THE IMPACT OF GOVERNMENT EXPENDITURE (SUBSIDY) ON THE CONSUMPTION OF PETROLEUM PRODUCTS IN NIGERIA

ABSTRACT

The aim of this study is to empirically analyze the impact petroleum subsidy has had on petroleum products consumption in Nigeria over the period (1980-2010).

Subsidy has been defined as a sum of money granted from public fund to help an industry or business keep the price of a commodity or service low. There have been a lot of arguments in favour of and against petroleum subsidy removal. The “Proponents” of subsidy removal argued that, it sequeezes government expenditure on other public goods because of the large amount that is spent on it. They also argued that subsidy has had an unintended consequences: fuel adulteration, smuggling and that benefits go mostly to the better off because they consume more energy than the poor while the “anti subsidy removal” argued that removing subsidy without spending of the associate income savings will increase the national poverty level and that it will also lead to lower revenue because of the slow down in growth rate which the increase in price will cause.

A model to regress petroleum product consumption on government expenditure on petroleum subsidy and other relevant variables could not be developed because of lack of data on petroleum subsidy so descriptive statistics was used to analyze petroleum products consumption (PPC), government expenditure (GOV), gross domestic product (GDP) and exchange rate (EXTR) and the “correlation coefficient PPC and each of GDP, GOV, EXTR.

The results that were obtained using descriptive statistics and correlation coefficient (r) show that there was a very high dispersion of yearly values on petroleum product consumption, government expenditure, gross domestic product and exchange rate over the period of study. It was also found that government expenditure, gross domestic product and exchange rate are positively related to petroleum product consumption.

Based on the above, the study recommended amongst others, that government should increase its investments in the oil sector – revamping all the old refineries and building additional refineries so as to increase the domestic production of refined petroleum products as it would help to improve our balance of payment position.

CHAPTER ONE

INTRODUCTION

BACKGROUND TO THE STUDY

A high pricing of petroleum products is never welcomed by the general populace. Yet in Nigeria where petroleum products are regulated, the government has always allowed the prices of refined petroleum products to rise, and is prepared to continue doing so. The study examines an aspect of Nigeria’s energy policy that can have appreciable effects on its poverty alleviation drive: the pricing and subsidizing of petroleum products. Nigeria is rich but its people are poor [World Bank, (1996)]. This irony has made it imperative to assess the policy implication of government activities.

The large and sustained increase in international oil price since late 2003 has led many developing countries to adopt pricing policies to protect users from its full impact. Petroleum products prices are often heavily regulated. Domestic price control are prevalent especially in countries that are net exporters of crude oil. Government often keep prices well below international levels resulting in implicit subsidization of petroleum products consumption. However, as these subsidies are typically not recorded in government budget as expenditure, their economic cost, as well as the incidence on different income groups is often poorly understood. The lack of readily available estimates of the sizes these implicit subsides has thus precluded a fuller discussion of their cost and benefit.

SIGNIFICANCE OF THE STUDY

A research of this kind wouldn’t have been embarked on at a better time than this, as there is an ever increasing argument “for and against the removal of subsidy” from various actors. This study is significant because it will help us know the various argument for an against subsidy, the impact it will have on various income groups and to recommend solutions to problems that may arise due to government subsidy.

OBJECTIVES OF THE STUDY

The study, basically focuses on the relationship between government expenditure (subsidy) and the consumption of petroleum products in Nigeria.

The specific objectives of the study are to:

know the economic cost of subsidy to Nigeria.

Know the effect subsidies have had on poverty alleviation drive in Nigeria.

Know the impact it has had on different income groups in Nigeria.

Shed light on subsidies of petroleum products

Make recommendation.

HYPOTHESES OF THE STUDY

In order to achieve the objectives of the study, the following hypotheses are formulated for testing.

Hypothesis 1: Subsidy has significant impact on the consumption of petroleum products.

Hypothesis 2: There is a positive relationship between consumption of petroleum products and government expenditure.

SCOPE OF THE STUDY

Although, government subsidies on petroleum products started in the 1960s, but this study is focusing on the period between 1980-2010. It will look at various views and arguments for and against subsidy removal and the impact both arguments will have on various income groups. It will also focus on the three commonly used petroleum products: Premium Motor Spirit (PMS) commonly known as petrol, Automative Gas Oil (AGO) commonly known as diesel fuel and dual purpose kerosene for household and aviation use.

LIMITATION OF THE STUDY

The main limitation to this study is time insufficiency, the time given for the completion and submission of this project is short considering the fact that alongside the project work, attention has to be given to other course work as required by the programme.

This limitation not withstanding, the researcher hopes to carryout a thorough work on the link between subsidy and the consumption of petroleum products.

STATEMENT OF THE PROBLEM

The economic and financial cost of government subsidies on petroleum products have attracted a great deal of attention among government officials in Nigeria, but not much has been said about the impact it (subsidies) has had on its (petroleum products) consumption. The lack of attention to the impact of subsidies on petroleum products consumption has attracted many economists to ask the following questions:

To what extent can subsidies on petroleum products reduce Nigerian’s poverty level.

What are the likely impact subsidy removal will have on petroleum products consumption vis a – viz the welfare of citizens.

These and other questions economics researchers have been trying to answer.