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OIL PRICE INSTABILITY
AND INDUSTRIAL SECTOR OUTPUT IN NIGERIA
ABSTRACT
This paper analyses oil prics stability and industrial
sector output in Nigeria. Results show that the impact
of oil price on industrial sector output is asymmetric
in nature; with the impact of oil price decrease significantly greater than oil
price increase. Also, from the variance
decompositions, oil price changes play a significant
role in determining the variance decompositions of output and prices. The
implication is that any policy that is aimed at moving the economy forward must
focus on price stability in which changes in oil price play a significant role.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE
STUDY
The need to promote a
virile industrial sector has continued to be a major concern of most
development economies. The reason for this awakened interest in
industrialization can be traced to the fact that a significant work to be the
level of industrialization offers the place in a growing economy.
Also, a significant increase industrial output offers prospect of growing
availability of manufactured products, increase employment, greater efficiency,
improved balance of payments and higher technological innovation “CBN 2002”
However, despite efforts by past administrations in Nigeria at promoting trade
and industrial development, and its effects of macroeconomic variables on the
industrial sector shows that efforts by policy makers have not effectively
satisfied the desired industrial development which should increase national
income per capital income, prove foreign exchange earnings, secure full
employment and expand the market for local law materials. Industrial sector
performance in Nigeria has been rather poor since independent. Prior to 1970,
there was a real total reliance on agricultural production while the past 1970
era shower a total shift to exclusive reliance on petroleum.
In addition to the monoculture structure of the production bases, there was the
problem of oil price instability, which to a large extent has advancely
affected industrial sector productivity in Nigeria since 1973,substantial
fluctuations in the international price of crude oil have had for reasing implication
for the country’s macroeconomic policies “Olapoenia, 1986” Okigbo, 1973,
Iwayemi, 1995.
The price of crude petroleum rose from the first time in Nigeria in 1973 from
$3 to $11.6 per barriers in response to the uncertainties created by the Grab –
Israel war, which erupted in October 1973. The resultant rise in the price of
crude petroleum generated a total of N9.2 billion in revenue for Nigeria in
1994 as the country exported 108 million tons of crude oil that year “mandal,
1977. The upsurge in crude oil and price and the resultant increase in the
revenue for the country created opportunity for industrial development and
modernization of the Nigeria economy.
Although the oil price increase in 1943 was short lived, between 1979 and 1980,
the price of oil rose in the international market between 135 and A$40 a barrel
from et $14 level recorded in the early part of 1978. the rise in crude oil
price again was only mainly to the Iraninan revolution. In responses Nigeria
produced 84.2.5 million barrel in 1979 and realized N9305.6 million in the
prices “The Africa Guardian, 1986, First Bank Business Report,1990” with the
increased revenue derivable from oil sector the Nigeria economy became
mono-cultural as emphasis shifted from the agriculture sector to the oil
sector. Thus is 1980 the nation experienced a severe economic crisis which is
receasble to the over dependence a severer economic crises which is traceable
to the overdependence on the oil sector “Otashere, 1988” The oil glut era
of the 1980s created a serious problem for the industrial sector, as there was
a decline in industrial output and the level of industrial employment.
Consequent upon the freezing, the country passed through a period of structural
adjustment programmed in 198. This was accompanied by austerity measure of
enormous proportion. By 1990 a sign of relief was not welcome with the price of
oil in the international market seoard as a result of the guif war between Iraq
and Kawat. as a result of the war, Nigeria earning from crude oil export
reached N106.62 million as against the targeted N38.62 million.
These translate into windfall of N68 billion since the exchange rate was
stabilized atN9 to 11 between September and December 1990. The revenue gained
from the glut crises was however not translated to productive investment and
increased manufacture productivity.
In the late 1990’s and early 2000 crude oil maintained at position as the
highest contributor to the federation account. This was shown in the year 2003
annual budget. Out of estimated proved revenue of N1,819.0214 billion, a total
of N120. 1789 billion representing 61.58% is expected to be generated from oil.
The projection is predicted on a crude oil price at $21 per barrel: the answer
to this question rest on the pattern of crude oil price volatility
1.2 STATEMENT OF
THE PROBLEM
Nigeria like many other developing
nations has seen several decades of political instability and dictatorship the
country in addition to continuous oil price instability is still faced with a
lot of political tension, there is tension between the tension between
different ethnic groups especially current ethnic crises in the Nigeria Delta
which is threatening the down stream oil sector. As the 7th largest
producer, Nigeria external liquidity position has been strengthened by the high
oil price.
The country produced 2 million barrel of oil pending and high oil price has
seen to it that it’s current account changed from a deficit of 9% GDP in 1998
to a surplus currently.
