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07030248044CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND OF THE STUDY
Nigeria is richly blessed with natural resources of which crude oil products play a key role. On the domestic economy, the petroleum sector generates over 90% of the country’s foreign exchange earnings, and provides employment in various forms to Nigerians citizens. Nigerian Government has been the custodian of petroleum and its products. Though, this brought a temporary growth in the economy, the price instability of the crude oil in the world market has led to the downfall of Nigerians economy in various sectors, such as the production, manufacturing and services sectors. The earnings from the oil have influenced significantly Nigeria’s international relations, and sometimes the politics of oil has taken centre stage in the nation’s history of international relations in the last few decades. Petroleum products are derived from crude oil and they include petrol, diesel, kerosene, natural gas, bitumen etc. The origin of the persistent rise in prices of goods and services can be traced to government and its use of the oil revenue. Evidence has shown that petroleum export earns valuable foreign exchange to Nigeria. Indeed, the occasional petrol shortages experienced by Nigerian due to inefficient distribution, which is as a result of incompetence and corruption on the part of bureaucrats and the business class. However, the persistent instability of crude oil prices in the global market has been revealed to have adversely affected macroeconomic performance of the Nigerian economy (Mba-Afolabi, 2008; Labys, 2006; Nwosu, 2009; Arinze, 2011; Runl, 2011; Bobai, 2012) owing to the fact that Nigeria is a monoculture economy which is heavily depending on crude oil export for its foreign earnings. Crude oil price instability has been found to affect production cost of foreign firms and since Nigeria is import dependent, an increase in crude oil prices makes imported goods to be very expensive which in turn is transmitted to domestic prices by raising the general price level. The upward review of domestic prices of petroleum products was necessitated by the high spot market price of crude oil and the need for higher margins for the Nigerian National Petroleum Corporation (NNPC) to meet operational and capital costs. Petroleum pump prices in the domestic market have been under governments control since 1973 when it was handed over from the private oil companies (Iwayemi, 1993). The prices of petroleum products in Nigeria should theoretically be derived from International Crude oil prices since the marginal supply (litres) comes from import, it should therefore reflect import price. In other words, when the marginal unit of consumption is imported, the economic price should be import parity price. Government of both oil producing and consuming countries invariably intervene in the market to influence product price. The extent of such intervention depends on the specific needs of the country and importance of the product in question. It has also been noted that crude oil cost is not the only cost incurred in the supply and distribution of petroleum products as other costs such as refining costs, transportation and distribution costs are involved. In other OPEC countries the growth rate of the money supply has been generally high, the recent growth rates of money supply in Nigeria is alarming. The alarming rate of money supply is influenced by the earnings from petroleum (Osagie 2007).
1.2. STATEMENT OF THE PROBLEM
The changes in prices of petroleum products have resulted in inflation, high cost of living, and inequitable distribution of income in Nigeria. The high cost of full price has paralyzed social and economic activities in Nigeria and as a result, there has been a noticeable hike in prices of commodities and products in markets. Most of the increase made petroleum products prices to be adjusted upwards sometimes twice in one year. One major problem this has caused was the instability of the prices of goods and services in the country. Transporters on their part complained that getting their tanks filled in the face of fuel scarcity is very difficult as at times their vehicles are abandoned at the filling stations for days. At other times they have to patronize the black market at a very high cost which leads to a corresponding higher transportation costs. The problem also affects civil servants, businessmen, students and lecturers adversely. Inflation, the condition of a continually rising price level, has become a major concern of politicians and the public, and how to control it frequently dominates the discussion on economic policy. It is therefore on this backdrop that the researcher wants to examine petroleum pump price and inflation rate, enumerated problems as a result of fuel price increase on Nigerian economy.
1.3 AIMS OF THE STUDY
The major purpose of this study is to examine petroleum pump price and inflation rate in Nigeria. Other general objectives of the study are:
6. To recommend roles government should play in petroleum products’ price determination.
1.4 RESEARCH QUESTIONS
6. What are the roles government should play in petroleum products’ price determination?
1.5 RESEARCH HYPOTHESIS
H0: There is no significant relationship between petroleum pump price and inflation rate in Nigeria.
H1: There is a significant relationship between petroleum pump price and inflation rate in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
This study is significant in that it will fit a model that predicts the Nigerian economy given petroleum product prices. This model will be useful in planning the Nigerian economy by channelling the revenue generated from petroleum to those areas that the impact of the petroleum revenue has not been felt. This research will be a good resource in planning how to utilize the excess revenue that will result in the imminent increase in the demand for petroleum products as a result of population explosion and technological breakthrough. Many people will benefit from this research; both the young and the old will gain a lot of things from this work.
1.7 SCOPE OF THE STUDY
The study is based on petroleum pump price and inflation rate in Nigeria (1981-2015).
1.8 LIMITATION OF STUDY
Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
1.9 DEFINITION OF TERMS
Petroleum: Literally 'rock oil,' it is a general term for crude oil and natural gas. Primary source of automotive fuels and lubricant oils, petroleum is a complex mixture of hydrocarbons and paraffin’s in some areas, and aromatics and cyclo-paraffins in other areas.
Price: Is a value that will purchase a finite quantity, weight, or other measure of a good or service. It’s the consideration given in exchange for transfer of ownership, price forms the essential basis of commercial transactions. It may be fixed by a contract, left to be determined by an agreed upon formula at a future date, or discovered or negotiated during the course of dealings between the parties involved.
Inflation rate: This measurement is influenced by how high or low the prices of goods and services move throughout the economy.
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