CHAPTER TWO

REVIEW OF RELATED LITERATURE

Nigeria has a population of over 100million people and an abundance of the

natural resources, especially hydro. It is the 10th largest oil producer in the world,

the third largest in Africa and the most prolific oil producer in sub-Sahara Africa.

Nigeria is overwhelmingly dependent on its oil industry. Oil is 90% of its natural

exports. The collapse oil market would be a disaster to the country because the

country has such a large population and needs large money to maintain the

population standard of living.

PRODUCTION

Nigeria crude oil production as of 1991 was at 189500 barrel per day. This

amount is about 3.0% of worlds total and it was a 606% increase in production

from 1990

RESERVES

Nigeria reserves were estimated to be 17.9billion barrels, which is equivalent to

18% world total. Furthermore, the Nigerian government has set a goal to

achieve reserves of 20 billion barrels a level has not been marched since 1995.

INTERNATIONAL TRADE VOLUMES

From OPEC annual statistic bulletin on page 11, as at 1992, the bulk of Nigeria

oil was exported to the USA and Westerns Europe out of 1, 585, 00 barrels per

day exported in 1992, the USA accounted for half or 701,000 barrels paid.

Western Europe accounted for 690,000 barrels paid. The greatest oil was
exported to Germany, 180,000 barrel paid and the Netherlands received 74,000

barrel paid Africa trade was only 80,000 barrel paid.

NIGERIAN GENERAL INFORMATION

Nigeria is marked by the presence of foreign oil companies and dependence on

oil through its modern history. Oil form the backbone of the Nigerian economy. It

accounts for 25% Gross Domestic Production (GDP) 95% of total export earning

and 75% of government revenue.

LAND CONCESSIONS

The following chart shows the land concession made by the following companies.

LAND CONCESSION DISTRIBUTION

COMPANY KM2

SHELL 43243

ELF 11113

GULF 14138

NAOC 9966

MOBIL 4928

TEXACO 2570

NNPC 40440

EXXON 2200

STAOIL 5698

Source: NBS Bulleting 2011

Shell and NNPC by far hold the majority of land concession.

NNPC HISTORY AND EMPIRICAL REVIEW
In 1971, the Nigeria National Oil Corporation was established to gain greater

control over Nigerian oil production.

Oni (1986) broadly classified Nigerian economy into two; the period of Agriculture

boom, oil boom. It was when Nigeria was about to experience oil boom (1971)

that federal government established NNPC to have greater control over the oil

production. For the most part it acted as the main agent of the state in partial

nationalization of oil companies in the country. However, by 1977, neither NNPC

nor the ministry of oil could efficiently achieve, control over the oil market. This

made the government pull its resources and formed the NNPC. The Nigerian

National Petroleum Company, given it the power over issues formerly handed by

NNOC and the ministry.

The NNPC served as an organization for the production, transportation refining

and marketing crude and petroleum products with extended regulatory power.

By 1989, the NNPC was deregulated for the NNPC needed to be quasi-

independent in order to operate in the market effectively. In 1991, the NNPC was

officially allowed to set product price and it became commercial and

autonomous” by 1992.

Finally, NNPC has engaged in a number of joint ventures with foreign

companies, most notably with Royal-Dutch/Shell in a recent liquid gas project.

ROLE OF NNPC
1. The petroleum inspectorate division of NNPC performs regulatory

functions by overseeing all the activities of all the company licensed to

 engage in the activities in the country to ensure compliance with the laws

and regulations relevant to oil industry.

2. The role in oil exploration fell on NNPC as a result of the mergers of

NNOC and ministry of petroleum resources in 1977.

3. Oil refining in Nigeria is done under the NNPC

4. The NNPC product movement section is responsible for planning

operation to pump products from the source of supply to various

destinations in a safe, economic and controlled manner and ensuring

advocate stock in the deposit to meet tanker-truck loading demands.

5. Another crucial role playing by NNPC is the area of manpower training of

Nigerians to ensure that they occupy managerial, professional and

supervisory grades in all the companies operating in the country.

OPERATION
The Nigeria National Petroleum Company (NNPC) controls the production and

distribution of the petroleum products. It distributes these products through its

marketing company, petroleum pipeline marketing company (PPMC).

