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Prices Of Petroleum Products In Nigeria Economics Essay

INTRODUCTION

The prices of petroleum products in Nigeria have been a way to obtain contention and controversy. In the meantime, the Nigerian overall economy which used to rely upon the agricultural sector years ago now is dependent intensely on the essential oil sector which, the International Monetary Account (IMF) says makes up about over 95 percent of export income and about 65 percent of federal government revenues.

The removal of subsidies on petroleum products remains a contentious issue in Nigeria.

The Federal Government of Nigeria has of recent attemptedto liberalize the price tag on the various fuels prior to the end of 2010 or in early 2011 implying that the federal government won't pay subsidies to importers of enhanced oil products. The full total cost of importing the sophisticated oil is shared between the authorities and the importers thus minimizing the overall cost to the importers and allowing them sell at a lesser price than would have ordinarily been bought from the absence of subsidies. The best beneficiaries here are the Nigerian consumer as well as the Nigerian current economic climate.

A Nigerian currently pays N65 per litre (just a little less than US$0. 5) for PMS used to run their vehicles and power their generators but the price of importing the petrol and setting it up to the petrol channels is thought to cost over N90 or $0. 60 per litre. The government thus gives subsidy to protect the difference, reducing the cost to the importers enabling them still gain benefit from the business enterprise as well as keeping prices down for the consumers.

Giving subsidy for energy began through the military guideline and has remarkably remained the most sustained acts of the government. The government has never been seen to aid any industry in a suffered manner supporting it maintain steadily its comparative advantages region wide and still continue being globally competitive. The economical as well as sociable impact of the weakened refining sector has been offset by the subsidies. Despite the fact that the Nigerian federal saw itself spending almost as much as the other local government authorities for locally used petrol, the burden of the excess costs weren't used in the consumers providing it an edge over the other Western African countries. The country thus maintained its position as the economical hub of the Economic Community of West African Says (ECOWAS) region. However the build up of infrastructural and institutional inefficiencies and wide spread systemic corruption began to create in even as local countries were starting to put their work along and outdo Nigeria in a number of important sectors. Ghana from 2006, with better policies implemented and constant electrical power source, is among the most magnet in the Western world African region for overseas immediate investment. Several multinational companies and even Nigerian entrepreneurs have finally chosen Ghana as their location of choice for their head office.

A reform program for the petroleum industry known as the Petroleum Industry Invoice (PIB) is now being deliberated after in the Nigerian National Assemblage. The PIB includes a plan to stop the repayment of engine oil subsidies to importers and deregulate fuel costs. The aim of this PIB is to once again repair Nigeria to its economical command position of the region. The bill is intended to improve the performance of the industry by enhancing crude removal and engine oil exploration and pushing more private investment, especially in the downstream sector where Nigeria must revive existing refineries and build new ones capable of meeting all domestic and international demand for processed products.

Most of the general public attention received has been centered on taking care of of the reform charge - the government's purpose of removing energy engine oil subsidies. Consumer advocates, especially the trade unions, have condemned the removal of this subsidy. There is a basic support for the PIB, but the removal of petrol subsidy is not being accepted. If the purchase price deregulation undergoes, there would be at least a 54 percent increase in the purchase price Nigerians must purchase petrol, kerosene and diesel. The US $1. 97 per gallon or $0. 43 per litre, which it costs now to buy gas at the pumps, increase to between $3. 04 and $4. 54 per gallon. The unions are apprehensive of the consequences that these price increase will have, speculating that high inflation will follow.

Suffice it to say that the Nigerian overall economy (which includes the olive oil industry) is crippled, dragged down by politics unrest, militant mutiny, infrastructural and institutional inefficiency and problem. The oil and gas industry is suffering from these as well. The federal government really wants to fix these issues now with reforms based on the PIB but critics fear that energy price deregulation, that will no doubt lead to price rises - will deteriorate the overall economy further, unless authorities pays attention to the divided refineries and revives them- a task that would demand integrity, time and plenty of resources. The government's guarantee of revived refineries seems far-fetched seeing that previous attempts at this, which gulped vast amounts of dollars, havent been effective. The unions are therefore advocating for at least four refineries to be serviced and completely use before the price reform is gone through.

