AN ANALYSIS OF THE EFFECTS OF DEREGULATION OF PETROLEUM PRICE ON NIGERIAN ECONOMY

PROPOSAL

1.1             Background to the Study

The Nigerian oil industry has continued to play a significant role in the nation’s drive towards economic growth and development. The sector has become the mainstay of the economy, pivoting other sectors and accounting for about 90% of the country’s foreign exchange earnings (Aghalino , 2012). Nigeria, OPEC’s sixth largest crude oil producer, with her abundant natural resources still import and pay international prices for a natural resources it has in abundance. The Federal Government complained that the cost of subsidizing importation which was estimated to be as high as $1.5 billion annually (Ibanga, 2006) has become unbearable to sustain, and that deregulation of the downstream sector would attract investors into the oil and gas industry and provoke competition which would result in reduction in the prices of petroleum products.

In recent years, deregulation of the downstream sector of the oil and gas industry has become a controversial issue in Nigeria. In 2003, the Federal government bedeviled with fiscal deficit, high external debt, unfavorable balance of payment and inability to sustain the huge subsidy for fuels announced her intention to deregulate the downstream sector of the petroleum industry (Adagba, Ugwu, & Eme, 2001). Since the announcement, Nigerians have lost count about how many times organized Labor went on strike over downstream oil deregulation policy.

The government believes that subsidy for fuels distort the system, and encourages corruption; that deregulation will offer more benefits to Nigerians because the oil market will become more competitive and efficient, and the resulting benefits will be passed on to Nigerians in the form of lower product prices, better quality of service and ease as well as constant availability of the product (Yar’adua, 2009). Odidison (2003) stated that deregulation would bring sanity into the oil and gas industry since smuggling of petroleum products, vandalizatoin of pipelines and all other vices in the sector will be totally removed. According to him, domestic price of oil will increase and the smugglers being irrational are likely to reduce their activities. Consequent upon this, the neighbouring countries that rely on smuggled petroleum products would experience scarcity and as such would be forced to take the legal and normal route to buy fuel. Akinmade (2003) explained that the emergence of the private refineries will create a better maintenance culture of the refinery and this will likely reduce unemployment by employing both skilled and unskilled labour. They would also engage in the training of manpower in Nigeria and thereby contribute to human development in the country.

In the other hand, some scholars and pressure groups in the country strongly believed that deregulation of the downstream oil sector will have negative effects on the Nigeria economy. Eson (2002) sees deregulation in Nigeria as a measure that might give marketers of petroleum products the opportunity to fix prices, which in most cases lead to exploitation of the average Nigerian. Ogunbodede, Ilesanmi and Olurankinse (2010) explained that deregulation which results in increase in fuel price have a multiplier effects on the economy; that is, the ensuing inflation would rubbish the income of the worker in such a way that greater percentage of their income would be spent on consumption. This in effect limits their ability to save and thus leads to little or no incentives to save.

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Therefore, for this paper, multivariate linear regression model of the Nigerian economy is constructed to examine the impact of downstream oil deregulation policy on Nigerian economic performance.

1.2       Statement of the Problem

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1.2             Objectives of the Study

The primary objective of the study is to establish whether or not there is a need for a different perspective on or understanding of the generic effects of deregulation of petroleum price on Nigerian economy.

In order to achieve the primary objective of understanding the effect of deregulation policy on Nigerian economy, the study focuses on specific secondary research objectives that support the accomplishment of the primary objective. The secondary research objectives of the study are the following:

  1. To assess and validate the extent of deregulation of downstream oil on employment generation in Nigeria
  2. To assess and validate the strength of the relationships between petroleum prices and inflation in Nigeria
  3. To assess and validate the strength of the interrelationships of deregulation of downstream oil and curbing of corruption in the oil sector;
  4. To establish the relationship between deregulation of downstream oil sector on the standard of living of Nigerians

1.4       Research Questions

The research questions have been formulated to address the research problem and research objectives as discussed above. There are four principal research questions to be answered in this study. These are presented below:

  1. To what extent would deregulation of downstream oil sector have on employment generation in Nigeria?
  2. What is the strength of the relationships between petroleum prices and inflation in Nigeria?
  3. Is there any interrelationship between deregulation of downstream oil and curbing of corruption in the oil sector?
  4. Does deregulation of downstream oil sector have any effect on the standard of living of Nigerians?

1.5       Research Hypotheses

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1.6       Scope of the Study

The focus of this study is on the effects of deregulation of petroleum price on Nigerian economy. It looks at oil policies in Nigeria from 1960s up to 2011. It also covers the problems and prospects of deregulation of the downstream sector on Nigerian economic growth and development.

1.7   Significance of the Study

            A major concern of government is to develop the economy. This research therefore becomes important for several reasons.

            First, it will provide information on the nature of deregulation on the downstream sector and why government should get all the four refineries working at all costs. This will help to reduce the huge subsidy burden and the money spent on refined fuel importation will be diverted to infrastructural development for the economy.

            Second, it will complment the existing body of research on the need for government encourage more private sector participation so that better equipped oil infrastructures (refineries and pipelines) can be built and the cost of refining crude oil and its distribution will reduce.

            Third, it will provide information on agencies such as Petroleum Product Regulatory Agency (PPPRA), on how to fix prices of petroleum products, as well as prosecute corrupt officials or firms that wants to make abnormal profit

            Finally, it will augment existing body of knowledge on the need for government and other stakeholders to chemmating the issues of insecurity, Godfatherism, corruption, tribalism, ethnicity, religious affiliation and nepotism, but embracing meritocracy and qualification in employment and management of public enterprises.

1.8       Limitations of the Study

Except authorized, staff and managers of government owned establishments in Nigeria do not grant press interview and seldom give out information on the running of the organisation. Many Nigerian executive managers are not comfortable with disclosing organisational “secrets” to “outsiders”, let alone secrets about their corporate financial issues.

Collecting data in a developing country such as Nigeria led us to encounter problems of skepticism and apathy. Skepticism emanates from suspicion about the intentions of the researcher and the ultimate purpose of the study.

1.9       Definition of Terms

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2 Comments to “AN ANALYSIS OF THE EFFECTS OF DEREGULATION OF PETROLEUM PRICE ON NIGERIAN ECONOMY”

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