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Effects of Oil Price Shocks and Deregulation of Downstream Oil Sector on the Nigerian Economy


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PROJECT TOPIC AND MATERIAL ON Effects of Oil Price Shocks and Deregulation of Downstream Oil Sector on the Nigerian Economy

The Project File Details

  • Name: Effects of Oil Price Shocks and Deregulation of Downstream Oil Sector on the Nigerian Economy
  • Type: PDF and MS Word (DOC)
  • Size: [216KB]
  • Length: [77] Pages



This research work attempted to evaluate the economic logic behind Nigeria’s government policy of deregulation of the oil downstream sector. Thus, this work assessed the effect of deregulation of downstream oil sector on the economic performance of Nigeria using annual time series data from 1981 to 2015. The main focus is on the relationship between changes in oil prices as a result of deregulation and two macroeconomic variables namely; economic growth and public investment expenditure. The main instrument of the data analyses were multiple linear regression models and linear trend model. The results revealed a significant inverse impact of oil price shock on economic performance in Nigeria. Results also revealed a significant positive impact of deregulation on economic performance in Nigeria while the impact was supposedly inverse on non-oil exports.The result of the linear trend model suggested that there is a downward direction of movement between oil price shock and investment expenditure variables. The study recommends thatthe government should facilitate the maintenance and building of new refineries by interested investors (including those who have not utilized their licenses since 2004). The existing refineries should be appropriately priced and sold to investors who will make them work. The study concludes that the reasons advanced by federal government for the deregulation of the downstream sector of the oil and gas industry fail to add up to the realities on ground.


1.1 Background of the Study

In the beginning Nigeria largely operated an agriculture-driven economy. It cultivated major cash crops such as cocoa, groundnuts, palm oil, cotton, rubber and cashew nuts for export. The regional governments thrived on these, as well as solid minerals, cattle rearing, fishing, and other forms of livestock production which also fetched incomes.Though crude oil had newly been discovered in commercial quantity it wasn’t a major revenue earner for the government. Suddenly, it became a major source of income and indeed a game changer. It accounted for more than 80 per cent of the nation’s budget revenues and over 90 per cent of its foreign exchange earnings (Isangediok, 2016).

With the windfall, the government altered its initial policies that had been agriculture driven, and with enormous resources at its disposal, it indulged its fancies which were the importation of anything and everything. It abandoned the hitherto mainstay of the economy, became import-dependent, encouraged consumption patterns that altered contempt for local products and a strong desire for white collar jobs. That sounded the death knell on agriculture.

Clearly, before the Nigerian civil war, crude oil was not a dominant commodity. The economy did not suffer from the Dutch Disease- the crowding out of the traditional export sector by a new booming export sector and the non-tradable goods sector.The symptoms started appearing in the early 70s during Gowon’s military regime (1967-75) when crude oil became the mainstay of the economy, especially in the aftermath of the phenomenal increase in the price of crude oil in 1973 (Ogunbodede, Ilesanmi and Olurankinse, 2010)

Since June, 2014, when the cost of a barrel of Brent crude, the benchmark for world oil prices, began to plummet, the turbulent matter of fall in oil prices expectedly become a subject of international discourse, amidst fears that slide could have a profound effect on some nation’s economies.The price, according to experts, has dropped as much as a quarter, from around $110 a barrel in June, 2014 to just above $80 a barrel in April, 2015. It was the first time in four years that such drastic drop has taken place. In fact, there are worries as the price is hovering around $30 to $45 in February, 2016, a development that has altered the budget benchmark of many OPEC countries.

However, 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, et al,(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.


1.2     Statement of the Problem

Revenue from crude oil has declined in recent times because of the plummeting crude oil prices, large-scale oil theft, vandalisation of pipelines leading to financial leakages, production shut-ins and the rise of shale oil production in the United States, resulting in sustained cutbacks in the US imports of Nigerian crude.Also, the surge in renewable energy, an alternative to oil, especially in the United States, has meant reduction in the purchase of Nigeria’s crude oil and ultimately, a sharp drop in accruable funds for the country (Jimoh, Onochie, Okere and Chijioke, 2015).

Figure 1: plummeting crude oil prices

Lower oil prices have reduced the fiscal buffers of the Nigerian economy. Essentially, the amount entering the Excess Crude Account (ECA) has shrunk and has put some pressure on federal allocations, which often have to be supported with withdrawals from the ECA. Already, the impact of the slide in oil prices is being felt by the federal government which has been unable to bear some financial responsibilities.