Export growth has seen spectacular, but Nigeria remains too dependent on oil,
her position can weaken quite significant and quite rapidly if the oil price
drops too far below $20 per barrel.
The highest oil price in the early 1970 led to massive industrialization of the
Nigeria economy. However, hopes that Nigeria will regain the strong growth
momentum that characterized its performance in 1970’s are unlikely to be
realized in the near terms growth in the 70’s was driven by rapid expanding oil
production that quadingpling of the declare price of oil and the massive public
sector investment in the infrastructure and scare owned heavy industry. The
favourable condition that favoured industrial sector performance and growth in
the No’s as unlikely it apply in the event 6 to 8 years because of the
existence of the following constraints.
1
Export and balance of payment imbalance with the continuous decline in oil
price and the heavy reliance oil revenue the Nigeria economy is likely to be
faced with constrained growth in the industrial sector by limiting import
capacity. Thus in turn will result in investment falling below the level
necessary for the high rates of growth targeted in the vision of 2010 pham
drawn up in 1997
2
Infrastructure: In the 1998 African competitiveness report Nigeria was ranked
within out of 20 countries evaluated on electricity and water supply,
telecommunication, railway infrastructure and internet access. Nigeria has the
smallest number of telephone in use per capital out of 23 African countries and
if it is in bottom three on our transport, port facilities and transport cost.
This to a large extent has hampered industrial sector growth in the last two
decades.
3
Institutional Capacity: Lack of institutional capacity has also
constrained growth of the Nigeria economy compared to some of the world’s
poorest economies adult literacy is still relatively low in Nigeria school
enrollment ratios which stagnated since 1980 were above average for developing
countries as a whole but are now below it.
In year 2000, the
expenditure on education represents. 1.4% of GDP and accounted for 7.1% of
total expenditure. This performance falls below the average for developing
countries.
4
Regional Disparities: Concentrations of Industries are located in major cities
with very few industries in most states and few region of the federation.
Regional disparities in Nigeria are amongst in the world. When the countries
were ranked by united nations development programme in its 1994 human
development report at found that the state senders was top with an index nearly
five times as great as that of Borno state.
5
High Incidence of Uncertainty: According to Pindgick “1991” uncertainty play a
key role in investment decisions because such decision are by and large
invariable. Uncertainty in the Nigeria economy has manifested in the form of
internally generated and externally generated uncertainties. Since 1970 include
high unpredictable inflation and price variability, uncertain demand, increase
volatility of demand, interest rate volatility and frequent policy reversal. Forms
of uncertainties arising from external sector include external shocks emanating
from falling crude oil price uncertainty arising from a high and rising
external debt shock and debt service payment. Both internally and externally
generated shocks have had an adverse effect on the performance of industrial
sector for the past two decades
6
Political Instability: During the past two decades the manufacturing sector in
Nigeria has seen constrained by such factor as macroeconomic policy inadequacies
and by social and political instabilities. In addition to the problem of
political instabilities is the problem of governance and corruption which as
eastern deep into the fabric of the Nigeria society.
Given this limiting factor, the
researcher is constrained to asking the following questions.
(i)
To what extent has oil price instabilities constrained the industrial sector
performance in Nigeria
(ii)
To analyze the pre SAP the post SAP industrial sector policies in Nigeria
(iii)
To appraise the major characteristics of the manufacturing sub- sector in
Nigeria
1.4
HYPOTHESIS OF THE STUDY
To realize the objective of this study,
we formulate the following hypothesis
(i)
That there is a strong positive correlation between high and rising oil price
and industrial sector growth in Nigeria.
(ii)
That there is a negative correlation between uncertainty “Political Instability
and macro-economic instability” and industrial sector performance in Nigeria
(iii)
That exchange rate volatility have had an adverse effect on manufacturing
sector performance in Nigeria and
(iv)
That financial repression “low interest rate” have had an adverse effect on the
manufacturing sector programme in Nigeria.
1.5
THE SCOPE OF THE STUDY
The study will basically cover the
period “1979 – 2006” the choice of the long span is deliberate as it cover the
“oil boom” era the early 70’s and “oil gulf” era of the early 1980’s and the
post structural adjustment programme era of the 1990’s
1.6
METHODOLOGY
In an attempt to
empirically analyze the impact of oil price instability on the industrial
sector a functional model will be formulated and specified for the period 1970
to 2006 a period a thirty one year. The methodology here involves specifying
and industrial sector model and estimating the model with the use of ordinary
least squares “OLS” regression techniques. The study shall employ the use of
secondary data. Ultimately the following source of data will be utilized.
·
Use of Journals
·
Use of CBN publication
·
Federal Office of Statistics (FOD) publications
·
Literature and seminar papers on the oil sector and industrial sector out put
in Nigeria
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