BACKGROUND OF THE STUDY

Over the past decade Nigeria has faced the worst and most prolonged economic crisis this century. The crisis is characterized by large fiscal imbalances, poor export performance, high levels of account deflects, large and growing external debt, stagflation, large and rising unemployment and an alarming deterioration in basic social and economic infrastructure. These ten years of economic crisis, which notably resulted in a precipitous and unrelenting decline in living standards, further exacerbated economic, political, enhance and social cleavages, thereby producing what essentially has become a desperate and potentially volatile social and political environment. An almost discouraging aspect of the crisis is the fact that despite several years of implementing the structural adjustment programme (SAP), albeit in an inconsistent fashion, under the guidance of the World Bank and International Monetary Fund, no perceptible recovery in economic and socials conditions seems in sight.

The current economic situation contrasts sharply with the 1970s when oil export boom sustained a transient but exceptionally robust macroeconomic performance. The large variability in economic performance illustrates in clear terms a major paradox in the evolution of the Nigerian economy since the transition from agriculture to an oil-based economy. The overall picture that emerges since the transition is that of a pervasive but largely negative influence of oil on economic and social behaviour. The unnecessary incursion of the military into politics is predicated mainly on their perception of poor governance, poor economic management, and the direct or indirect misuse of oil wealth by the civilian governments they overthrew. Certainly, there is sufficient evidence to suggest that the origin of the deepening economic crisis in Nigeria can be traced to the consequence of deep-rooted structural imbalances set in motion by the response of economic agents to the unprecedented inflow of oil income between 1973 and 1981 and the flawed economic policies and development strategies induced by the boom environment.

The current economic crisis was precipitated by three major but largely inter-related factors - Dr Joseph Sanusi (former CBN Governor). Two of these, namely the oil and debt shocks, were exogenously determined. The oil shock is linked to the negative impact of the economy’s overdependence on a resource export that is subject to sharp fluctuations in price and volume arising from a volatile world oil market. The risks associated with such dependence are highlighted by the dramatic reversal in the status of the economy from boom to depression following the sudden collapse of the erstwhile oil export boom.

Furthermore, and in so far as oil was the dominant source of government revenues, and given that the public sector was the driving force in the economy because it earned the bulk of oil rent, it was obvious that the large, albeit periodic, shocks from the world oil market would constitute a powerful destabilizing influence on government fiscal operations and economic planning and management. Oil export revenue instability exacerbated fiscal imbalances. This is largely because policy makers were more eager to engage in unsustainable increases in spending and borrowings to pursue ambitious and spurious development projects rather than make hard but rational development. In many cases, fiscal indiscipline was induced by the need to appease various and competing interest groups. The constraint imposed by the absorptive capacity of the economy was properly recognized. Thus, instead of exercising some moderation in public expenditure in boom years to ensure higher public sector saving for future investment, the easy option adopted was to engage in a very expensive expenditure spree which subsequently resulted in serious economic problems.

The emerging economic disequilibria is internal and has tom do with the rapid and poorly managed expansion in public expenditures (including investment in the innumerable large loss-making public enterprises), a major factor in the emergence of large and excessive public sector fiscal burden when oil export boom disappeared. Equally important is the failure of policy makers to use fiscal, monetary, trade and exchange rate policies to ensure a more flexible and less costly macroeconomic adjustment, especially in the face of the two vicious external forces of oil and debt shocks. Against this background came the development in the middle of 1986 when the economy was faced with an acute foreign exchange shortage as oil export earnings collapse in the wake of the 67 per cent fall in the price of oil in the world market within six months. With little degree of financial freedom for policy makers to manoeuvre, the ensuing liquiding crisis provided the fiscal stimulus that made the transition to a period of economic adjustment process inevitable.

The main purpose of this study is to shed further light on these and related questions as well as draw some broad conclusions on the place and role of oil in the Nigerian economy. We shall explore some of the main issues involved in the inter-relationship between oil, economic policy and economic performance, all issues having often been plagued by insufficient and simplistic generalizations.

In light of these considerations, two major issues would dominate my discussion of the role of oil in the economy. First, is an analysis of why, how and through what channels oil has contributed to the current economic crisis? The second issues centres on the role of the government and economic policy in creating and reinforcing the distortions in the national output and income given that the bulk of the oil rent that came to the government. These two issues focus on an interpretation of the trend and the lessons from Nigeria’s economic performance and policy experience since the advent of oil. A number of caveats is necessary. The analysis is highly aggregative as only a broad overview of the macro perspective of the problem is presented for lack of space. Furthermore, the conclusions will necessarily be qualified by the credibility problem of available economic data of which most analysts of the Nigerian economy. However at least the data on the key macro variables (Gross National Product and Consumer Price Index) provide us with the general direction of macroeconomic development.

