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THE IMPACT
OF OIL SECTOR ON THE NIGERIAN ECONOMY
CHAPTER ONE
1.0Introduction
Nigeria is a
major of crude oil and importance or of this commodity has been highly
manifested in the nation’s economy. Starting from the early 70’s, the petroleum
industry has become the dominant industry in the economy following quickly
after the agriculture the dominant industry before the discovery of crude oil.
It has dictated the pace of economic, political, social and cultural progress
in the country.
1.1 Background of the Study
Crude oil, a
commodity otherwise referred to as “black gold” is of strategic importance in
the world, particularly since the second half of the twentieth century as noted
by Mikelson (1972), Tugendhat and Hamilton (1975), Odell (1979), OPEC bulletin
(1984). It is both the most important source of energy and the largest
internationally traded commodity.
Thus, as
Tugenhat and Hamillton (1975) have observed, out civilization depends on oil
more than any other single commodity.
The search
for oil in Nigeria was dated back to 1903 when the colonial government set up
mineral survey corporation, No significant result was achieved.
In 1907, oil
seeped was observed at Aruromi arsssound Abeokuta province which led to a
German company, Nigerian Bitumen Company to obtain license to exploit oil
deposits. The Nigerian oil industry is 105 years old this year because the very
first attempt to find oil in Nigeria was made in 1908. Fifteen wells were
drilled between 1908 and 1914 without success.
By 1937, the
second attempt was made and this time by an Aglo-Dutch consortium called Shell
D’Arey. Unfortunately, the outbreak of the Second World War interrupted the
attempt. By 1947, Shell D’ Arey came back as Shell BP Petroleum Development
Company of Nigeria and drilled two exploratory wells between 1951 and 1955.
Commercial oil discovery was made at OLOIBIRI FIELD in 1956 and in 1958 Nigeria
was exporting about 17,000 barrel of oil per day (BOPD). Between 1961 to 1962,
the right to explore oil were granted to other companies like Texaco Tenneco,
Gulf (Chevron), Satrap (Elf) and Agip.
Initially,
all crude oil produced in Nigeria was exported without being processed. Most of
the by-product of petroleum was imported because Nigeria had no refinery. By
1965, the first oil refinery was commissioned in Nigeria at Port-Harcourt.
Nigeria joined organization of petroleum exporting countries (OPEC) in 1971.
This same year, that Shell BP, GULF (Chevron), Mobile, Satrap (Elf) and
Agipacquired 35% equity interest in commercial discovery.
In 1973,
Nigerian National Oil Company (NNOC) was established and late in 1977, Nigerian
National Petroleum Corporation (NNPC) was established by merging the activities
of NNOC and department of petroleum inspectorate (DPI).
Thereafter,
in 1978 Warri refinery was commissioned and the third refinery, the Kaduna
refinery was established in 1980.
The
Port-Harcourt refinery is the oldest refinery with capacity of 35,000 barrels
of crude oil per day.
It produces
petroleum gases (LPG), Gasoline (Petroleum) for cars dual purpose kerosene
(DPK) for cooking, automotive gas oil
(AGO) or lorries and fuel oil two grades which are low power point (LPPO) and
high power point (APPO).
The warri
refinery processes two domestic crude oil from Chevron Escravo crude oil and
Shell’s Ughelli quality control center crude and produces the same type of
products as Port-Harcourt. It has a capacity of 100,000 barrels of oil per day.
It has been updated to about 200,000 barrels per day now.
A forth
refinery was established in Eleme in Port-Harcourt in 1989 with about 150,000
capacity of barrels per day. It has been updated to about 300,000 barrels per
day. Now Nigerian supplies about 1.9 million to 2.0 million barrels per day
since 2009 to 2010, according to Network news from Radio Nigerian presented by
the (OPEC).
In general
development, there is nothing short of truism that there have rapid charges in
the spheres of economic and social life of Nigeria due to the emergence of oil
in national lives. This discovery of oil has systematically submerged
agricultural sector which used to provide the bulk of our revenue. This sector
has been neglected for oil sector. Today the oil sector contributes about 86
percent of the federal government revenue, accounts for about 90 percent of the
country’s foreign exchange earnings and constitute over 25 percent of the
nation’s Gross Domestic Products. Also the previous impact of the good work of
the petroleum trust fund (PTF) cannot be over emphasized.
Structurally
and otherwise, the oil boom of the 1970’s helped significantly in transforming
Nigeria from an ordinary third world black country to an appreciate position
both in term of development, infrastructure, international politics et cetera.
It is the first and only producer in West Africa and the second most producer
in West Africa, it is only to Libya. Among the major world producers with an
output of 110 million tons in 1974. it was placed sixth. Because of its limited
internal market, it exports largest proportion of its output. To facilitate
exportation, pipelines have been laid to connect the major oil wells with the
ports of Bonny and Escravos. Today, urban and rural development in parts of the
country can be traced to the oil wells located in the remote villages of the
country where oil continues to gush out day and night.