However, advocates of the suggested reforms inside authorities seem anxious to resuscitate this industry. They think that the implementation of the PIB reform offer all together would do this. They believe by resuscitating the industry, there would be a better inflow of FDI as well as increased competition which would lead to increased efficiency and the acceptance and implementation of the PIB is the right location to start. The private importers of petroleum products as well as the domestic marketers also seem to be willing about the organized deregulation. On their behalf, for the reason that presently, the federal government continues to be sluggish to make payments leaving those to bear the price tag on importation alone before the subsidy repayments finally go through. In '09 2009, The Central Loan company of Nigeria's audit of commercial lenders showed oil marketers to be the major borrowers (albeit defaulting ones) from the finance institutions. These oil sellers, in turn, place the blame on the government's failure to pay subsidies at the correct time. The Petroleum Products Costs Regulatory Organization (PPPRA) was accused of often taking years to results payment and in some instances did not pay completely. Marketers thus think that deregulation will ensure marketers restore their opportunities and profits straight and quicker. By expansion, therefore, the commercial banks would also recommend that this deregulation to takes place.

On the other hands, the Nigerian consumer perceives price deregulation as an easy way to avoid it for a administration that consistently remains reluctant to pay out over N400 billion each year in subsidies to the oil marketers. Consumer organizations are convinced that deregulation means Nigerians in the near future will be paying the purchase price for authorities and industry failures - failed general public enterprises because of the inefficiency in administration processes. A definite example is the truth of the Nigerian National Petroleum Company (NNPC) which, for a long time, had the singular certificate for the importation of enhanced petroleum products in to the country. This brought on a number of source and syndication hiccups leading to the issuance of licences to private individuals and organizations for the business. However, these private providers handle just about thirty percent of the full total imports with the bulk of the subsidies still going to the NNPC.

Basically, the coal and oil sector is crucial to Nigeria for earnings era, investment and country large progress and development. The Nigerian market is heavily reliant on the olive oil sector, which accounts for 95 percent of government revenues. Even with the substantial engine oil wealth, Nigeria ranks as one of the poorest countries on the planet, with a $1, 000 per capita income and more than70 percent of the population living in poverty.

BACKGROUND WITH THE STUDY

By the time Nigeria became politically unbiased in October 1960, agriculture was the dominant sector of the economy, adding about 70% of the Gross Local Product (GDP), utilizing a comparable ratio of the working populace, and accounting for approximately 90% of foreign earnings and AUTHORITIES revenue. The early period of post-independence up until mid-1970s saw an instant growth of industrial capacity and outcome, as the contribution of the manufacturing sector to GDP increased from 4. 8% to 8. 2%. This structure changed when olive oil all of the sudden became of strategic importance to the planet overall economy through its supply-price nexus.

Crude oil was first uncovered in commercial quantities in Nigeria in 1956, while real production were only available in 1958. It became the prominent learning resource in the mid-1970s. On-shore essential oil exploration makes up about about 65% of total creation and it is found mainly in the swampy areas of the Niger Delta, as the left over 35% represents just offshore production and will involve drilling for oil in the profound waters of the continental shelf. Nigeria has proven reserves around 32 billion barrels of mainly low sulphur light crude, which at current rate of exploitation could go on another 38 years. The purpose is to extend the reserves to 40 billion barrels and development capacity to 4 million barrels per day (mbd).

The massive increase in oil revenue as an aftermath of the Middle-East conflict of 1973 created unprecedented, unexpected and unplanned riches for Nigeria. Then started the dramatic change of guidelines from a alternative method of benchmarking them from the point out of the engine oil sector. Now, in order to make the business enterprise environment conducive for new assets, the government started spending the newfound wealth in socio-economic infrastructure in the united states, especially in the urban areas. As well, the assistance sector grew. The comparative elegance of the urban centres made many able-bodied Nigerians to migrate from the hinterland, abandoning their farmlands for the locations and wishing to partake in the growing and successful (oil-driven) urban economy. This created sociable problems of congestion, pollution, unemployment and crimes.

The national currency, Naira, strengthened as foreign exchange inflows outweighed outflows, and international reserves were developed. Until 1985, the Naira was more robust than the US Dollar. This motivated import-oriented consumption habit that soon switched Nigeria into a perennial online importer, which became a problem when oil revenue decreased with lower international olive oil prices. External reserves collapsed, fiscal deficits mounted and exterior borrowing ensued with the "jumbo loans" taken in 1979. The majority of Nigeria's macro-economic indices became unstable and worrisome.

Several coverage initiatives to handle the defective framework and inefficiencies were considered, but poorly integrated and sometimes contradictory (with cases of self-interest encouraged reversals). These created new distortions and additional weakened the inchoate corporations for policy implementation.

