The impact of oil and non-oil exports on the economy of nigeria

CHAPTER ONE

INTRODUCTION

1.1THE BACKGROUND OF THE STUDY

Oil, a very versatile and flexible, non-reproductive, depleting, natural (hydrocarbon) is a fundamental input into modern economic activity, providing about 50% of the total energy demand in the world. (Anyanwu J.C. et al, 1997)

Petroleum or crude oil is an oily, bituminous liquid consisting of a mixture of many substances, mainly the element of carbon and hydrogen known as hydrocarbons. It also contains very small amounts of non-hydrocarbon elements, chief amongst which are sulphur (about 0.2 to 0.6% in weight), then nitrogen and oxygen. (Anyanwu J.C. et al, 1997)

Non-oil exports comprises of agricultural products, solid mineral, textile, tyre, manpower, etc. it is made up of every other thing we export, except petroleum products. In the decades of the 1960s and 1970s, the Nigeria economy was dominated by agricultural commodity exports. Such commodities include cocoa, groundnut, cotton and palm produce. From the mid 1970s, crude oil became the main export produce of the Nigerian economy. (Anyanwu J.C. et al 1997)

The development of the petroleum (oil) industry in the country began in 1909. It started with exploration activities by the German Bitumen Corporation, but their search for oil seized after the First World War because the Germans started the war and lost in the war. With Nigeria being under British sectorial control, it was only natural that the Germans had to stop their exploration activities.

In 1937, an oil prospecting license was granted to shell D’Arcy Exploration parties. The first commercial discovery of crude oil in Nigeria was made in 1956 by shell at Oloibiri. The company started production and in 1961 the Federal government of Nigeria issued ten oil prospecting licenses on the continental shelf to five companies. Each license covered was subject to the payment of N1 million. With this generous concession full-scale on-shore and off –shore oil exploration began.

Oil was found in commercial quantities at Oloibiri in the Niger delta, further discoveries at Afam and Boma established the country as an oil-producing nation. The Nigerian crude oil is described as a sweet type because of its lightness and its low sulphur content. It was largely sought-after in the international oil market.

The global perception of Nigeria is that of a really blessed oil producing nation, but with a growing poverty index. (Maaji Umar YAKUB, 2008). The problems of low economic performance of Nigeria cannot be attributed solely to instability of earnings from the oil sector, but as a result of failure by government to utilize productively the earnings from the export of crude oil from the mid 1970s to develop other sectors of the economy. Nigeria is among the poorest countries in the world, with the poverty incidence estimated at 54% in 2006. The economy has been substantially unstable, a consequence of the heavy dependence on oil revenue and the volatility in its prices. The oil boom of the 1970s led to the neglect of non-oil tax revenue, expansion of the public sector, and deterioration in financial discipline and accountability. In turn, oil-dependency exposed Nigeria to oil price volatility which threw the country’s public finance into disarray.

This study will examine the relative impact of oil and non-oil export on economic growth in Nigeria.

1.2 STATEMENT OF THE PROBLEM

Oil is a major source of energy in Nigeria and the world (in general). Oil being the mainstay of the Nigerian economy plays a role, vital role in shaping the economy and political destiny of the country. It was towards the end of the Nigerian civil war (1967-1970) that the oil industry began to play a prominent role on the economic life of the country.

Non-oil product on the other hand plays an important role in the economic growth and development of the country. Non-oil exports, especially agricultural product like groundnut, palm oil, cotton, natural rubber, coffee, gum Arabic, sesame seed, etc. was our main stay before the period of the oil boom. It was during that period (that is, period of oil boom) that Nigerians neglected non-oil exports to an extent.

Nigeria can be categorized as a country that is primarily rural, that is, it depends on primary product export (especially, oil product). Since the attainment of independence in 1960 it has experienced ethnic, regional and religious tensions, magnified by significant disparities in economic, educational and environmental development in the south and in the north. This could be partly attributed to the major discovery of oil in the country which affects and is affected by economic and social components.

Crude oil discovery has had certain impact on the Nigerian economy both positively and adversely. On the negative side, this can be considered with respect to the surrounding communities within which the oil wells are exploited. Some of these communities still suffer environmental degradation, which leads to deprivation of means of livelihood and other economic and social factors. Although, large proceeds are obtained from the domestic sales and exports of petroleum products, its effects on the growth of the Nigerian economy with regard to returns and productivity is still questionable.

Hence, there is need to evaluate the relative impact of oil and non-oil exports on economic growth in Nigeria. In the light of the study, the main objective is to assess the relative impact of oil and non-oil export on the Nigerian economy.

Below are the research questions of the study.

1. What is the relative impact of oil and non-oil exports on investment in Nigeria?

2. What is the relative impact of oil and non-oil exports on economic

growth in Nigeria?

1.3 OBJECTIVES OF THE STUDY.

The broad objective of this study is to investigate the impact of oil and non-oil exports on economic growth in Nigeria. However, the specific objectives are;

1. To determine the relative impact of oil and non-oil exports on

investment in Nigeria.

2. To determine the relative impact of oil and non-oil exports on

economic growth in Nigeria.

1.4 RESEARCH HYPOTHESIS

The following hypotheses are tested in this study;

1. Both oil and non-oil exports have no significant impact on investment in Nigeria.

2. Both oil and non-oil exports have no significant impact on economic growth in Nigeria.

1.5 SIGNIFICANCE OF THE STUDY

Countries of the world today are engaging themselves more in international trade to earn foreign currency, maintain a surplus Balance of Payment (BOP), establish good relationship with foreigners and most of all achieve economic growth. Nigeria as a country is not left out in the international trade. Our export commodities can de divided into oil and non-oil.

It is important to study the relative impact of oil and non-oil exports on economic growth in Nigeria to ascertain whether the exportation is contributing to our economic growth and per capita income or whether we have just been wasting our resources.

1.6 SCOPE AND LIMITATIONS OF THE STUDY

This research work covers the impact created on economic growth by oil and non-oil exports. The geographical area involved is Nigeria. The study is as such a comparative one. The variables of interest are oil export, non-oil export, real interest rate, inflation rate, investment and GDP. The time period is from 1983-2007.