ABSTACT
The petroleum sector is an indispensable body in Nigeria economy. It has remained
the Nigerian biggest revenue earner. It still brings in more than 80% of the foreign
exchange earned by the country. However, this resulted in the shortage of the
quantities of petroleum products consumed locally in the country. Hence, the
problem of development is generally faced in Nigeria. This work will as well go to
show what actually constitute the petroleum subsidy in Nigeria. It will analyze the
cost to the government if not removed and the welfare of the local consumers. It will
also reveal to a greater extent what effect it has on the GDP of the economy, at its full
sustenance, partly to be taken in the issue of petroleum subsidy in Nigeria. The
research work used a dummy variable to explain its finds(1 when there is subsidy and
0 when there is no subsidy).The research work however, looks into the impact of
petroleum subsidy on the consumption of petroleum products in Nigeria and it was
found that there are more consumption of petroleum products with subsidy than
without. Among other recommendations the study opines that government should
diversify the economy as quickly as possible and direct its positives to other sector of
the economy that have been overlooked.
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TABLE OF CONTENT
Title i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of content vi
CHAPTER ONE
Introduction 1
1.1 Background of the study 4
1.2 Statement of research problem 6
1.3 Objective of the study 7
1.4 The research question 8
1.5 Statement of the hypothesis 9
1.6 The significance of the study 9
1.7 The scope of the study 10
CHAPTER TWO
Literature Review
2.1 The theoretical review of the study 11
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2.2 The empirical review of the study 18
CHAPTER THREE
Research Methodology
3.1 Introduction 46
3.2 Sources of data 46
3.3 Method of data analysis 47
3.4 Model specification 48
3.5 Economic aprior test 50
3.6 Evaluation of model 51
3.7 Evaluation based on econometric criteria 52
CHAPTER FOUR
Presentation and analysis of results
4.1 Presentation and interpretation of results 54
4.2 Economic aprior criteria 56
4.3 Statistical criteria 58
4.4 Econometrics criteria 61
CHAPTER FIVE
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Summary of findings, policy recommendation and conclusion
5.1 Discussion of findings 55
5.2 Policy recommendation 56
5.3 Conclusion 75
Bibliography 77
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CHAPTER ONE
INTRODUCTION
Petroleum subsidy is one of the most passionate and controversial issue
of the Nigeria‘s petroleum industry irrespective of the technical, economic,
political aspects and implementation of politics adhering to one pricing system
or another would largely hygiene the ultimate pattern of cost and profit sharing
of the two major parties concern that is the producer (NNPC) and the
consumers.
The momentum generated by the exploitation and exploration of oil has
been regarded by many as a “mixed blessing”. Nigeria started exploring its
petroleum resources in the mid 60’s, however, it was until the early 70’s that
large scale production was realized in Nigeria and by May 1970, had entered
the league of the largest ten oil producers and by1973, oil accounted for over
80% of our foreign exchange earnings.
The presence of petroleum and the greater spending power which
followed has no doubt acted as a catalyst in Nigeria‘s economic development
constraints-finance. Consequently, however, it has given rise to the planning
executive and completion of some worthwhile project and has given a stronger
“twice” to Nigeria in international politics.
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The oil arrival created its own problems, given Nigeria‘s absorptive
capacity conceived in its widest context. There have been adjustments.
However, not only has the petroleum power created illusion in the economy, it
has given impetus to false hope. Many policy decisions were not given through
thought since finances was not a constraint.
The consequences of FESTAC and UDORJI award are still with us. The
enormous financial power also led to the federal government over extending its
activities and responsibilities resulting largely to waste and inefficiency.
Petroleum subsidy has been removed several times in the past years
beginning from 1980 to present, because of the drastic reduction in the
government revenue as a result of oil glut in 1981 and the attendant austerity
situation, also because of the loans collected from the international monetary
fund (IMF). This is to enable the country to meet up with its foreign debts. In
1986 the federal government removed 80% of the subsidy on the price of
petroleum products. The second tier foreign exchange marked (SFEM) and its
successor foreign exchange market (FEM) inflated the remaining 20% subsidy
to nearly (100%) because of the decline value of naira via-a-vis the us dollar.
