleum has remained the backbone of the Nigeria Economy. In other words, Nigeria as a nation is fully dependent on the revenue generated from oil exports. This revenue is a function of price oil in the international market. Empirical analyses have proved that there are instabilities in world’s oil prices and these instabilities have different impacts on various countries depending on how dependent the economy is on oil. So, in a country like Nigeria which this study is based on, more than 80% of her export revenue is generated from oil. As a result of this oil price instabilities have adverse effects on its economy. While positive changes leads to an increase in government revenue its negatives counterpart manifest in form of budget deficit.

The oil sector in Nigeria is an enslave sector employing an infinitesimal portion of the labour force and having little forward and backward linkages with the rest of the economy. There is need for government to diversify the economy to reduce the adverse effects of oil instabilities on the economy.

The impact of petroleum in the overall economy of Nigeria is so great that when petroleum sneezes, the nation not just the economy alone catches cold and trembles to crumbling point. This has become more pronounced because of the over-dependence of the economy on this sector. In the oil boom ear of the 1970s, the government spree on consumption activities and execution of white elephant projects, the result had been chronic budget deficit. But since the global glut and subsequent fall in the price of oil, the Nigerian government has been finding it difficult to adjust with the economy realities of the time. The now permanent feature of belt tightening and belt loosening inherent in the country’s budgeting planning and policies is as a result of the over reliance in the petro-oil culmination in the implementation of the structural adjustment programme (SAP) in 1986. The impact of oil instabilities on government revenue is so great that the fourth development plan almost hit the rock. For example in that which was to last for four years (1981-1985) with a capital investment target of 82.2 billion all the resources needed to accomplish this plan was based on a projected oil production of over 2 million barrel per day and selling price of over $40 per barrel during the plan period.

Not fast was the plan launched in 1981 than the world oil market weakened. By 1983, the level of Nigeria’s oil production had dropped from 2.1 million barrel per day in 1983 while the selling price also fell from $40 to $30 per barrel during the period; the plan had to be reviewed. This study is expected to assist the government, policy makers, individuals and development planners to plan for the future especially in the diversification of the productive base of the economy with a review to averting the danger of over dependence of oil as the major source of foreign exchange earning.

That there is need to diversify the production base of the Nigerian economy cannot be overemphasized. This has become necessary in view of the current move by the international community especially the west to impose economic section especially oil sanction on Nigeria. the goals of this study however, is to examine the genesis of oil price instabilities, to examine the instability in oil price and the condition for stability, to examine ways and means of diversifying the economy with a view to removing the over dependence of government on this sector and to show the extent to which fluctuation of oil prices affect the Nigeria economy in terms of GDP, government revenue, balance of payment equilibrium and economic growth.