APPROPRIATE PRICING OF PETROLEUM PRODUCTS AND ITS EFFECTS ON THE NIGERIA ECONOMY AN APPRAISAL 1980-2004.
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APPROPRIATE PRICING OF PETROLEUM
PRODUCTS AND ITS EFFECTS ON THE NIGERIA ECONOMY AN APPRAISAL 1980-2004.
ABSTRACT
In Nigerian
the issue of appropriate pricing of petroleum product and its effect on the
Nigeria economy has been a stimulus in the down ward trend of the Nigeria
economy. And the major problem that revolves around this topic is inflation and
failure of the government to grant subsidy to NNPC. The work is a survey
covering issue of appropriate pricing of petroleum product and its effect on
the Nigeria economy, some of the objectives include: the pricing criteria, the
effect and implication on the socio-economic developments and subsidy removal
on petroleum products in Nigerian economy. We have discovered that price of
foodstuff and other commodities respond quickly to any increase in the price of
petroleum product. Therefore the government should make law for biding the
smuggling of petroleum products, the issue of indiscriminate adjustments should
also be addressed by the government.
TABLE OF CONTENTS
Title
Page i
Certification ii
Dedication
iii
Acknowledgment iv
Abstract
v
Table
of Contents vi
CHAPTER
ONE: INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Research questions
1.5 Scope and limitation of study
1.6 Method of study
1.7 Organization of the study
1.8 Significance of the study
1.9 Definition of key concepts
CHAPTER TWO: LITERATURE REVIEW/THEORETICAL
FRAMEWORK
2.1 Introduction
2.2 Literature
review
2.3 Theoretical
framework
2.2.1 Theory of pricing
2.2.2 The classical view of subsidy
2.2.3 The Keynesian view of subsidy
2.2.4 The Neo-classical view of
subsidy
CHAPTER THREE: THE STRUCTURE OF THE NIGERIAN
ECONOMY
3.1 Introduction
3.2 Structure
of the Nigerian economy
3.3 Petroleum
industry in Nigeria
3.4 The contribution of the petroleum industry to
the Nigerian economy
3.5 The
problem and prospect of the petroleum industry in Nigeria
3.6 Removal
of petroleum subsidy
3.7 Arguments
for subsidy removal
3.8 Arguments
against subsidy removal
CHAPTER FOUR: PETROLEUM PRICING AND THE NIGERIA
ECONOMY
4.1 Introduction
4.2 Petroleum
pricing in Nigeria
4.3 Cost
structure of petroleum product in Nigeria
4.4 Data
analysis
CHAPTER FIVE: SUMMARY, RECOMMENDATION AND
CONCLUSION
5.1 General
summary
5.2 Summary
of major findings
5.3 Conclusion
Bibliography
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
The
major rule in Nigerian economy during and after colonial was agrarian in mature
with more than 60 percent of the labour force engage in small scale peasant
agriculture. The agricultural policies and programmes where centred in the
rural area where majority of Family Economic Advancement Programme (FEAP) to
the local areas with a view of establishing cottage industries and other
projects that will help the economic empowerment of the local populace, there
was a shift the economy due to the Isreali-Arabs which create a shortage of
petroleum products since the Arabs were not producing. Demand became greater
than supply which led to price increase. The government at that time engages in
projects that had little or no positive impact on the economy.
The
petroleum as a resource does not necessary help in the production of energy per
ser, but it is used to effect motion in machines, metals, tools are the
factories source of lubricants, today about half of all petroleum products used
in transportation business. The issue of whether or not to adjust upwards, the
present absurdly prices been on the agenda of public debate for quite some
thing now. While the government has continued to remind the public of the waste
inherent in retaining the region of very low priced in the petroleum products,
some interest groups in the society have insisted that correct pricing through
adjustment upwards of products price may be desirable as an economic
proposition but that, it will have adverse effects on the lives of ordinary
Nigerians if it’s process are not applied to the provision of much needed
infrastructure and social services. The issue required is not sentimental
arguments but a close look at the major facts and figures both in our domestic
economy and comparative figures in other countries of the world.
History
reveals three primary energy cras, coal, oil and gas, the three energy played
vital roles in economic development, it also revealed the increase in prices of
petroleum products which leads to commodities, like food stuffs and other
documented materials. We discovered the prices of petroleum products have been
upwards in six times between 1990-1999, ever since the study proved food stuffs
and other commodities prices respond positively to increase in pump prices, to
adjust it six times within ten years it make food prices to go up
automatically. The case of transportation of goods and services with the
personnel is always a matter in petroleum products prices and adjusted.
Deregulation
and petroleum pricing, the major thrust of the economic reform measures in the
structural adjustment programme (SAP) is the deregulation of prices of goods
and services in the economy. While pricing in most other sectors have been
deregulated, there is still regulation in the pricing of petroleum products.
The current pump price of 70 kobo per litre of premium motor spirit (PMS) is
the result of a system of regulated pricing by government, through the NNPC
sells, PMA at 61.7 kobo per litre, the gross margin allowed the marketers to
cover their cost, over heads, and transportation. This implies that both the
wholesales and retails prices of petroleum products in Nigeria are regulated.
