OIL PRICE FLUCTUATIONS, OIL REVENUE, AND WELFARE IN NIGERIA

OIL PRICE FLUCTUATIONS, OIL REVENUE, AND WELFARE IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1         BACKGROUND TO THE STUDY

A country with the population of over 170 million people, endowed with crude oil ought to have been prosperous. This is because with the value and demand attached to this natural resource, the revenue being generated from it is expected to be sufficient enough to provide for the populace and also, to diversify the economy. This is the case of Nigeria that relies mainly on crude oil for her revenue, thereby, regarded as a mono-cultural economy. The overdependence on crude oil for revenue in Nigeria in the face of oil price fluctuations is likely to affect economic planning as oil price is always a benchmark for the nation’s annual budget.

After the discovery of oil in commercial quantity in 1956 at Oloibiri, it became an exportable commodity in 1958. Before this period, Nigeria’s main exports were agricultural commodities such as palm oil, cocoa, groundnut, cotton, and rubber; which was formally the mainstay of the economy. Agriculture was then overtaken by the discovery of oil in commercial quantity. The emergence of oil on the Nigerian economy has affected agriculture so much so that the country even imports agricultural products. The high import price index relative to the export price index makes matters worse. This creates tension on welfare, as the disposable income of the masses is further depleted through the increase in the price of products they purchase for consumption. To support this statement, Mordi (2006) noted that Nigeria is highly dependent on imports for both consumption and production. This hampered the performance of the manufacturing sector and led Nigerian economists towards thinking that the nation is bedevilled by a phenomenon known as “Dutch disease syndrome” (Englema, Duke, Ogunleye, & Isma’il, 2010).

According to Englema et al. (2010), the initial production level of crude oil stood at 1.9 million barrels per day (mbpd) and later rose to 2.35 mbpd in the early 21st century. However, the socio-political unrest in the Niger-Delta region of Nigeria caused the production rate to fluctuate between 1.26 and 1.8 mbpd within the period 2007 and 2010. Bankole and Shuaibu (2013) noted that the external reserve and balance of payment of an oil exporting country improves when international oil prices increase and vice versa.

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The fluctuations in oil price make it difficult to discern the direction of the economy as Nigeria is both an oil importing and exporting country in terms of refined oil and crude oil respectively. These tend to have an influence on her revenue and foreign reserves which further led Omojolaibi (2013) to opine that in an oil producing/exporting country like Nigeria, the behaviour of government spending of oil revenue becomes the most important feature of the economy. Thus, this makes monetary and fiscal policy highly dependent on oil price (Rosser & Shechan, 1995).

The high dependence on oil exports in Nigeria supports a dramatic increase in oil revenue. Akinlo (2012) noted that the share of oil revenue in federally collected revenue increased from 26.3 percent in 1970 to 85.8 percent in 2005; which later dropped to 78.7 percent in 2009. Implicitly, the difference in percentages is directed towards the non-oil export revenue. The decrease in oil revenue as stated was occasioned by the slump in oil price in 2008 from US$147 per barrel in the mid-2008 to US$46 per barrel (Akpan, 2009).

Oil price fluctuations which logically affect oil revenue are mainly caused by demand and supply conditions. For instance, the upheaval in the Middle-East led to an increase in production quota by the organisation of petroleum exporting countries (OPEC). Consequently, it led to excess supply which brought crude oil price down. But initially, the price of oil was high due to its short supply and corresponding high demand. Akinleye and Ekpo (2013) pointed out that Nigeria is exposed to unanticipated fluctuation in oil prices as a result of massive importation of refined petroleum products since the collapse of local refineries in the late 1980’s. Currently, the country imports about 85 percent of refined petroleum products for local consumption. The collapse of the country’s local refineries to meet its refining capacity further worsens the welfare of the workers, who were hitherto employed in the oil sector and the masses in general. The imported refined petroleum products come with a value addition, which makes the price of these products higher than when produced locally and this affects the domestic income of the masses coupled with the unemployment created as the result of the low functioning refineries. To improve the welfare of the masses and alleviate poverty in the economy, the federal government in the mid-1980’s introduced consumer subsidy in the Nigerian energy sector. Consumer subsidies are common in developing countries in a bid to reduce poverty.

As a result of these international oil price fluctuations which tend to affect the economy, the Federal Government of Nigeria created a special account that will accommodate savings of

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all oil revenue in excess of the benchmark price set in the annual budget. This account is known as the Excess Crude Account (ECA) and was set up in 2004 under the administration of former president Olusegun Obasanjo. The ECA has been in existence since then till now but there have been controversies on the utilization of the fund, which have made top headlines in Nigeria. This account is built on the difference between the benchmark and actual crude oil price. If the actual price is lower than the benchmark price, then there will be nothing going into the account and vice versa. This also has implication on the budget of Nigeria. The ECA forms part of the country’s external reserves, thus its depletion affects the external reserves of Nigeria. In a similar way, another national account known as the Sovereign Wealth Fund (SWF) was created in 2011 to save money which typically comes from a nation’s budgetary surplus. This is a long-term instrument to further diversify and generate wealth for the future generations so as to attain sustainable development (Bassey, Alobari, Naenwi, Dimoji & Onwuneme, 2014). However, the ECA is a short-term instrument designed to cushion shortfalls in oil revenue that may come from low production, oil theft or fall in crude oil price on the international market (Budina & Van Wijnbergen, 2008). The ECA is intended to ensure that government expenditure is maintained at a sustainable level (Obinyeluaku & Viegi, 2008). According to Akinlo (2012), the huge revenue from oil enables the governments of oil producing countries to spend and invest massively without recourse to taxation. Thus, if oil revenue is properly utilized, it would serve as a “big push” for development. Such development extends to the accumulation of foreign reserve which tends to attract foreign direct investment (FDI). Specifically, FDI inflows into developing countries not only help in increasing the stock of capital but may also assist in boosting labour productivity and incomes in the host country. Ramirez (2006) observed that a consequent follow up on these, could probably enhance the level of output, employment creation, and general improvement in welfare.

