CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Crude oil is one of the abundant natural resources nature has blessed Nigeria with. Since the discovery of oil in commercial quantity in Nigeria at Oloibiri in the present day Bayelsa State, the country’s oil sub-sector has grown phenomenally and the importance of oil in the development of the economy cannot be overemphasized. Baghebo and Atima (2003) confirmed the above by stating that oil industry has gradually, albeit at a sharp increase become the most valuable and vibrant industry in the Nigeria’s economy.
The huge revenue from oil of course presented net wealth and thus provided opportunity for increased expenditure and investment. Oil provided approximately 90 percent of foreign exchange earnings and about 80 percent of federal revenue and contributed to the growth of Gross Domestic Product (Gunu and Kilishi 2010). Iledare (2007) in his contribution, forwarded that petroleum, especially oil, has been the main driver of the Nigeria’s economy since the end of civil war in 1970, contributing nearly 80 percent of government’s revenues and 90 – 95 percent of its foreign exchange earnings; On the average, an analysis he draws from 1970 – 2007. The above stated benefit notwithstanding, the discovery of oil also came with its attendant problems. This is because, oil industry has replaced the agricultural industry as Nigeria’s highest producer of export commodity and highest export earner.
After acquiring a 51 percent stake of the petroleum, Nigeria joined the Organization of Petroleum Exporting Countries (OPEC) in 1971 paving the way for enhanced significance on the global stage of oil producing and exporting nations (ORTII Report, 2013). This is an intergovernmental Organization of thirteen (13) developing countries, founded in 1960 by five (5) nations. The Organization has as its stated mission “to coordinate and unify the petroleum policies of its member countries to ensure the stabilization of oil market in order to secure an efficient, economic and regular supply of petroleum to consumers,…” (Aluko 2005). One of the mechanisms it uses to achieve these objectives is the crude oil production quota it places on all its members.
Since the country joined the Organization in 1971, the impact of crude oil production quota on Nigeria’s economy has been double edged meaning, that it has benefited the country in some ways and has in many other ways, turned out to be a problem. Specifically, changes in the production quota internationally affect the nation’s domestic economy and force government to adjust its expenditure in line with such changes. Basically, the crux of the problem lies in the fact that Nigeria has extremely relied on this commodity over the years, making its economy a mono-product economy and this has triggered severe structural difficulties for the economy.
It is therefore within this context that this research intends to examine the impact of crude oil production quota systems on Nigeria’s domestic economy.
1.2 Statement of the Problem
Nigeria’s position as Africa’s largest oil producer in the Organization of Petroleum Exporting Countries (OPEC) is not in doubt; this makes the nation’s oil sector accounting for almost all the country’s export earnings. However, the country is currently rated as the 62nd poorest country in the world and the 32nd in Africa out of 185 countries and 53 countries in the list respectively (Global Finance Magazine). While most literature and scholarly works have channeled most of the blames for the obvious lacuna to internal corruption and mismanagement, a wider lens should be drawn at the external factors, the international oil market for example. The production quota imposed on Nigeria by OPEC has largely curtailed the country’s production capability and then affecting the nation’s revenue. Nigeria has over the years limited its production and export below and within the export benchmark stipulated on it by the Organization of Petroleum Exporting Countries (OPEC). Within the context, certain troubling problems abound that have further deepened the state of the Nigerian socio-economic society. First is the issue of Nigeria’s population compared to other members of the organization, also there is the issue of Nigeria’s sole dependence on the petroleum sector, that is the country is a mono-cultural one that is tailored on the lines of the oil industry, hence should be able to produce and export to full capacity without restrictions. This doubles with the fact that there is an intensive search for alternative energy sources going on in the advanced world for cost and environmental reasons. Hence, the Nigerian economy has been hampered by the OPEC quota from taking advantage of its oil benefit now that it has the opportunity. Again, 98% of Nigeria’s revenue is from the oil sector; hence, the problem of nation’s sole dependent on oil revenue.
Apart from the above problems, a major problem that accompanies the OPEC production quota system is the fact that the organization has widely been regarded as a cartel. This cartel situation have led to insufficient production and consumption conditions; Hence OPEC’s production quota system is a stumbling block to smooth flow of international trade and economic development. This is evident in the fact that none of the OPEC member countries could be regarded as haven`t truly crossed the line of underdevelopment despite all the petrol-dollars they have amassed over the decades.
1.3 Research Question
To what extent has the OPEC’s crude oil production quota systems impacted negatively on Nigeria’s domestic economy?
ii. How has crude oil production quota systems helps in the diversification of the nation’s domestic economy?
iii. What are the impacts of over dependence on income from crude oil on Nigeria`s domestic economy?
iv. To what extent does production quota impacted on Nigeria’s socio-economic development?
1.4 Objectives of the Study
(i) Main objective:
To examine the impact of crude oil production quota systems on Nigeria’s domestic economy.
(ii) Subsidiary objective
To examine the extent to which crude oil production quota systems has in the diversification of the nation’s economy.
To examine the impact of over dependence on income from crude oil on Nigeria’s domestic economy.
To examine how crude oil production quota systems has impacted on the nation’s socio-economic or national development.