It is the
oil of these villages that has brought sky crappers, express roads, development
of federal capital territory (FCT) fly over and other physical structures to
cities and towns, which are from the gushing wells.
But the
villagers from whose ancestral land and territorial waters the black gold oil
is mined, there is a sad tale full of sound and lury signifying something
neglect.
Furthermore,
with the over growing contribution to Gross Domestic product, one should not
consider it as an over statement by saying that the Nigerian economy is highly
dependent on the oil sector for its economic activities and hence concluded
that crude oil is now the mainstay or power of the Nigeria economy. Now as a
result crude oil being the mainstay or power of the Nigerian economy it
haveinfluence its expenditure profit outlined by the president in the proposal
of its budgeting which #841 billion is for recurrent expenditure while #540
billion would go for capital projects.
About 48
percent of the proposal expenditure would go to priority sector such as
education (11%), health (7%), Power (5%), water (2%) and security (15%). The
provision of 2 percent for agriculture and agriculture research institutes.
(The leader 2005-130) Christmas Edition.
1.2 Statement of the Problem
Nigeria’s
position as Africa’s biggest oil producer in the OPEC according to Syngn(1986)
no doubt which makes Nigeria oil sector accounting for almost all the countries
exports have earned billions of dollars from its oil export is currently
considered as the thirty six poorest country in the world, out of the hundred
and fifty six nations as reported by radio Nigerian through theress network
news at 7am on 4th sep. 2012. (FRCON…2012). Earnings from oil sector alone in
1974 and 1990 as a result of Arab League was between Israel and Palestine and
gulf war about 17 billion Nigeria were relies over then.
Yet, many of
the citizens above fifty five percent (55%) are living still below poverty
line. There is lack of infrastructural facilities; her educational system is at
the verge of collapse because of underfunding and mismanagement. The health
sector has nothing good to write home about, the cost of life and standard of
living are becoming more difficult nowadays, policies has taken over every
place and industrial and agricultural sector were neglected “inefficiencies”
and operating problems in the downstream sector are causing a financial looses
of equipment to above ten percent (10%) of Gross Domestic product (GDP) every
year due to “bribery and corruption” (world bank and Nigeria 1995).
Therefore,
even in the oil sector and its associate revenue, a question is then asked,
where are we going? What will be our future and how will I look with all the
potentials of the oil sector or revenue, is oil responsible for the boom or
doom of the Nigeria economy, how are we going to turnover present curses to
better our situations.
In this
work, I hope to meet the challenges of providing some successions as a solution
to these problems.
1.3 Objective of the Study
The objectives
of this work are
1. To examine the impact of oil sector on
Nigeria economy.
2. To examine the relative contribution of oil
revenue on total government income and government capital expenditure.
3. To evaluate the findings and make a necessary
recommendations.
1.4 Statement of Hypothesis
For the
purpose of this work, the researcher will test the following hypothesis which
is in null and alternative form.
Ho: The oil
sector has made no significant impact on Nigerian economy. (Null hypothesis).
Hi: The oil
sector has made a significant impact on Nigerian economy. (Alternative
Hypothesis).
1.5 Significance of the Study
These will
also analyze oil sector as a mono-cultural product base of the Nigeria economy,
knowing how much have being earned, the amount invested in other sector of the
economy to boost the economic activities and its resultant multiplier effect.
Again the advantages as well as the disadvantages of the oil sector will also
be discussed.
Finally, in
our bid to find a way of bearing in mind the burdens of the backwardness of our
economy, there is still believes that with a good policies and implementation strategies,
what remains of our oil sector is for he castile to transform it
technologically and economically for a better tomorrow and towards greater
Nigeria.
1.7 Definition of Terms
Economic
growth may be expressed as the expansion of real Gross National Product (GDP)
or real per capital income (GNP). R.M Harven 1960 P.36).
Economic
growth as the real income in GNP or NNP which occur over a period of time. (Dr.
S.I Udabah 2002 P.70) economic growth as a long term rise in capacity based on
advancing technology and the institutional and ideologically adjustment that it
demand. (Prof. Simon K. 1973 and Dr. Sil Ndabah 2002 P.66).
Ihingah, in
his definition of economic growth he relates it to a quantitative sustained
increase in the countries per capital output or income, accompanied by
expansion in its labour force, consumption, capital and volume of trade.
(Ihingah2002).
Finally,
economic growth is all about raising the production capacity of a country and
expansion of its Gross Domestic Product (GDP).
Gross
Domestic Product (GDP) is the total income earned by national domestically, it
includes income earned domestically, b foreigners, but it does not include
income earned by domestic residents on the foreign ground.
Gross
National Product (GNP) is the total income earned by nationals (i.e. by
residents of a nation), it includes the income that national earns abroad but
it does not include the income earned within a country by foreigners.
Now from the
above statement, it shows that there are various impact of the oil sector both
in development and economic growth within the country and outside the country.
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