The federal ministries of information disclosed sometime in 1987 that
government would save or gain more than #6 billion per annum in revenues if
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petroleum products were correctly priced. He analyzed that the cost of
producing one barrel of petrol was #110.79. It was sold locally for #35.48 and
showed a loss of #75.79. It was the intention of government to stop this loss,
but the percentage of subsidy removed will be such that people will suffer
undue hardship. It was contended that the removal would generate additional
revenue to the government. It would also conserve petroleum products for
export and so earn additional foreign exchange.
More so, the heavy subsidy of petroleum products contributed to the
lopsided development of the Nigeria energy system. It was also inferred that the
extra #6 billion could be used to support the economy and provide social
amenities.
Currently the objective of subsidizing, that is to aid the poor- stabilize
prices, promote economic growth which have not been achieved rather NNPC
resorted to massive importation of products to stem the scarcity. The short fall
between the landed cost of imported products and their selling prices are also
the subsidy claim by NNPC. This so called subsidy can be justified for now and
until such a time that the power supply situation in the country improves to the
extent that it enables the ordinary Nigerian to work hard enough to raise his
income level to a level absorb future increase in petroleum products, and until
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there is an acceptable level of infrastructural development to cushion the impact
of increased cost of petroleum products.
It is self-evident that as at the year 2000 there is no subsidy removal or
whatsoever on Petroleum products in Nigeria. Indeed, from current cost of
refining at $10 per barrel sold to the NNPC refineries, the price of petrol (PMS)
should be #15 per liter as against the pump price of #22 per liter. Thus the
current price of PMS includes sufficient government task indicating that no
subsidy exists on the current product prices.
More so, when the naira hopefully recovers its lost grounds, a new
(reversed) twist may be given for the problem of petroleum subsidizes. It goes
to show that whatever the action the government may take on petroleum
between 2000 and the year 2003, it probably will not be the last word on the
matter
1.1 BACKGROUND OF THE STUDY
Nigeria is one of the major sources of crude oil in the world. The
importance of petroleum to Nigeria can only be appreciated when one realizes
the dominant role it plays in our economy. Petroleum products and export is the
main stay of the Nigerian economy providing almost 90% of our export earning
locally petroleum products are used as major sources of energy for the industry.
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Petroleum is an international commodity, which is highly politicized
since variation is supply of the commodity has been known to cause ripples in
the international commodity is evident for the cartel cliché that exist to bring
about a measure of control in the supply price marketing of petroleum.
Petroleum prices are based on the dollar currency.
It has been believed in the past that Nigeria stood ready and in fact
subsidized petroleum products. This accounted for low prices of petroleum
products. this accounted for low prices of petroleum products in Nigeria and
comparative prices obtained in other countries their oil glut which had affected
the Nigerian economy adversely has caused the country to reduce the subsidy
on petroleum products. Of later Nigeria has sought assistance from world
international financial institution.
The aid has required that the nation reduce or reduce or remove entirely
subsidy on petroleum products before any assistance can materialized Thus, so
that the country can earn more income to solve its debt problems.
The dollar removal of subsidy and thus, increase in local prices of
petroleum products has generated a lot of attention lately. All this reduced us to
delve into the study of the economies petroleum subsidies in Nigeria
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1.2 STATEMENT OF THE RESEARCH PROBLEM
During the national debate on the international monetary fund (IMF)
loan, in 1985, most Nigerians oppose to the withdrawal of the so-called
government subsidy on petroleum products in Nigeria, which was part of the
(IMF) conditionality‘s. But the military government rejected the loan; it went
along in 1986 to remove 80% of the subsidy. While the economy was still
battling with the inflationary consequences of this, the second-tier foreign
exchange market (SFEM) was introduced.
In addition to refueling inflation, SFEM introduced other distortions in
the economy. One of such distortion is the pricing of petroleum products in
Nigeria. Therefore, the need to review the domestic price of petroleum products
has become necessary for the following problems.