The average Nigerian therefore, became so hypersensitive to petroleum essential oil and everything the variables adjoining it, to the scope that any development in the international engine oil market segments invites an almost instantaneous response from domestic financial agents and coverage makers alike.

In essence, policy formulation appears to react to the petrol situation or try to take advantage of it. This often takes the proper execution of "expand costs when oil profits increase, keep up with the position when there is a dip in profits and seek a desperate way out when there is certainly problems. " Another aspect to the petrol concern is to "look for opportunities in the engine oil sector to improve Federal government revenue". Invariably, everything factors in the direction of oil.

STATEMENT OF RESEARCH PROBLEM

The Nigerian petrol sector can be grouped into three main sub-sectors, namely, upstream, downstream and gas. One of the most problematic through the years has been the downstream sector, which is the distribution arm and reference to last consumers of enhanced petroleum products in the local economy. The incessant turmoil in supply of products culminated in the decision by Administration in 2003 to deregulate the downstream sub-sector. However, the way in which of its execution has been controversial because it ignores the monetary realities in Nigeria.

The over-dependence on oil has generated vulnerability to the vagaries of the international market. Specifically, the place of olive oil in the psyche of the common Nigerian has become more profound because the "imperfect" deregulation of the downstream segment of the Nigerian petrol industry in 2003. The contradiction is more glaring now with the recent surge in crude olive oil prices at the global markets, which supposed more external earnings for Nigeria, but also increased the trouble burden on imported processed petroleum products! It really is such contradictions (perhaps aberrations) that produce the Nigerian market appear strange sometimes, as policies appear to dismiss what appears obvious to do. So, policies designed to treat the deficiencies and flaws in the structure finish up being badly articulated and/or implemented because of local, political or rent-seeking selfish passions. Obviously, it is the same rent-seekers that continuously sabotage the reinvigoration of the home refineries, making Nigeria to rely upon importation of refined products to meet up with the domestic need.

OBJECTIVE OF STUDY

To ascertain the way the Nigerian oil and gas industry has fared

SOURCES OF DATA AND RESEARCH METHODOLOGY

Based on the nature of the analysis, the extracted data for the study are mainly from supplementary sources specifically from Central Loan provider of Nigerian (CBN) statistical bulletin Bureau of Figures publications.

The research is dependant on exploring the essential causal relationship between petroleum liberalization and overall economy growth. Parameters are permitted to have interaction among equations to test for multi-collinearity. Estimation is by the normal a minimum of square (OLS) technique of estimation.

Further, the effect of higher petroleum prices on the aggregate price level, real growth, and income syndication is appraised within the multi-sector computable standard equilibrium (CGE) model.

SIGNIFICANCE OF THIS STUDY

At the finish of the analysis, the results will be useful in the next ways:

It will be of tremendous use to plan makers because it will further improve their knowledge on the impact of petroleum liberalization on the Nigerian market.

It will assist in highlighting the way the nation's vulnerability in the olive oil sector can be curbed. It is known that Nigeria's hydrocarbon resources are the mainstay of the country's current economic climate but creation and progress of the essential oil and natural gas sectors tend to be constrained by many factors including instability in the Niger Delta (the southern region of the united states). The oil industry is mostly found in the Niger Delta where it's been a source of conflict. Local organizations seeking a show of the oil wealth often harm the essential oil infrastructure and staff, forcing companies to declare power majeure on oil shipments. At the same time, oil fraud, commonly referred to as "bunkering" causes pipeline damage that is often severe, causing loss of production, pollution, and forcing companies to shut-in development. The industry has been blamed for pollution that has harmed air, dirt and water leading to losses in arable land and reducing fish stocks and options.

The outcome of the analysis, also, will be worth focusing on to international community, local and international oil and gas administrators, economical development experts, and more in related fields of study.

PLAN OF THE STUDY

This study is divided into five different chapters. The first section is the facet of the analysis that deals with the release to the analysis. It assists as the overview of the entire research work. Chapter two covers a thorough review of relevant opinion of eminent scholars and institutions of thought on the subject matter.

Research technique is presented in chapter three. The followed ways of research and models are detailed in this section like the methods used in gathering and studying the data. In chapter four, data related to the study is shown and examined. This section reports the result of the policy simulation. The fifth section contains the synopsis of the study including the presentation of findings of the research and referrals.

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