The drop means a weaker currency which in turn means increased importation with the attendant cost, further depleting the already stretched foreign reserves, which stood at $48.9 billion in May 2013, but have now fallen more than 50 per cent this year as the government has had to fall back on it to bolster the naira. Decline in oil prices and revenue, the lagging and collapsing non-oil export sector will not be able to compensate for the drop in oil revenue, while domestic demand for non-traded goods and imports remain sticky.

The consequence is clearly depressing: the country will be forced to borrow from the international financial market to compensate for the decline in oil revenue. Over time, external debts will increase and so will the debt service obligations. How did Nigeria get to these messy situation?

Economists say the sharp consequences of this will be to raise interest rates or devalue the naira, meaning that Nigerians would have to pay more for imported goods and services. In essence, inflation rate will increase and companies already battling to stay afloat will plunge deeper into the murky waters of depression with the attendant reduction in workforce.

Nigeria’s problem is not money but how to spend it.” This statement is often attributed to Gen. Yakubu Gowon, Nigeria’s Head of State between 1967 and 1975. Obviously, Nigeria’s problem then was not paucity of money, it was basically how to spend it. Over 40 years on, the problem has broadened in scope. Nigeria still does not know how to spend its oil money to the benefit of its people.

Now, Nigeria wallows in the fang of uncertainty of the oil market. In fact, the issue of oil prices has become a subject of international discourse, with fears that the sinking oil prices could affect some nation’s economies in more ways than one.

In Nigeria, panic is the word. Few months ago, when the drop began to look serious, the Nigerian government had sought to calm frayed nerves and anxiety by repeatedly assuring that it has enough foreign reserve to shore up whatever deficiency there may be. That was then, now the pains have increased, the injury seems fatal and there is palpable desperation in the land, despite the federal government’s pretense to the contrary.

However, in spite of the depression in oil revenue, Nigeria is still running a trade surplus, aiding reserves, but it may last long. Thus a way out of the malady is to return to the bases.


1.3       Research Questions

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

  1. What is the extent of the impact of oil prices on the Nigeria economy?
  2. What is the effect of potential deregulation of downstream oil sector on the Nigerian economy?
  3. Is there any impact of oil prices on non-oil sector of the Nigerian economy?
  4. What is the relationship between oil price and investment expenditure of the downstream oil sector?


1.4 Objectives of the Study

The broad objective of the study is to establish the effects of oil price shocks and deregulation of downstream oil sector on the Nigerian economy as well as understanding of the generic effects of deregulation of petroleum price on Nigerian economy.

In order to achieve the broad objective of the effects of oil price shocks and deregulation of downstream oil sector on the Nigerian economy, the study would focus on specific secondary research objectives that support the accomplishment of the primary objective. The specific research objectives of the study are the following:

  1. To investigate the extent of the impact of oil price shocks on the Nigeria economy.
  2. To examine the effect of potential deregulation of downstream oil sector on the Nigerian economy.
  3. To determine the impact of oil prices on non-oil sector of the Nigerian economy.
  4. To establish the relationship between oil price and investment expenditure of the downstream oil sector.


  • Research Hypotheses

Ho1: Oil price shock has no significant impact on the Nigeria economy.

Ho2: Potential deregulation of downstream oil sector has no significant impact on the Nigerian economy.

Ho3: Oil price shock has no significant impact on non-oil sector of the Nigerian economy.

Ho4: Oil price shock has no significant impact on investment expenditure of the downstream oil sector.


1.6   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 complement the existing body of research on the need for government to 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 checkmating the issues of insecurity, god-fatherism, corruption, tribalism, ethnicity, religious affiliation and nepotism, but embracing meritocracy and qualification in employment and management of public enterprises.

Above all, it would also be an invaluable tool for students, academic, institutions and individuals that want to know more about the deregulation of the downstream sector in Nigeria and it hopes to provide basis further research on the topic.

1.7       Scope of the Study

The focus of this study is on the effects of oil price shock and deregulation of petroleum price on the Nigerian economy. It also covers the problems and prospects of deregulation of the downstream sector on Nigerian economic growth and development. The study would span 35 years (1981 through 2015). The major reason for this range of coverage is owing to the availability of data.




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