CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Petroleum products supplies have always been an acid test for successive governments in Nigeria. With the democratic dispensation, the supply and distribution of petroleum products improved but this was without a price frequent increase in petroleum products prices. With few months to the end of the regime, the ugly incidence of petroleum scarcity surfaced again and one begin to wonder if there is any solution to the problem.
The contemporary passion and tension that usually characterize petroleum discourse is due to inexplicable deprivations and sufferings of Nigerians amidst plenty and abundance of these products. As the 6th largest producer of petroleum, it is a paradox that in the past decade, supply of all products has been erratic and on sharp decline ironically, as supply declined, products prices have been on the increase as successive governments searched for “appropriate pricing”.
The combined impact of erratic and inadequate supply and unending price increase have brought untold hardship to the citizens and worse too, prevented economic recovery as promised by the present democratically elected government given that capacity utilization in the manufacturing sector nose-drives due to shortages of industrial products indeed many industries have been compelled to close due to non availability of some of these products.
In the bid to solve the problem in many developing countries, structural reform of petroleum markets has become a critical component of macroeconomic liberalization policies. The role of the government in the petroleum sector is being redefined and markets are being deregulated (i.e state interventions such as special treatments of state owned oil companies, price controls and monopolies are being broken up). Increasingly, the private sector is participating in more competitive environment.
But unexpectedly, the outcome of the deregulation has not been encouraging. There has been continuous increase in petroleum products. It was expected that deregulation would give room for competition which would transform to price reduction and excellent supply and distribution network. This study is devoted on to evaluation of the deregulation exercise, critically appraising its impact on petroleum pricing, consumption and the general living standard of the people.
1.2 Statement of the Problem
Historically, major petroleum marketing companies were the main sources of petroleum product’s supply. The companies transported and distributed the products relying on their distributed the products relying on their distribution and retail outlets. This was an era of deregulation in which Nigerian paid market-determined prices for products. However, this arrangement was not sustainable given that it was depended on the profit and market imperatives of the oil marketers. The country’s economic activities expanded in the seventies such that private companies could no longer cope with increase demand for products. This resulted in erratic supply of petrol and kerosene and ultimately acute scarcity of the product. The shortage was endemic and created social and economic dislocation in the country. This market failure made government to venture into petroleum products marketing and distribution.
The concern by government to overcome this lack of policy and total dependency on oil companies led to policy shift towards regulations Government therefore introduced uniform pricing to satisfy domestic demand strengthen self-reliance and avoid a situation in which the oil companies could hold the country to ransom. The nation witnessed adequate supply of petroleum products up till 1986. Thereafter, due to the sustained devaluation of the Naira on account of the implementation of the structural adjustment programme (SAP)coupled with the non-maintenance of the refineries, domestic production was soon undermined making it imperative for demand to be met through imports. The shortage of petroleum products escalated inspite of increases in prices of products since 1990.
The Obasanjo administration on coming on board decided to gradually withdraw the subsidy on petroleum products to allow the mechanics of market forces to take its full course. This again, resulted to frequency increase in petroleum products price.
1.3 Aims and Objective of Study
The aim of this study is to appraise the deregulation exercise that was carried out in the Nigerian downstream sector. The specific objectives of this study are as follow:
i. To evaluate the pattern of petroleum products prices in Nigeria.
ii. To examine the consumption pattern of petroleum products before and after the deregulation.
iii. To examine the impact of the deregulation of the downstream oil sector on the petroleum products pricing in Nigeria.
iv. To investigate the effect of the deregulation of the downstream oil sector on the living standard of the people.
v. To examine the pre and post deregulation era and make critical comparison.
vi. To explore the reasons why deregulation has not yielded the desired result in terms of prices and supply.
1.4 Significance of the Study
This study is significant in the following ways:
a. It would use a market structure conduct performance framework to analyse the industry, both before and after deregulation as a means of judging the impact of deregulation in terms of petroleum product’s prices.
b. The significance of this study also lies in the fact that it would contribute to existing literature on the subject by providing an expository analysis of the pattern of increase of petroleum products prices in Nigeria. This would enhance policy formulation in the downstream oil sector with the intention of alleviating the suffering of the masses.
c. It would be an important tool for students, academic, institutions and individuals that want to know more about the deregulation of the downstream sector of the Nigeria oil industry.
1.5 Hypothesis
This hypothesis will be of immense good to this study.
H1: Deregulation of the downstream sector is a solution to the problem of petroleum product distribution.
H2: An approved market margin will encourage product demand.
H3: Deregulation of the downstream sector will enhance the efficiency of the petroleum sector.
1.6 Scope and Limitation of the Study
This study examined economic rationality behind deregulation of the downstream sector of the Nigeria oil industry. The study seeks to investigate the effect of the deregulation on the prices and consumption of petroleum products as well as its impact on the living standard of Nigerians. The empirical analysis is restricted to the period between 1986 and 2011 because it was during the period that policy was implemented.
One of the major limitations of this study is that the period of time given by the institution’s authority for the study would not allow for an in-depth coverage of all the issues connected with the topic under study, and collection of related information.
Also, certain information required in order to highlight and analyse some observation may not be accessible e.g independent oil marketers’ operation record may be regarded as strictly confidential and would not be divulged to the research. And also finance is another constraint to an indebt study of this topic. The researcher also faced a problem of collecting all the questionnaires issued out to the respondents.