1.2.1 The domestic price of local products is well below what operates in other
countries including our neighboring countries. This low price level, for
petroleum products has tended to encourage the usage of products as amply
demonstrated in the growth pattern, which is not explainable on the rate of
industrial growth of the country. Furthermore, this price differential has
encouraged active trafficking in products across our borders and shores. The
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result is that government is subsidizing a much larger population in respect of
petroleum products.
1.2.2. The creation of distortions in the consumption of petroleum product.
Subsidy discourages consumers (especially the private sector of the economy)
from being cost conscious.
1.2.3. The current level petroleum prices does not adequately account for the
capital outlay and overhead incurred in manufacturing and distribution of
petroleum product in Nigeria.
1.2.4. The early 80% subsidy withdrawal and the impact it has on the
economy, plus the effect of oil glut on prices of petroleum product, coupled
with inflation which has eroded the expectation of the government in relation to
the generation of appropriate revenue.
1.3 THE OBJECTIVE OF THE STUDY
The research would however intend to investigate on the major effect of
petroleum subsidy on consumption of petroleum product in Nigeria. However,
it will be able to determine how “the reduction in the price of petroleum
products via subsidy” can consequently lead to distortion on the consumption of
petroleum product (wasteful consumption) in the economy, adulteration and
smuggling of petroleum products and however, does not account adequately for
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the capital outlay and cost overhead incurred in the production and distribution
of petroleum in Nigeria could adversely harmfully affect the revenue
generation, economic development and human growth of the economy.
Moreover, i will always attempt to make some necessary policy
recommendation which will enable the Nigerian government to make necessary
economic decision towards the impact of subsidy on petroleum to remove or
allow.
1.4 THE RESEARCH QUESTIONS
The following research questions would serve as a guide to enable this
project achieves its identical problems solution and objectives. Which depends
mostly on the impact of petroleum subsidy on the petroleum production and
consumption in Nigeria and what government should do in order to boost
stability in the economy via petroleum consumption?
The questions are:
• Has Nigerian government given subsidy on petroleum before?
• What are the impacts of the subsidy on petroleum consumption?
• What are the necessary policy recommendations for economic
stabilization via the effect of petroleum subsidy?
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1.5 THE STATEMENT OF THE HYPOTHESIS
Based on the available information and data, this researcher will be able
to test the following hypothesis whether to accept and or reject them. This gives
the researcher the insight to make the decisions and policy recommendations
using a common decisions rules and certain level of significance. It follows:-
1. Petroleum consumption on the average does not have a linear relationship
with the gross domestic products for capital and petroleum subsidy.
Mathematically:
Ho: b1=b2=0
2. Petroleum consumption has linear relationship with the gross domestic
product per capital and the petroleum subsidy. Mathematically:
Ho: b1≠b2≠0
1.6 THE SIGNIFICANCE OF THE STUDY
This work on petroleum subsidy in Nigeria will go a long way to trying
to exposed the problem associated with the petroleum subsidy maintenance and
its removal in the economy.
Meanwhile government, private and individual household sectors are
expected to benefit much from this work. The firm and the household sectors
18
that form the major consumers of petroleum products will be able to either or
not to appreciate government intentions to remove the subsidy on petroleum
products in Nigeria.
This work will as well go to show what actually constitute the petroleum
subsidy in Nigeria. It will analyze the cost to the government if not removed
and the welfare of the local consumers. It will also reveal to a greater extent
what effect it has on the GDP of the economy, at its full sustenance, partly to be
taken in the issue of petroleum subsidy in Nigeria.
1.7 THE SCOPE OF THE STUDY
Based on the work, references are to be made on the production of
petroleum in Nigeria, with special touch on pricing policy and the marketing
strategy of petroleum. There will be general overview on the concept of subsidy
and cost analysis in the petroleum industry, major elements of and basic
assumptions for, the calculation of crude oil and consumption.
There will be a general overview of cost-benefit analysis of petroleum
subsidy in Nigeria, particularly, to what effects its withdrawal and sustenance
will have on the economy, influence of structural adjustment programmed
(SAP) on petroleum subsidy, SFEM and subsidy will be reviewed, the nature of
the country without oil will be looked into.
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