For instance, from the production point, whether produced in the country’s

refineries or imported to the retail outlets, NNPC control them all the product go

from NNPC to the PPMC and to the marketers whether major or independent,

from the marketer to the tankers owners and then to the petrol stations,

government retains close control-over its activities through the appointed senior

executives.
PROBLEMS
Recently, the government owned company is been performing below

expectation, the main report signed, by 32 members of the committee said that

the downstream sector of the petroleum sector is operating below capacity

because a “domestic supply of the refineries have been eroded over time and it

would require massive investment in existing refineries to restore capacity”.

NIGERIA-DEPENDENCY ON OIL
Nigeria is overwhelmingly dependent on oil industry. Oil is 90% of its national

export. The collapse of oil market could be a disaster to the country because the

country has such a large population and needs large amount of money to provide

for these people. OPEC forced countries to lift more crude oil from Nigeria Field

to help the country’s economic situation.

The value of crude is the key to success with a high price of crude, less wealthy

oil exporting countries cannot afford to pay compensation or to cover the cost of

equity acquired out of future production.

DEREGULATION SAGA
FUEL RUNDOWN

Until 1960, government participation in oil industry was limited to the regulation

and administration fiscal policies. In 1971, Nigeria joined OPEC and in line with

OPEC resolutions, Nigerian National Oil Corporation (NNOC) was established,

later becoming NNPC in 1977, this giant parastatals, with all its sectors of the oil

industry, both upstream and downstream. Nigerian suffers persistent shortage

despite being the world’s fourth largest oil producer. For so long, petro stations

have run dry across the country with endless queues. Although fuel is readily
available at a price higher than N97(Naira) pump price at the back market. In

November 1999, the government announced that the market price for petroleum

would be deregulated and domestic crude allocation to NNPC could offer the

country debt relief. It noted that all petroleum prices would fully deregulate and

doom ethic crude allocation to NNPC would pay for at export price with

immediate effect. This would have an immediate effect on pump price outcries by

the National Labour Congress (NLC) and public led the government in December

1999 to subsidy and to defer price increase.

In April 2007 to Nigeria government set up a committee on oil and gas reform to

deal with deregulation and privatization of NNPC. Seven subsidiaries of NNPC

were due to be sold including 3 refineries, the Petrol Chemical Company Ltd, the

Nigeria Petroleum Development Company and the partially owned oil marketing

firm, Hyson Nigeria Ltd, NLC warned that government could not afford to impose

price of committees as was the case during military era. It recommended that the

current price regime be maintained while the federal government takes steps in

the spirit of integration in West Africa to patronize the refineries in Abidjan, Ivory

Coast and any other facilities in sub-region.

WHY MUST THE PRICES BE DEREGULATED?

Before we go further there is need to define the term deregulation.

Deregulation is a system or method where every willing investor is allowed to

take part in a specific section or sub-sector of the economy allowing for more

private sector participation in an industry and thereby reducing the monopoly of

such sector.
The government as to why the fuel price must be deregulation gave various

reasons. Some of the reasons are as follows;

 To ensure proper pricing.

 To bring in more investors thereby breaking the monopoly of NNPC and

reducing the artificial fuel scarcity by increasing the supply of the products

which overtime would lead to competition and fall in price. Greater

participation by private sector would inject more investment both local and

foreign into sector.

 The fuel subsidy paid by government could be diversified to another sector

such as education.

 Deregulation would offer the country debt relief.

 Under deregulation, no mafia would be able to dominate the oil sector a

scenario that gave rise to smuggling and made nonsense of controlled

prices.

BENEFITS OF DEREGULATED FUEL PRICES

For efficient use of resources, deregulation should be given a light especially in

this type of economy where our debts are growing. The deregulation could offer

debts relief and this would make the country currency to be strong and

appreciated.

Falegan (2001) stressed that the federal government’s intention on deregulation

was to break the name monopoly of the Nigeria petroleum companies and allow

free market forces through increase in number of experts in the oil industry. By

implication, this will reduce unemployment.

He went further to opt on positive effect of deregulation that it will increase the

number of players (suppliers) and thereby resulting to increase in supply of

petroleum products and removing shortage. It will also embrace competition,

thereby, yielding qualitative products output.

Gauss Obaseki (2001) Said deregulation will bring in more investors. (injection of

capital), especially the foreigners and removing the inefficiency, bureaucracy and

to a lesser extent reducing corruption.

