AN ASSESSMENT OF DEREGULATION OF THE DOWNSTREAM OIL SECTOR IN NIGERIA AS A PANACEA TO ECONOMIC RECOVERY
Abstract
The Nigerian oil and gas industry has been experiencing a showdown since the announcement of the downstream oil
deregulation policy. This paper, therefore, seeks to analyse the relationship between deregulation of the downstream
sector and Nigerian economic performance using annual data from 1980 to 2009. The Ordinary Least Squares (OLS)
regression method was employed to analyze the data. Chow Test was used to determine parameter stability of the
regression model, while Granger Causality Test was used to predict the direction of influence. The findings reveal that
increase in price of petroleum products and inflation rate were not as a result of deregulation, and deregulating price
of petroleum products significantly influence economic growth with marginal inflation. The paper recommends that
government should encourage private sector participation in the oil and gas industry.
Key words: Deregulation, Downstream sector, Economic Growth, Unemployment and Inflation.
CHAPTER I. INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Oil and gas industry has continued to serve the mainstay of the Nigerian economy since 1956 when oil was
discovered at Oloibiri in the Niger Delta region. The industry, no doubt, is widely acknowledged at the nation’s livewire because it creates employment opportunities for Nigerians (particularly with the enactment of the Local Content
policy), contributes to Nigeria’s gross domestic product as well as government revenue, boosts foreign exchange
reserves, provides cheap and readily available sources of energy for industry and commerce through the operations of
the local refinery and the utilization of locally discovered natural gas (Odularu, 2008). Nonetheless, despite this benefit,
the oil industry is plagued by various problems which the Federal government believed that deregulation of the
downstream sector was a solution.
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 bedevilled with fiscal deficit, high external debt, unfavourable
balance of payment and inability to sustain the huge subsidy for fuels announced her intention to deregulate the
downstream sector of the petroleum industry. Since the announcement, Nigerians have lost count about how many
times organized Labour went on strike over downstream oil deregulation policy.
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.
As part of the deregulation policy, the Federal Government stopped the sale of oil to Nigerian National
Petroleum Corporation (NNPC) as the government was buying refined products at huge international prices only to sell
at a heavily subsidized rate. NNPC now buys at the prevailing international price, since its refineries are almost down.
Thus, it exports and uses the proceeds to import refined fuel for local consumption. Nigerians are saddled with
continuous increase in the cost of locally consumed fuel as international oil prices rise. NNPC, major and independent
marketers, have become importers of petroleum products, leaving pricing at the mercy of market forces. Therefore, it
has become imperative to evaluate the impact of deregulation of the downstream sector on the Nigerian economy
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