1.2         STATEMENT OF THE PROBLEM

Notwithstanding the blessings from oil, Nigeria is undoubtedly still in a state of crisis. This is evidenced by the inadequacy of infrastructural facilities, capacity underutilization of local refineries, high poverty and unemployment levels (Akinlo, 2012; Udoh, 2014). Worthy of note is a generalized belief that petroleum dependent countries appear to have records of political instability and high level of corruption (World Bank, n.d.). These in one way or the other may affect the welfare of the citizens at the macro level.

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The World Bank (2010) report as cited in Ogbonna and Appah (2012) reveals a shocking outcome of Nigeria’s oil resource endowment. It stated that as a result of corruption, 80 percent of oil revenue (which is almost its total sum), benefited only 1 percent of the population. This invariably means that 99 percent of Nigerians do not benefit from oil proceeds according to the World Bank report.

A touch with data reveals that Nigeria and South Africa (which is not an oil producing country) had a real GDP per capita of US$1055.84 and US$5916.46 respectively in 2013 (World Bank, 2015). This is evident that the windfall from oil is not properly utilized for the well-being of Nigerians. South Africa’s population is one-third of that of Nigeria. Even under such estimation the real GDP per capita of the former supersedes the latter with a reasonable margin. This solidifies what economists call “resource curse” from the Dutch disease syndrome phenomenon.

Oil price has been fluctuating over the years in an unpredictable pattern (as depicted by figure 2 in Appendix D). The fall in oil price in 2008 affected the oil revenue by shrinking the value of exports in Nigeria to US$28.9 billion in 2009 from US$76.3 billion in 2008. Thus, the Central Bank of Nigeria (CBN) had to embark on “emergency” measures to augment the liquidity of the system by easing monetary policy rate from 9.5 percent to 8 percent. This move by the CBN was found to be inflationary as Nigeria’s core inflation rose from 2.5 percent in January 2008 to 8 percent in January 2009 (ThankGod & Maxwell, 2013). This tends to affect the welfare of citizens as civil servants may agitate for a wage increase in commensurate with the situation (inflation) at hand, which government might not subscribe to. Therefore, this reduces the standard of living and increases the cost of living in the country. In addition, fluctuations in crude oil price most especially a fall, is likely to make the exchange rate more volatile, stagnate savings, increase the national debt, cause a threat in capital expenditure and create unemployment in the public sector thereby leaving the national economy at the mercies of private individuals.

It is no more news that the foreign exchange earnings are tied to oil price coupled with the shortened revenue in terms of dollars which puts naira under pressure. With the rapid devaluation of the naira by the monetary authority from a maintained level of ₦155 to over ₦190 per dollar currently, given a fall in oil prices, Nigeria will earn even less revenue from oil and gas exports and importation of household items will be more expensive. This increases the burden on Nigerians and as importers pass such increase in price to the citizens,

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national consumption may likely reduce. The consequence of these goes further to affect national savings as a whole, even as Nigeria will not be able to have additional revenue in the Excess Crude Account (ECA) and Sovereign Wealth Fund (SWF), coupled with high recurrent expenditures. According to Fosu (2010), in the year 2007, the amount in the ECA reached US$17.3 billion from US$5.1 billion in 2004. However, the easygoing structure of government in Nigeria permitted extensive ad hoc withdrawals, depleting the ECA balance by about 16 billion dollars just within the space of 18 months. More so, Olufemi and Akinwumi (2015) pointed out that Nigeria is expected to have an inflow of ₦23.79 trillion (US$166.87 billion) in the ECA going by the Nigerian National Petroleum Corporation (NNPC) of actual production and monthly oil price within the period of 2007 to 20014. Olufemi and Akinwumi further noted that despite frequent withdrawals, there is still an unaccounted amount of about US$82.46 billion (₦11.56 trillion) which ought to be in the ECA. It will thus not be wrong to say that economic rationale which should have governed the ECA has been sacrificed on the altar of political expediency.

On the part of Sovereign Wealth Fund (SWF), the International Institute of Petroleum, Energy, Law and Policy (IIPELP, 2015) pointed out the top ten countries with their respective asset value of SWF. These countries are China - US$1,534 billion, United Arab Emirate - US$1,214.8 billion, Norway - US$824.9 billion, Saudi Arabia - US$673.9 billion, Kuwait - US$592 billion, Singapore - US$537.6 billion, Hong Kong - US$417.9 billion, Canada - US$401 billion, Qatar - US$256 billion and Kazakhstan - US$156.5 billion. Of these countries mentioned along with their individual SWF, seven are owned by major oil producing countries. Unfortunately, Nigeria, an oil producing country ranks 36th in terms of the asset value of SWF (with US$2.9 billion). This suggests that Nigeria is quite unable to provide stabilization in government finances and therefore may find it pretty difficult in calming economic crisis especially during periods of oil price slump.

The above circumstances create a scenario of depleting the external reserves and such a situation might possibly result to debt servicing to finance budget deficit (this is as a result of the national budget being benchmarked on oil price). With the stagnated Excess Crude Account and Sovereign Wealth Fund, raising debts becomes the glaring alternative. Nigeria is a country where recurrent expenditure outweighs capital expenditure. Kanu, Ozurumba and Ihemeje (2014) noted that 68 percent of total government spending goes to recurrent expenditure, while the remaining 32 percent goes to capital expenditure. This is not good enough for a nation that is aspiring to grow and improve the living standard of her populace.

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