According to This day newspaper, (pages 5, 2001) Telecommunication was used

to serve as a guide for deregulation of oil sector and the role-played by the

private telecommunication operations in apt. it was analyses that there will be

increase in price in the short term where in the medium and long rum term the

price will tumble. Also it will result to efficiency allocation of scarce resource to

areas deserving attention and competition.

Oyetunji micheal (pg 4, 2001) concurred with deregulation of oil sector in Nigeria

by stressing that privatization of refineries is misplaced. The absence of

competition will bring about efficiency in quality and quantity and marketing of

services to the users.

From the above, this would increase the revenue accrued from oil sector and this

could be ploughed back to the industry and the other sector of the economy.

Also one concludes that the deregulation of Nigeria oil sector is the ultimate

solution especially due to social and orientation of Nigerians. Apart from the

aforementioned benefits Bio Ben Baquo (2001 opted it was not logical that

deregulation would attract investors into the country. He went further to say that
all the monies acquired in the past by the federal government from previous price

increase had not made any significant impact on the people’s lives and the

country’s economy.

LIMITATION OF THE DEREGULATION FUEL PRICES

Although the federal government intention on deregulation was to break the

monopoly of the Nigeria NNPC and allow free market forces through increase

number of experts in the oil industry, but this could cause sharp increases in oil

price in the short-run and if not well managed may result to cartel.

Falegan (pg 4, 2001) strongly against the assertion made by NLC on effect of the

deregulation that would lead to increase in the price of petroleum products and

as such satisfy the masses he had forgotten that the oil touches close a hundred

percent of human activities. These activities include transportation, health,

agriculture, etc. one deregulation sets in, it will jerk up the price resulting to

increase in transportation cost, electricity and the multiplier of this in real income.

Allowing free market system operating optimally may cause serious economy

problem such as unfavourable of trade payment. This is because if the local

supply cannot meet demand, then the augmentation will come from importation

and virtually seal the hopes of reviving the refineries.

The NLC was scared of the crush ring effect of increase in prices where earnings

are declaring and cost of living is rising this limit are the reasons why federal

government were yet to embark on deregulation.

In 2001 the 36 state government disagreed with the option of deregulation rather

embraced and endorsed the liberalization of the oil sector and this will pave way
for the breaking the monopoly NNPC the removal of subsidy and opening up the

market.

Onabolu L (pg 11, 2010 stressed that he does not disagree with deregulation that

is a good policy. And government should not forget that what worked in west may

fail here. This is because there are requisite things to do. For instance, in aboard

very few private cars were on the road, there is facility for good transport cars

were on the road, there is facility for good transport system and cheap effective

phone services for businesses etc. but right now, if federal government should

embark on it; it will:

1. Increase the private fuel since the primary aim of deregulation is to equate

price with those that obtain across our boarders those prices are of course

much higher than our local price.

2. The Government was of the opinion of settling all players at international

prices. Then, this will translate to high cost and prices.

3. There is every tendency for cartels to come play armed with every

antitrust tool available to them they will also be in too much of a hurt to

recoup their massive investment plus a neat and tidy profit.

THE GOVERNMENT AND INDEPENDENT MARKETERS

The normal distribution ratio between the independence marketers is 3.2 that is

60% and 40% respectively and this was very effective because of the bulk of the

filling stations owned by the independent marketers are located in the rural area

in the country.

The multinational who had branches in some neighbouring country crashed in on

the change of leadership in NNPC to reverse the situation by asking for more
allocation of products to the major marketers so they could feed their branches

that were located outside Nigeria with products, which are in very high demand in

those countries. The Group Managing Director (GMD) of NNPC. Mr. Jackson. G.

Obaseki agreed with the major marketer following which he announced that

PPMC should change the allocation formulary from independent marketers 60%

to 40% and major marketers 40% and major marketers 40% to 60%. The

marketers kicked against this and every effort made by PPMC To explain the

situation was not accepted as they insisted that the former sharing formulary was

better.

When the government summoned the states holders in March 2000. It was

difficult for the GMD of NNPC, Obaseki to retrace his steps about the agreement

to give more product to the major marketer, all he had to justify the formulary was

to inform the government that the marketers were all diverting, hoarding and

regularizing prices of all the products they received from the deports. Eventually,

the government was made to understand that agreement between the major

marketers and top officials of the NNPC.

CAUSE OF FUEL SCARCITY

The issue of fuel scarcity has begun since 70’s, which led to setting up a panel of

enquiry in 1975 to determine the root cause of the shortages.

