EFFECT OF OIL DEPENDENCY ON NIGERIA’S ECONOMIC GROWTH

CHAPTER ONE

INTRODUCTION

1.0 Background of the study

Nigeria is a natural resource rich country inhabited by an estimated 167 million people and a land area of around 924 thousand square kilometer. It is situated in West Africa surrounded by Cameroon to the east, Benin to the west, Niger to the north and Gulf of Guinea to the South. It is considered the second largest economy in Africa1 and largest oil producer in Africa (OPEC 2012).  The country’s primary productive base includes the production of agriculture, crude oil and other hydrocarbons and is said to account for more than 90 per cent of foreign exchange and 75 per cent of employment (Nigerian National Petroleum Corporation 2012). In the last five years, Nigeria’s economy grew by an average of 7 per cent2 and is primarily driven by the oil sector which accounts for more than 30 per cent of gross domestic product and 70 per cent of all exports. According to Organisation for Economic Co-operation and Development, in 2011, mining and quarrying (including oil) accounted for 33.5 per cent of total GDP. Despite the oil sector’s dominance, agriculture is also an important contributor to the economy accounting for 35.2 per cent of GDP in 2011(OECD 2012). 

In the last five years, GDP has shown very impressive growth with a growth rate of 7.43 per cent in December 2011 and 6 per cent in 2012 (FSDH 2002).

This growth rate makes Nigeria one of the fastest growing economies in the world despite the lack of infrastructure and economic development. While oil and agriculture are the primary contributors to the increased growth, the nonoil sector including telecommunications has showed explosive growth (FSDH 2). Nevertheless, oil continues to account for more than 85 per cent of all exports each year. In 2011, fuel exports were 89 per cent of all merchandise exports. And as Figure 2 illustrates, fuel rents have remained noticeably high and volatile. As an oil dependent country, the volatility of the oil sector greatly affects Nigeria’s government revenue which coincidently determines the extent of the fiscal policy.

With Nigeria’s rapid growth currently becoming stagnant at around 7 per cent and oil prices which continue to be volatile, there is much discussion on the topic of what can be done to ensure continuous growth regardless of the global market. This volatility has come from international shocks caused by financial crises, strikes, wars and decreased oil production. It is because of this volatility in oil prices and Nigeria’s dependence on oil that many economists raise concern about the future of the economy. As alternative fuels become more popular and oil importing countries continue to discover oil deposits, there is a need for the Nigerian economy to look to other, more manageable sources of foreign exchange and government revenue to spur economic growth.

1.1 Problem Statement and Justification

It is estimated that Nigeria has 37.2 billion barrels of oil reserves (as of 2011) and produces an average of 2.13 million barrels per day (EIA 2013). The hydrocarbon sector also accounts for more than 75 per cent of the federal government’s revenue. This suggests that Nigeria is heavily dependent on the oil sector for the majority of government spending, infrastructure and most economic development activities. With the increasing volatility of oil prices, the discovery of oil in other parts of the world and the instability of the global economy, oil imports from Nigeria to major economies such as the United States has steadily decreased. The U.S once imported 9-11% of its crude oil from Nigeria but in the first half of 2012, the share of imported oil from Nigeria to the U.S has dropped to 5% (EIA 2013). The resource based growth strategy followed by Nigeria and many developing countries with an abundance of natural resources appear to not be working. Most Latin American and African countries still struggle to develop, while developed countries follow industrialization strategies which have led to economic growth. The issue of Nigeria’s oil dependency is closely related to that of globalization and commodity prices. While globalization is inevitable, Nigeria and other such countries must find ways to protect its economy from the global shocks including commodity pricing shocks not controllable by the domestic market.

1.2 Research questions 

The research questions postulated for this study include the following:

1.      What are the major causes of oil dependency on Nigeria’s economic growth?

2.      Does a long run relationship exist between oil dependency and economic growth in Nigeria?

3.      What are the factors that could minimize Nigeria’s over dependency on oil revenue?

1.3 Objectives of the study 

The broad objective of this study is to examine the relationship between oil dependency and the Nigerian economy. However, the study will pay particular attention to the following specific objectives:

1.      To assess the causal relationship between oil revenue and Nigeria’s economic growth.

2.      To determine long relationship between oil dependency and economic growth in Nigeria.

3. To analyze the implication of over dependency on oil revenue in the country.

1.4 Research hypotheses

For the purpose of this study, the following research hypotheses will be tested. 

1.  Ho: There is no significant causal relationship between oil revenue and economic growth, in Nigeria

Ho: There is significant causal relationship between oil revenue and economic growth, in Nigeria

2.   Ho: There is no significant long run relationship between oil dependency and economic growth in Nigeria

H1: There is significant long run relationship between oil dependency and economic growth in Nigeria

3.  Ho: Overdependence on oil revenue has more negative effect than positive effect on Nigeria’s economic growth.

H1: Overdependence on oil revenue has more positive effect than negative effect on Nigeria’s economic growth. 

1.5 Significance of the study 

The study is significant because it assesses the impact of Nigeria’s overdependence on oil revenue. Also, the study will help direct attention of the federal government and the oil sector on the need for diversification into other sources of revenue like agriculture, for economic growth.  It will also serve as a reference for future researchers in the same field. 

1.6 Scope of the study 

The study is on assessing the impact of overdependence on oil revenue to Nigeria economy. The study focuses on the impact of overdependence on oil revenue to Nigeria economy, factors that could minimize Nigeria’s overdependence on oil revenue, the level of importation of petroleum products in Nigeria and problems encountered by the Nigerian oil sector. However, the study will be carried out in the Federal Ministry of Finance, Abuja.

1.7 Limitation of the study

The main constraints of the study include the following: 

Time: Due to the limited time given for the study, the researcher could not get all the required information needed for the study. 

Finance: The researcher has not got enough money to embark on the study and therefore could not visit places where information relevant to the study could be obtained. 

Attitude of the Respondents: The attitude of the respondents affected the research work because some of the respondents were unwilling to co-operate with the researcher. They felt they have nothing to benefit from the study. 

1.8 Organization of the research work

The paper is organized as follows:

 - Chapter two reviews the literature from mainstream and structural economists on topics of natural resource dependency, economic growth and industrialization which is directly related to the topic of the paper. The result of the literature review is synthesized into a brief summary.

 - Chapter three gives an overview of the Nigerian economy and an overview of the natural resource and industrialization based policies which were meant to promoted economic growth and development.

- Chapter four analyzes the macroeconomic data available for Nigeria regarding GDP, oil prices and manufacturing.

- Chapter five presents the conclusion and recommendations.   

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