On the contrary, with the deregulation of the foreign exchange market and an
1100% decline in the value of the Naira, the cost of machinery, spares and
additives in the oil industry have risen by a corresponding petroleum products
prices between 1987 and 1992.
Electricity,
required widely as man’s greatest achievement in the power sector, in the
developed countries of the world the electricity industry performance is very
high. This is in contrary with most third world nations where electricity
availability is limited to only the urban areas. The electric power utilization
and hence the energy consumed for power generation has increased the standard
of living to people.
Energy
resource in Nigeria, Nigeria’s oil and gas industry, transportation corporation
and international cartels, in petroleum products and marketing, prices for
energy development and marketing policies for energy development and
utilization in Nigerian economy. The international trends in petroleum products
pricing, prices in Nigeria are the lowest in African and the “PMS’ retail for 70
kobo per litre in Nigeria; the aggregate average price in other African
countries is equivalent to N18.6 per litre. Thus, the Nigerian pump price is
only about 40% of the current average price in African countries. This wide
differentials between prices in Nigeria and our relatively poorer neighouring
state as the genesis for the wide spread smuggling of petroleum products across
our borders and the frequent shortages that have in the past cause our populace
considerable hardship. A country like Cameroon has had to shut an 80,000
barrels per day refinery as it find it more cost effective to have her citizens
use cheaper petroleum products smuggled from Nigeria. Relative to the trend in
these other groups of countries, Nigeria, has maintained a monumental decline
of prices at an average of 29% per annum in real terms. Similarly, the pump
price of our motor spirit is only 30% of the cost of proceeded crude, 24% of
the prevailing average price of gasoline in the reference OPEC countries and
paltry 5% of those of the countries demand for social services is higher in
Nigeria with a vast population of over 80million than in most of these other
countries, some of these countries have a very developed infrastructure and
efficient social services.
Effect
of low petroleum products, pricing, petroleum products prices in Nigeria have
continued to have damaging effect on both the national economy and the
petroleum industry, the implication for both areas in the future are even more
far reaching. The economic effects between Nigeria and neighbouring countries,
there is a real incentive for smuggling of petroleum products to these other
countries. This trend which became so wide spread along most of the nation’s
borders contributed to many incidents of fuel scarcity and their attendant of
social, witnessed in the recent past. It is clear the financial incentive of
petroleum price smuggling is quite tempting; hence, the petroleum of smuggling
has remained almost intractable. The petroleum product supply and demand
balance in the West African shows that there is supply deficit of 2.63 million tons
per annum (MP) annum in west African countries outside Nigeria. This deficit
translate to about 60,000 b/d of crude oil, it satisfies with cheap smuggling
products from highly subsidized Nigerian market.
Wasteful
consumption when the price of petroleum product is low sit encourages wasteful
consumption need for petroleum products showed by 1992 standards are equivalent
of 270,000 barrels per day (b/d). at present, we consume in excess of 360, 000
barrels daily as shown in figure 2 below. If the carets pricing system adopted,
the extra 90,000 b/d would be consumed either for export to earn much needed
foreign exchange or added to the much talked about strategic reserves, growth
rate rose from 2% to 18%, at this rate Nigeria will be dependent mainly on
imported fuel for domestic consumption ten years from now.
1.2 STATEMENT OF PROBLEM
Among
the several causes of inflation in the Nigeria economy is added the fact of
increases in the price of petroleum products in the economy. Given the fact
that human life generally revolves around the use of energy for which their
price increase the price of every other product is likely to follow suit.
The
gradual withdrawal of petroleum subsidy and subsequent increase in petroleum
products prices, have social and economic implication. On a general level the
argument against petroleum price increase, include consequent rises in
transportation, cost inflation social injustice since the whole nation will be
suffering for illegal acts of few through smuggling and adulterations coupled
not too effective law enforcement agents, social detonations, tendency towards
misdirect distortion in the economy. With the increase in petroleum prices,
transport fares escalated and these had spillover effect on other sectors in
the price of general consumer goods and the rising cost of living that has
lowered living standard.
The
argument for subsidy by the government is to enable NNPC build up a reserve for
the maintenance of structure as well as recovering, investment in the
production of petroleum and petroleum products and at the same time provide
basis amenities for its populace. While the arguments for subsidy removed by
the citizens is based on the fact that petroleum and its associated products
should have a reasonable balance in their disposable income at all time and at
affordable prices. This will make the ability for these two groups to be
harmonized that determines the appropriate price of petroleum products.
1.3 OBJECTIVES OF THE STUDY
The
course of this study shall be made attempt in analysis with the following:
1. The trends of petroleum product prices and
subsidies
2. The
pricing criteria, their effects and implication on the socio-economic
development.
3. The effects
and implication of subsidy removal on petroleum products on the Nigeria
economy.
4. To finding
out ways of avoiding the attendant inflationary conditions that results
increase of petroleum products and prices.
1.4 RESEARCH QUESTION
The
implication of the following study to the research question and effects
withdrawal of subsidy in current trends of petroleum product price on the
social economic development of the country.
