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

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

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

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.

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

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