CHAPTER ONE: INTRODUCTION
1.0 The Problem
Nigeria seeks to grow oil reserves to 40 billion barrels by 2010 and maintain her position as a global energy player by opening up her economy to windows of investment, most significantly in the oil and gas sector. Hence, it is of no surprise that in 2000 the downstream petroleum subsector was deregulated by the President Olusegun Obasanjo administration.
If we think oil is a problem now, we had better wait for the next 20 years; it will be a nightmare. The world has already consumed about 80 million barrels of oil. Of the world’s total oil reserve, estimated to have been some 2 trillion barrels in volume, approximately 900 to 1,000 billion barrels have already been consumed. At present, production rates and oil supplies are predicted to last another 40 years.
Geologists Colin J. Campbell and Jean H. Laherrere claimed in 1998 that within the next decade, the supply of conventional oil would be unable to keep up with global demand. Conventional wisdom erroneously assumes that the last bucket of oil can be pumped from the ground just as quickly as the barrels gushing from wells today. From a socio-economic point of view, when the world runs completely out of oil, it is an indication of economic crisis, as oil dictates global economic trends. If production rates fall while demand continues to rise, oil prices are likely to spike or fluctuate wildly, raising the prospect of economic chaos and even war.
HISTORICAL EVOLUTION OF OIL DISCOVERY
Oil, among other energy sources, was first discovered in 1805. The search for mineral deposits such as hydrocarbon was undertaken by a German-Nigerian Bitumen Company together with the British Colonial Petroleum Company. It all started in the Okitipupa region, 55 miles east of Lagos (now Ondo State). Between 1908 and 1914, some 15 wells were drilled down dip of the oil seeps to depths ranging from 350 to 1300 feet.
This process was interrupted by World War I, and the situation dragged until 1937 when Shell/D’Arcy initiated reconnaissance works. In 1946, Shell/D’Arcy started exploring in the Niger Delta, while there was a similar reconnaissance summary in the Sokoto basin by Mobil. Before the mid-nineteenth century, shallow pits and hand-dug shafts were the sources from which asphalt oil and its byproducts were obtained. The first well where oil was actually drilled and produced was at Oil Creek, Pennsylvania, by Colonel Drake in 1859, followed by rapid growth in production. This led to a giant stride in the development of the internal combustion engine in the 1870s and 1880s.
Before the 1920s, the oil industry was dominated by seven major companies, termed the “Seven Sisters”:
- British Petroleum (European Based)
- Shell (European Based)
- Exxon (American Based)
- Gulf (American Based)
- Texaco (American Based)
- Mobil (American Based)
- Socal / Chevron (American Based)
2.0 PRE-INDEPENDENCE AND POST-INDEPENDENCE ECONOMY
Nigeria is endowed with vast and largely untapped natural and human resources. Politically, the nation experienced civilian rule from independence to January 1966, followed by multifarious coups d’état until 1979. The military staged a comeback in 1983 until May 1999, when the Abdusalami Abubakar regime relinquished power to the democratically elected government of Olusegun Obasanjo.
Between 1962 and 1985, Nigeria implemented four national “Development Plans.” These plans were woven around specific objectives, including an increase in real income, more equitable distribution of income, a reduction in unemployment, and the maintenance of macroeconomic stability. Despite this, the nation remained bedeviled by poverty, a high concentration of wealth among small groups (elites), and an unfavorable mono-economic policy dependent on petroleum.
The Oil Boom and Macroeconomic Shifts
The oil boom of the 1970s brought fundamental changes but also created a heavy dependence on crude petroleum exports. By 1980, the oil sector accounted for 22% of the GDP, providing 80% of government revenue and 96% of export earnings. Inappropriate policies, such as the Economic Stabilization measures of 1982, aggravated the economic quagmire, leading to a substantial drop in capacity utilization and a massive right-sizing of the workforce. By the mid-1980s, real per capita income fell simultaneously with the elimination of the middle-class structure.
3.0 THE REASONS FOR DEREGULATION
Nigeria started refining operations in 1965 with a capacity of 38,000 barrels per day (bpd). In the 1990s, with a fast-growing population, the country faced a situation where domestic demand far outweighed supply. Corruption, smuggling, and mismanagement meant refineries operated at suboptimal levels. Turn Around Maintenance (TAM) failed to achieve desired effects, forcing the NNPC to import heavily, which cut into revenue derived from oil exports.
Upon assuming office in 1999, President Obasanjo found a comatose economy and a heavy debt burden. A substantial part of revenue was used for debt servicing and a bloated public service, leaving little for capital investment. The government decided it could no longer afford to subsidize pump prices for white petroleum products (PMS, AGO, and HHK). Currently, 1 liter of gas in Nigeria is sold at a government rate of 70 Naira (approx. 50 cents), even after price increases.
The goal of deregulation is to dismantle the natural monopoly of the State-owned enterprise by privatizing and removing price controls. Competition in all sectors is expected to trigger economic growth, reduce government subsidy costs (which ran as high as $1.5 billion annually), and boost Foreign Direct Investment.
4.0 SECTORAL DATA AND TRENDS
Table 1: Sectoral Contribution to GDP (%)
| Sector | 1960 | 1980 | 2000 | 2006 |
|---|---|---|---|---|
| Agriculture | 64.1 | 30.8 | 35.7 | 15.54 |
| Manufacturing | 4.8 | 8.1 | 3.4 | 14.38 |
| Crude Petroleum | 0.3 | 22.0 | 47.5 | 47.41 |
Table 5: Historical Trend of PMS Prices (Naira)
| Year | Price (N) | % Change |
|---|---|---|
| 1980 | 0.15 | 0.00 |
| 1990 | 0.60 | 42.86 |
| 1998 | 20.00 | 81.82 |
| 2005 | 52.00 | 6.12 |
6.0 CONCLUSION AND RECOMMENDATIONS
The implementation of domestic petroleum price liberalization and deregulation has often invited general strikes, costing the economy incalculable losses in man-hours and growth opportunities. The contention is whether a market-based approach can work in a political environment that may not tolerate short-term price volatility. However, competitive pricing is expected to produce “Kaldor-Hicks” improvements over the long run—increasing social net benefits even if not everyone is made better off immediately.
Key Recommendations for Policy Development:
- Data Integrity: Establish a databank for the total barrels of crude refined, imported, and exported to ensure precise planning.
- Remove Barriers: Dismantle bureaucratic barriers to encourage private investors and stimulate “perfect pricing” competition.
- Refinery Optimization: Inject life into existing refineries to enable them to operate at optimum capacity while waiting for private refineries to come on stream.
- Stabilization Fund: Establish a “Petroleum Stabilisation Fund” using excess crude revenue to cushion the effects of international price fluctuations.
- Regulatory Harmony: Harmonize the activities of the DPR, PPPRA, and SON to eliminate regulatory distortions and overlapping functions.