STATEMENT OF THE PROBLEM

Given the number of years that the oil sector began it operations and the substantial financial resources, endowment available in the country, coupled with the impact of the sector on the economic growth of the country, one can claim that the sector has not been sufficiently active especially in the 1990s which was characterized by gross mal-appropriation of public fund by the military leaders. The problems facing the sector can be stated as follows:

a) High cost of maintenance of refineries and other equipment.

b) Gross mis-appropriation of fund.

c) Over-reliance on the sector as the main source of revenue.

d) The control of operations of the sector by incompetent hands.

OBJECTIVES OF STUDY

The objective of the study can be enumerated as follows:

1. To examine the performance of Nigerian oil sector over years;

2. To investigate the contribution of the oil sector to the Gross Domestic Product (GDP) of Nigeria;

3. To examine the effect of the oil sector performance on the standard of living of Nigerians

RESEARCH QUESTIONS

Based on the objectives of the study, the following research questions would be considered in the course of the study:

1. What has been the performance of the Nigerian oil sector over the years?

2. Does the oil sector contributes to the Gross Domestic Product in Nigeria?

3. How does the oil sector performance affects the living standard of the people?

TEST OF HYPOTHESES

The hypotheses to be tested in the study are stated below:

HYPOTHESIS I

H0 - That the oil sector does not contribute to the economic growth of Nigeria.

H1 - That the oil sector contributes to the economic growth of Nigeria.

HYPOTHESIS II

H0 - That the oil sector does not impact on the standard of living of the people in Nigeria.

H1 - That the oil sector impacts on the standard of living of the people in Nigeria.

RESEARH METHODOLOGY

Secondary data would be used in this study. The relevant data to be used would be sourced from the publications Central Bank of Nigeria and Nigerian National Petroleum Corporation (NNPC) etc. for the years 1990 to 2010.

The Econometric approach that would be adopted to examine the performance of Nigerian oil sector shall be the Ordinary Least Square (OLS) method. This econometric method would be used because it is very reliable and widely used in researches. Two multiple regression models shall be adopted to capture the contribution of the oil sector to the economy and the living standard of the people.

The test of the hypotheses would be done at 5% level of significance and as such, the generalization of the study findings would be limited to this extent.

MODEL SPECIFICATION

The models used to evaluate the performance of the oil sector of Nigeria are stated below:

MODEL I

GDP = ?(Oilgdp, oilprod)

GDP = a0 + a1 Oilgdp + a2 oilprod + Ui

Where gdp - Gross Domestic Product Growth Rate at 1990 Constant Basic Prices

oilgdp - Oil Sector contribution to Gross Domestic Product Growth Rate at 1990 Constant Basic Prices

oilprod - Oil Production Growth Rate

a0, a1, and a2 - Parameters

Ui - Error term

MODEL II

cpi = ?(Oilgdp, oilprod)

cpi = b0 + b1 Oilgdp + b2 oilprod + Ui

Where cpi - Consumer price Index

oilgdp - Oil Sector contribution to Gross Domestic Product Growth Rate at 1990 Constant Basic Prices

oilprod - Oil Production Growth Rate

b0, b1, and b2 - Parameters

Ui - Error term

SIGNIFICANCE/RELEVANCE OF STUDY

The essence of the study is to evaluate the impact of the oil sector on the Gross National Product and the living standard of the people for the period spanning for 21 years (1990 – 2010). The research will be of great importance to researchers, students, policy makers and the general public, throwing more light on the role which the black gold plays in the reformation of the economy which could be positive or otherwise.

SCOPE OF THE STUDY

The scope of the study will be limited to only the oil sector and its performance in the Nigerian economy for the period between 1990 to 2010. Brief historical background of the sector will also be traced from the 70s in order to make a concise and comprehensive analysis of the contribution of the sector.

PLAN OF THE STUDY

The presentation of this study takes the following form: The first chapter is introductory. The second part deals with the literature review and related issues on Nigerian oil sector. The third chapter shall state the methodology to be adopted in the study. Chapter four shall focus on the analysis of data and discussion of empirical results of the estimations. Chapter five shall conclude the study.

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