The panel’s main findings were:

1. Domestic demand has outs ripped domestic refinery capacity.

2. Marketing companies possessed inadequate financial resources to;

(a) understanding the importation of substantial quantities of petroleum

products required to argument domestic production and

 (b) construct the practically non-existing infrastructure needed to receive and

distribute products to the government to the geographical widespread

consumption conters in the interlands.

Various governments; since then had intensified efforts to increase the supplies

of fuel and today, there are eight oil companies and about 750 independent

marketers activity involved in marketing of petroleum products. Jerry Gana

(2001) had a contrary view of cause of fuel scarcity he stressed that this issue is

no longer a question of supplies, it is a question of direction, and it’s a question of

sabotage. This implies that adequate supply of fuel cannot stop fuel scarcity in

Nigeria. He further explains and acknowledges that diversion and sabotage are

the main cause.

Nigeria has refineries with nameplate capacity of 445,000v bbl/d still has

problems such as fuel sabotage, poor management, lack of turn around

maintenance and corruption, which Ogunleye frown at. One could conclude that

the major causes of fuel scarcity in Nigeria are corruption and mismanagement

and this does not affect the oil sector alone but the whole sector of the economy.

ELASTICITY OF DEMAND
PRICE ELASTICITY OF DEMAND

Price elasticity of demand refers to the degree of even of responsiveness of

demand to a little changes in price of goods and services, that is how demand

responds to changes in price of goods and services e.g. if the fuel price increase

form = N40to N97, what would be the demand? Would the demand increase or

decrease?
 UNITARY ELASTICITY OF DEMAND

Elasticity of demand is said to be unity if there is and equal change in both price

and demand if there is 30% increase in price of fuel and a corresponding 3%

increase in demand that’s elasticity of demand.

P1

P2 D

Demand Q1 Q2 Quantity

INELASTICITY OF DEMAND

When a change in the price of fuel lead to little or no change in demand, if 30%

fall in fuel price brings about less than 30% decrease in quantity demanded or

rise in demand. Demand in this case is less than 1.

D
P1

P2

Q1 Q2 D
Quantity Demand
 ELASTICITY OF DEMAND
A charge in price brings about a greater change in quantity demand 30% fall in

fuel price leads to 50% rise in demand.

ZERO ELASTICITY
Demand is perfectly or completely in elastic as a result of changes in price.

Demand in this case remains unchanged no matter the change in price rising or

falling. This applies to necessity goods like fuel.

P3

P2

P1 D

Q1 Quantity Demanded 50Ltrs

PERFECT ELASTICITY OR INFINITE

Consumers react sharply to changes in price. Consumers are willing to buy

almost all quantities of the commodity they need if falls slightly.

P1

0 Q1 Q2
EFFECTS OF DEREGULATION OF FUEL PRICE ON THE FINANCIAL
PERFORMANCE OF THE ECONOMY
Deregulation of fuel price could have both negative and positive effect on the

financial performance of the economy it must be admitted that deregulation of

fuel price would and increased suppliers in the market would result in increase

supply of the products in overtime lead to competition and fall in price. But the

increase in price in the short run would be because the investors, who may have

their own refineries, may want to recoup the money invested that is cost of

building the refineries, the price of a litre would be above the current price of N97

but in the long run, the price would fall.

With the introduction of investor, foreign and local money would be pumped into

the economy there is increasing the National Income of the economy, which give

rise to a positive multiplies may arise as two much money is pumped into the

economy and price and other goods apart from fuel would increase, the would in

variably mean that the transport fare will increase and prices food study will

increase and deregulation to the masses would mean “swim or die” a situation

that is clearly dangerous. Greater participation any private sector would give an

opportunity to more employment.

There are thousands of industrials in operation in Nigeria using generator to aid

the production of their goods and services. Since power supply in the country is

so bad that it cannot be relieved on these industrials, small and once there is

deregulation of the products price the small scale may wind up and the large

scale may also reduce the number of employees since they may not be able to

afford the increment and many employees would be jobless. In this situation,
level of production reduces thereby affecting the financial position of the

economy. Deregulation could also help the government diverse the fuel subsidy

to other sectors such as Education, Agriculture and so on. So as to improve

these sectors, revenue accruing from sale of Nigeria’s crude oil to industry and

other sector of the economy.