These
will enable us answer the research question. We make the following assumption:
Ø That
petroleum and subsidy trends have considerable effects and implication on
industries transpiration cost and socio-economic lives of the citizenry.
Ø That
the gradual withdrawal of petroleum subsidy has effect on price increase
inflation and socio-economic lives of the citizens.
The research questions are:
1. What factors
were responsible for the review of petroleum subsidy?
2. What
is the relationship between the withdrawal of petroleum subsidy and the
socio-economic development of Nigeria?
3. What
measure other than the withdrawal of subsidy could be taken to enhance the
social economic lives of the citizens?
1.5 SCOPE AND LIMITATION OF THE STUDY
The
following project would be emphasis by limiting products, PMS, DPIA, AGO, LPFO
and LPG produced by Warri Refinery. The trend of the prices for these products
would be drawn from 1985-1991. The study examine the pricing policy of Nigeria
which is a determine of revenue to the nation for its socio-political and
economic development.
Limitations,
time and finance would be major constraints. Information contained in this
project are obtained from the branch office of the Warri Area Office of PPMC
and the petroleum inspectorate library. Efforts to lay hand on some of the
priced trends for certain period of years. The improper filling and record
keeping systems to research and perseverance is the use of project information.
1.6 SIGNIFICANCE OF STUDY
The
research method of study is to be used for the descriptive analysis based on
primary and secondary data collected from the Nigeria National Petroleum
Cooperation NNPC, Federal office of statistics and the CBN bulletin. Materials
from the Nigeria dealers and the Nigerian library as well as information from
the pipelines and product marketing cooperation (PPMC) and the Warri Depot will
also be used.
The
source of data collection includes oral interview, personal observation and
visit to the Depot and gas stations/outlets. The primary techniques intended
for use in the data analysis stage are trends analysis and simple percentage.
Trend and analysis is a component of time series analysis and defines the
general long-term movement in the time series values (y) over an extended
period of years. While simple percentage defined the proportion i.e. proportion
of despondence. The trend analysis will be used to analyze the movement of oil
prices.
1.7 ORGANIZATION OF THE STUDY
The
study has been divided into five chapters, chapter one is the introduction of
the work, this chapter contains the statement of the problem, objectives,
significance and as well as the method of study. Chapter two will focus on the
literature review, chapter three based on government policies on pricing and
performance while chapter four will be concerned on analysis of data collected.
Chapter five will be summary, conclusion and recommendations.
1.8 SIGNIFICANCE
OF STUDY
The
increasing rate of inflation in Nigeria study today, the significance of this
background of the important role of petroleum sector in the development of the
Nigeria economy. The oil is regarded as the prime move of the Nigeria economy
due to the dramatic increase power to the Nigeria economy. The pressure of
international competition, financial deregulation and the IMF, World Bank
supported Structural Adjustment Programme (SAP), have led to a resurgence in
price deregulation and hence withdrawal/reductions of government subsidies.
This
enables the people to evaluate the improvement of social welfare as a result of
the process from sales of petroleum products, this study take into
consideration the argument for petroleum subsidy removal which can be seen as
reasons to check or stop illegal bunkering, smuggling of petroleum products to
neighbouring countries as well as an easy way to bail out a cash-strapped
federal government. The effects of subsidy removal are the general increase in
petroleum product prices, the cause of oil wealth and impact consequence
incurred by fixing domestic prices above OPEC export quota on the economy.
1.9 DEFINITION KEY CONCEPTS
|
Price
|
In
this study the domestic level of petroleum and the associated products is use
here as the price level.
|
|
Pump
Price
|
The
price fixed by the retail the government at which the public buys from retail
petroleum products.
|
|
Depot
Price
|
Price
of which markets lift petroleum products at the depot.
|
|
Subsidy
|
The
difference between petroleum’s selling price to refineries and the domestic
price to consumers.
|
|
Economy
|
This
is an integration of all sectors of nation which consist of the production,
distribution and consumption activities of good and services.
|
|
Industry
|
These
are benefit directly by getting from the sale of petroleum products, this
include the petroleum markets, government and NNPC.
|
|
Through
Put
|
The
specified feed stock charge to process equipment in value of time if also
applies to the volume of crude or products pumps through a pipeline.
|
|
Petroleum
|
The
component crude oil that is used to affect motion in machines, metals and
tools, it is source of lubricants.
|
Petroleum Products
Products
manufactured from crude petroleum are liquefied petroleum gas.
|
PMS
|
Premium
motor spirit also known as super gasoline
|
|
NLG
|
Nigeria
liquidified Gas
|
|
OPK
|
Dual
purpose kerosene for illustration and jet engines.
|
|
AGO
|
Automotive
gas oil-issued to drive diesel.
|
|
HHK
|
Household
kerosene
|
|
JET
AL
|
Aviation
Fuel
|
|
LPG
|
Liquidified
petroleum gas
|
|
LPFO
|
Low
pour fuel spirit (coal tar)
|
|
APFO
|
High
pour fuel spirit (coal tar)
|
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