ENERGY CONSUMPTION AND ECONOMIC GROWTH IN NIGERIA

ABSTRACT

The research has been on the impact of energy consumption on the level of economics growth in Nigeria. The main objective is to empirically investigate the differential impact of the component of energy consumption on the level of economic growth in Nigeria. The study covered the period between 198-2017. The ordinary least square techniques were used for the study. The result indicates that capacity utilization has a positive and significant impact on the level of economic growth in Nigeria. The result also indicated that energy consumption has a positive and significant impact in the level of economic growth in Nigeria. Electricity generation has an insignificant and positive impact on the level of economic growth in Nigeria. The result recommends amongst others an improvement in the power situation in Nigeria.

 

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Today, Nigeria is seen as one of the greatest developing nations in Africa with highly endowed natural resources including potential energy resources. However, increasing access to energy in Nigeria has proved to be not only a continuous challenge but also a pressing issue with the international community (Odularu and Okonkwo, 2009).

Nigerian since decades have been battling with situations such as electricity black-outs and pervasive reliance on self-generated electricity to meet domestic demand and propel the needed economic development. However, awareness at improving the electric power sector as pivot for economic growth in Nigeria has commenced since year 2000 yet the generation capacity growth is relatively slow, (Bernard, (2015).

Today, power outages have metamorphosed into complete darkness in most parts of Nigeria, while many urban cities and towns across the country hardly enjoy three to four hours of uninterrupted power supply. The dwindling electricity per capita consumption in the face of the numerous problems, according to experts, cannot support any serious economic growth. The huge investment committed to make more recovery from existing plant capacities and increase generation through National Integrated Power Projects (NIPPs) and Independent Power Producers (IPPs), through the birth of the enactment of the Electricity Power Sector Reform Act (2005), by various governments were thwarted by bureaucracy and corruption (Koledoye et al, 2013).

Adegbemi, Adejuwon, Babatunde and Odedairo (2013), thus in the quest for optimal development and efficient management of available energy resources, equitably allocationand efficient utilizationcan put the economy on the part of sustainable growth and development. Arising from this argument, adequate supply of energy thus becomes central to the radical transformation of the nation’s economy.  In Nigeria, energy serves as the pillar of wealth creation evident by being the nucleus of operations and engine of growth for all sectors of the economy. The output of the energy sector (electricity and the petroleum products) usually consolidate the activities of the other sectors which provide essential services to direct the production activities in agriculture, manufacturing, mining, commerce etc. Nigeria is endowed with abundant energy resources but suffers from perennial energy crisis which has defied solution. The co-existence of vast wealth in natural resources and extreme personal poverty referred to as the “resource curse” or 'Dutch disease' (Auty,1993) afflicts Nigeria.

Masih&Masih, (1996) attribute the growth in energy demand to the level of economic development, others argue that the increase in energy consumption would stimulate economic growth.  Thus, there is lack of consensus among economic scholars on the relationship between energy consumption and economic growth. Soytas& Sari (2006) argue that the lack of consensus onthe causality between energy and output might be due to the fact that different economies have different energy consumption pattern and various sources of energy; consequently, different sources might have varying impacts on the economy.  This argument provides the spring board for our approach in this study.

Mustapha and Fagge (2015) the profile of Nigeria’s Energy Nigeria is fortunate to have huge energy resources, which potentially give the country ample opportunity to transform her economy and the lives of her citizens. Nigeria sits astride of over 35 billion barrels of oil, 187 trillion cubic feet of gas, 4 billion metric tons of coal and lignite, as well as huge reserves of tar sands, hydropower and solar radiation, among others, (Adenikinju, 2008).

 

Nigeria has not devoted equal attention to her abundant energy resources. Her efforts have been con-centrated on the development, exploitation and utilization of crude oil and gas for fiscal objectives. Oil Nigeria has an estimated 37.2 billion barrels of proven oil reserves as of the end of 2011. The majority of reserves are found along the country's Niger River Delta and offshore in the Bight of Benin, the Gulf of Guinea, and the Bight of Bonny. Current exploration activities are mostly focused in the deep and ultra-deep offshore with some activities in the Chad basin, located in the northeast of the country. The government hopes to increase proven oil reserves to 40 billion barrels in the next few years.

According to Mustapha and Fagge (2015),Nigeria has four refineries with a total installed capacity of 445,000 barrels per day. However, capacity utilization is low. Consequently, annual consumption of petroleum products, which according to government figures stood at 34 million litres per day, is not fully met by internal production and has to be supplemented by imports. 

Natural Gas Nigeria's proven natural gas reserves, estimated at about 187 trillion standard cubic feet, are known to be substantially larger than its oil resources in energy terms. Gas discoveries in Nigeria are incidental to oil exploration and production activities. As at 2001, over 50% of the gas produced (mainly associated gas) was flared. In view of the increasing domestic oil consumption, an economically optimal strategy to replace oil with gas and gas derivatives will enhance the availability of more oil for export. This will also promote the conservation of the oil reserves.

Apart from the economic advantage, fuel substitution from oil to gas is more environmentally friendly because gas is a cleaner fuel than oil. Given the current reserves and rate of exploitation, the expected life-span of Nigerian crude oil is about 44 years, based on about 2mb/d production, while that for natural gas is about 88 years, based on the 2001 production rate of 1850 bscf. It is therefore, strategically important to undertake major investments in the gas sector in order to prepare adequately for gas as a substitute for oil both for domestic needs and foreign exchange earnings.