It has the effect of increasing the crime rate in the country, this is because of the

people out of employment who cannot afford the exorbitant price, may resort to

crime.
 CHAPTER THREE

RESEARCH METHODOLOGY
This section describes brief discussion on the data collection method on effect of

deregulation of fuel of price on the Nigeria economy, the procedure employed in

carrying out this research work will be examined, the pattern and research

designed for the study as well as data collection and analysis.

It also highlights or tends to analyze the scope of research; source and of data

collected; the problem involved or inherent in the study and ability of the

generated data.

RESEARCH DESIGN
Source of data was used to elicit information on fuel deregulation from fuel meter.

Twenty respondents were purposively drawn from owners of filling stations in

Surulere. The filling stations are Oando, Total, Conoil, MRS and Mobil. Four

each of these marketers brand were served with questionnaires twenty questions

all together, each of the marketers brand returned completed questionnaire

instead of four. Thus 15 questionnaires were registered. Information on

educational status, desirability of fuel price, regulation and reasonability of fuel

price deregulation and perceived effects regulation on the economy.

AREA OF STUDY
Geographical location selected in which the impact of fuel price deregulation was

located in Surulere Local Government, Lagos State, Nigeria. The impact of

prices as it relates to the citizens of Ishaga, Iponri and Alaka district.

POPULATION
Data population of over 39 marketers in Surulere region in Lagos State,

petroleum marketers like Total, MRS, Conoil, Exon oil, Oando at Lawanson Mobil

among other respondents who deals mainly in petroleum products and its bye

products e.g. engine oil, grease, diesel and many others.

SAMPLE AND SAMPLING TECHNIQUE

The Strategic and procedure for summarizing and exploring relationship using

the variables on which data have been called and referred to as data analysis. In

carrying out this research work, the researcher used the simple xxx sampling and

chi square test in analyzing the data collected

The research population is 25 (twenty five) out of which 20 surveys was taken

sample. The survey cut across series of petroleum marketers across there

L.G.A. in all, 20 questionnaires were distributed and 15 were collected back.

The questionnaire administered were analyzed strategically, using a simple

random sample (i.e. using simple percentage) Chi-square X test is to determine

whether the deregulation of fuel price have significant effect on economic

development or not. This implies that Chi square test was used to test the

hypothesis sets for the findings at degree of freedom (or 5% significant level) this

test is also referred to as goodness of fit test as one of the most important non-

parametric test in distributing population.

Some the data collected are on frequencies, the chi-square is assumed to be

viable and is being calculated thus:

Actual data collected is referred to as observed data while the calculated

expected data are derivable from actual data by manipulating column total

multiplying by row total and divided by grand total and this gives the selected

data.

Calculated X2 is the summation of manipulation of observed data minus selected

data.

Here the theoretic X2 is based on degree of freedom that is being calculated

multiplying the number of row minus I by number of column minus 1 at significant

level of 5%. By comparing the theatrical X2 is and calculated X2, if calculated X2

is greater than theoretic X2, the Null Hypothesis (Hi) is rejected.

INSTRUMENT FOR DATA COLLECTION

Sources of data produced were used to elicit information on fuel population from

fuel marketers. Twenty respondents were purposively taken from owners of

filling stations in Surulere. The filling stations are Oando, Total, Conoil, MRS

AND Mobil. Four each of these marketers brand were served with

questionnaires making twenty questions all together, each of the marketers

brand returned completed questionnaire instead of four, 15 questionnaires were

recovered. Information on educational status, durability of fuel price deregulation

and reasonability of fuel price regulation and perceived effects of deregulation on

the economy.
THE VALIDATION OF THE INSTRUMENTS
This implies that the chi square test was used to test the hypothesis sets for

finding at 95% degree of freedom (or 5% significant level) this test is also

referred to as goodness of fit test as one of the most important non-arithmetic

test in distributing population.

The data collected are on frequencies, the chi-square is assumed to be able and

is being calculated thus:

Actual data collected is referred to as observed data while the calculated

expected data are derivable form actual data by manipulating column total

multiplying by row total and divided by grand total and this gives the expected

data.

While the theoretic X2 is based on degree of freedom that is being calculated

multiplying the number of row minus 1 by number of column minus 1 at

significant level of 5%. By comparing the theatrical X2, the Null Hypothesis (Hi)

is rejected.