INTRODUCTION
1.1 Background of the Study
Petroleum products supplies have always been an acid test for successive governments in Nigeria. With the democratic dispensation, the supply and distribution of petroleum products improved but this was without a price frequent increase in petroleum products prices. With few months to the end of the regime, the ugly incidence of petroleum scarcity surfaced again and one begin to wonder if there is any solution to the problem.
The contemporary passion and tension that usually characterize petroleum discourse is due to inexplicable deprivations and sufferings of Nigerians amidst plenty and abundance of these products. As the 6th largest producer of petroleum, it is a paradox that in the past decade, supply of all products has been erratic and on sharp decline ironically, as supply declined, products prices have been on the increase as successive governments searched for “appropriate pricing”.
The combined impact of erratic and inadequate supply and unending price increase have brought untold hardship to the citizens and worse too, prevented economic recovery as promised by the present democratically elected government given that capacity utilization in the manufacturing sector nose-drives due to shortages of industrial products indeed many industries have been compelled to close due to non availability of some of these products.
In the bid to solve the problem in many developing countries, structural reform of petroleum markets has become a critical component of macroeconomic liberalization policies. The role of the government in the petroleum sector is being redefined and markets are being deregulated (i.e state interventions such as special treatments of state owned oil companies, price controls and monopolies are being broken up). Increasingly, the private sector is participating in more competitive environment.
But unexpectedly, the outcome of the deregulation has not been encouraging. There has been continuous increase in petroleum products. It was expected that deregulation would give room for competition which would transform to price reduction and excellent supply and distribution network. This study is devoted on to evaluation of the deregulation exercise, critically appraising its impact on petroleum pricing, consumption and the general living standard of the people.
1.2 Statement of the Problem
Historically, major petroleum marketing companies were the main sources of petroleum product’s supply. The companies transported and distributed the products relying on their distributed the products relying on their distribution and retail outlets. This was an era of deregulation in which Nigerian paid market-determined prices for products. However, this arrangement was not sustainable given that it was depended on the profit and market imperatives of the oil marketers. The country’s economic activities expanded in the seventies such that private companies could no longer cope with increase demand for products. This resulted in erratic supply of petrol and kerosene and ultimately acute scarcity of the product. The shortage was endemic and created social and economic dislocation in the country. This market failure made government to venture into petroleum products marketing and distribution.
The concern by government to overcome this lack of policy and total dependency on oil companies led to policy shift towards regulations Government therefore introduced uniform pricing to satisfy domestic demand strengthen self-reliance and avoid a situation in which the oil companies could hold the country to ransom. The nation witnessed adequate supply of petroleum products up till 1986. Thereafter, due to the sustained devaluation of the Naira on account of the implementation of the structural adjustment programme (SAP)coupled with the non-maintenance of the refineries, domestic production was soon undermined making it imperative for demand to be met through imports. The shortage of petroleum products escalated inspite of increases in prices of products since 1990.
The Obasanjo administration on coming on board decided to gradually withdraw the subsidy on petroleum products to allow the mechanics of market forces to take its full course. This again, resulted to frequency increase in petroleum products price.
1.3 Aims and Objective of Study
The aim of this study is to appraise the deregulation exercise that was carried out in the Nigerian downstream sector. The specific objectives of this study are as follow:
i. To evaluate the pattern of petroleum products prices in Nigeria.
ii. To examine the consumption pattern of petroleum products before and after the deregulation.
iii. To examine the impact of the deregulation of the downstream oil sector on the petroleum products pricing in Nigeria.
iv. To investigate the effect of the deregulation of the downstream oil sector on the living standard of the people.
v. To examine the pre and post deregulation era and make critical comparison.
vi. To explore the reasons why deregulation has not yielded the desired result in terms of prices and supply.
1.4 Significance of the Study
This study is significant in the following ways:
a. It would use a market structure conduct performance framework to analyse the industry, both before and after deregulation as a means of judging the impact of deregulation in terms of petroleum product’s prices.
b. The significance of this study also lies in the fact that it would contribute to existing literature on the subject by providing an expository analysis of the pattern of increase of petroleum products prices in Nigeria. This would enhance policy formulation in the downstream oil sector with the intention of alleviating the suffering of the masses.
c. It would be an important tool for students, academic, institutions and individuals that want to know more about the deregulation of the downstream sector of the Nigeria oil industry.
1.5 Hypothesis
This hypothesis will be of immense good to this study.
H1: Deregulation of the downstream sector is a solution to the problem of petroleum product distribution.
H2: An approved market margin will encourage product demand.
H3: Deregulation of the downstream sector will enhance the efficiency of the petroleum sector.
1.6 Scope and Limitation of the Study
This study examined economic rationality behind deregulation of the downstream sector of the Nigeria oil industry. The study seeks to investigate the effect of the deregulation on the prices and consumption of petroleum products as well as its impact on the living standard of Nigerians. The empirical analysis is restricted to the period between 1986 and 2011 because it was during the period that policy was implemented.
One of the major limitations of this study is that the period of time given by the institution’s authority for the study would not allow for an in-depth coverage of all the issues connected with the topic under study, and collection of related information.
Also, certain information required in order to highlight and analyse some observation may not be accessible e.g independent oil marketers’ operation record may be regarded as strictly confidential and would not be divulged to the research. And also finance is another constraint to an indebt study of this topic. The researcher also faced a problem of collecting all the questionnaires issued out to the respondents.
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