Coal Recent technical and economic studies have identified coal energy as a cost effective solution for power generation; it comes at a cost that is about 20% that of fuel oil and with the cost of crude oil heading towards US$100 per barrel, the gap will continue to widen. Furthermore, with over two billion tons reserves in Nigeria, coal is an abundant domestic resource that can support the mining and energy industries and provide numerous jobs with potentially high multiplier effects on the local economy. Current technologies allow for clean burning of coal, which takes care of its negative environmental impact; indeed, over 50% of the US electrical power supply is from coal resources. Nwasike (2012) Nigerian coal can be utilized for power generation, steam production, in cement production and for brick making; as a heat source and reducing agent for steel production; as a domestic fuel; and as feedstock for the production of chemicals, liquid fuels, gaseous fuels, batteries, carbon electrodes etc. These potentials of coal need to be effectively harnessed into the country's energy delivery system and export commodity mix through the development of a vibrant coal industry. Coal is an alternative energy medium that could be used with oil and gas to give the nation the desired mix that will ensure a reliable, affordable and environmentally friendly energy medium.

1.2 Statement of the Problem

Nigeria has struggled to provide electricity to her large population ever since independence. According to the Nigerian Electric Power Authority (NEPA), the Niger Dam has the maximum capacity to generate 5900 MW of electricity per day which falls far below the average national consumption rate of 10,000 MW per day. This has compelled the NEPA to ration electric power supply over the years. The inability to satisfy the domestic and, to a large extent, industrial needs for electricityisreportedtohavehaddebilitatingimpactonthegrowthpotentialsoftheNigerianeconomy, (WorldBank,1991).

According to Bernard (2015), evenso,thedemand for electricity, according to the NEPA, is projected to increase from 5746 MW in 2005 to nearly 297,900 MW by the end of 2030. This implies that theNEPA needsto add approximately 11,686 MW of electricity to its stockeach year in order to match this projection. Electric power production and electric power consumption in Nigeria have generally followed the same trend over the period 1971–2011. In theexceptionofsomerareinstances, increasesinelectricpowerproduction have been associated with increases in electric power consumption and vice versa.

Iwayemi (2008), the low energy production has weakened the industrialization process, and significantly undermined the effort to achieve sustained economic growth, increased competitiveness of domestic industries in domestic, regional and global markets and employment generation. The current concern about global warming also poses a question about how can economic growths in Nigeria will be reconciled with stabilization in the use of both traditional and fossil fuels.

However, for any such policy making it is essential to determine the causal relationship between energy consumption and general economic activities. Although the causal relationship between energy consumption and economic growth has been widely studied, no consensus regarding this so-called energy consumption-growth nexus has yet been reached.

The study investigates the causality between GDP and each of the basic sub components of energy consumption, oil consumption, electricity consumption, and natural gas consumption, in Nigeria using a vector error correction model (VECM).  The first section of this article contains the introduction. The next section reviews relevant literature. Econometric methodology is contained in the third section. The fourth section contains the empirical analysis, while the final section.

However, the study is to identify answers to what is the level of energy production in Nigeria; what is the level of energy consumption in Nigeria; what is the relationship between energy consumption and economic growth in Nigeria and what are the challenges associated with energy consumption and economic growth in Nigeria?

1.3 Objectives of the Study

This study has specific objectives. There are:

  1. To determine the level of energy production in Nigeria.
  2. To examine the level of energy consumption in Nigeria.
  3. To discover the relationship between energy consumption and economic growth in Nigeria.
  4. To find out the challenges associated with energy consumption and economic growth in Nigeria.

1.5 Hypotheses

  1. There is no significant relationship between energy consumption and economic growth in Nigeria.
  2. There is no significance relationship between gross fixed capital formation and economic growth.

1.6 Significance of the Study

The issue of energy and the Nigeria economy has been a center subject to discuss at any given time in Nigeria. Hence, the study seeks to investigate the relationship between energy consumption and its implication on the economic growth of Nigeria with a view to close knowledge gap as regard to the level of energy production in Nigeria, the level of energy consumption in Nigeria, the relationship between energy consumption and economic growth in Nigeria and the challenges associated with energy consumption and economic growth in Nigeria.

The result from the findings will be useful to economic policy makers as well as individuals, corporate organizations and the government. The understanding from this research will be a guiding principle to all economic stakeholders.

1.7 Scope of the Study

The study shall focus of energy consumption of by Nigerians and the impact of economic development for the period of one year which cover from January to December 2018. Geographically, the study shall be limited to individuals, small and medium enterprises corporate organization and economic planners in the Delta State ministry of economic planning.

1.8 Definition of Terms

Energy: Energy is the ability to do work and work is the transfer of energy from one form to another. In practical terms, energy is what we use to manipulate the world around us, whether by exciting our muscles, by using electricity, or by using mechanical devices such as automobiles.

Consumption:This is regarded as the utility to a particular product. It also covers the amount a consumer can consume of a particular product.

Economic Growth: A growth achievement established and obtained in the economic sector with the mind to achieve cause development in the entire economic sectors.

Growth:This is the breakdown of achievement over a period of time with some measurable indices.