OIL SUBSIDY REMOVAL AND PERSONAL INCOME IN NIGERIA: AN IMPACT ASSESSMENT
ABSTRACT
    This study set out to empirically investigate the effect of oil subsidies removal on personal income Nigeria for a period of thirty two years (1981 to 2012). The ordinary least squared (OLS) econometric technique was employed in the analysis. The results from the empirical analysis show that generally, oil subsidies removal has a strong impact on personal income in Nigeria over the years. Inflation rate (INFL) has a weak negative relationship with personal income and also failed the significance test at the 5 percent level. Tax has a negative insignificant relationship with personal income in Nigeria, as it failed the 5% level of significance.
    The study however recommends among others that government should deregulate the downstream sector of the petroleum industry to attract investment as no investor that buys crude oil at international market price would be willing to refine and sell its products in a regulated market. The sector must be attractive enough to guarantee fair returns on investment.
    TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1    Background to the Study                
1.2    Statement of the Research Problem        
1.3    Research Questions                    
1.4    Objectives of the Study                    
1.5    Hypotheses of the Study                
1.6    Significance of the Study                
1.7    Scope of the Study                    
1.8    Limitation of the Study                    
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                        
2.2    Concept of Subsidy                    
2.3    The Potential Economic, Social and Environmental Consequences of Further Fossil-Fuel Subsidy
Reform                             
2.4    Analytical Frameworks                        
2.4.1    Welfare/Pro-Poor Framework            
2.4.2    Corruption Framework                    
2.5    Real Cost Of Fuel Subsidy Removal and Tax
Implications                        
2.6    Up To Date Stylized Facts about Subsidy
Removal Regime in Nigeria                
2.7    The Empirical Literature            
CHAPTER THREE: METHODOLOGY
3.1    Introduction                        
3.2    Model Specification                
3.4    Estimation Technique                    
3.5    Sources of Data                    
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1    Introduction                        
4.2    Regression Analysis                
CHAPTER FIVE: SUMMARYOF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1     Summary of Findings                    
5.2     Recommendations                    
5.3    Conclusion                            
Bibliography                        
Appendix                            
CHAPTER ONE
INTRODUCTION
1.9    BACKGROUND TO THE STUDY
    Nigeria is the most populated country in Africa with a 2011 population of 162.5 million. It is also regarded as the most populous Black Country in the world today. It possesses 28 percent of African proven oil reserves, second to Libya, and it is the top producer of African crude oil, producing 24 percent of 2010 African oil production equaling 2.4 million barrels per day (bpd) (UN, 2011; BP, 2011). Available records have that total crude oil production in the last two decades in Nigeria ranges between 2.1 to 2.5 million barrel per dollar. It is among the top twelve world oil producing countries of the world (BP, 2012). Over the last four decades, crude oil has become Nigeria’s top export commodity. The share of oil in Nigerian exports peaked at 97 percent in 1984 and has not been less than 90 percent since, while its share in gross domestic product (GDP) has ranged between 25 percent and 30 percent in recent years (NBS, 2010). Between 1970 and 2005, crude oil sales contributed about 75 percent of government revenue and 96 percent of Nigerian foreign exchange earnings (Adenikinju, 2009).
    Despite being Africa’s largest oil producer, Nigeria still relies heavily on imported refined oil. Its four refineries Port Harcourt I and II, Warri and Kaduna have a combined capacity of around 445 thousand bpd, which covers 63 percent of domestic demand. However, these refineries are running far below their capacity due to operational failures, poor maintenance, sabotage on crude oil pipelines feeding refineries, theft, and fire (EIA, 2012; Business day, 2013). In 2009 and part of 2010, particularly low refinery runs forced the country to import about 85 percent of its refined oil needs. Other estimates show the domestic refineries to satisfy a maximum of 25 percent of domestic consumption (Rice, 2012).
    With the global trend of drastic fall in price of crude oil in the world market, Nigeria is faced with serious challenges of grooming the economy to meets with is aspiration of joining the worlds’ best 20 most developed economies by the years 2020.  Currently, the country is facing another round of huge debt servicing, deficit budgeting, pups of unpaid workers’ salaries at both the federal, state and local government levels. Recently, the federal government said that it borrowed over N667billion to pay salaries and wages of federal staff and that at it stands, many states may not be able to pay salaries of workers in the next six months. In order to meet up with its political manifestoes and enhance the standard of living of the citizenry, subsidies on petrol was recently removed and pump price of petrol increased by over 90% (from N65.50 to N145 per liter) by the federal government unilaterally without due consultations and interest of the poor masses. The overall implication of this action is that people take home pay (salaries) can no longer take them home, due to the multiplying effects of hike in pump price culminating in high transportation fair, high house  rents, increase in foodstuffs, school fees e.c.t.   
    Some arguments put forward by the government before removing the subsidy is that though the subsidy helps the poor, by keeping Nigerian prices lower than world prices, the biggest beneficiaries have been importing companies and local wholesalers (The Economist, 2011) that smuggle some of the subsidized fuel into neighboring countries and sell it at higher prices (The Economist, 2012). Illegal trade is not well recorded in official trade statistics, which makes it difficult to analyze. According to the BBC (2012a, b), however, the Nigerian government paid the subsidy on 59 million liters of fuel a day in 2011, although domestic consumption in Nigeria was approximately 35 million liters a day. Thus, fuel importers were paid hundreds of millions of US dollars to import fuel that was never delivered to the Nigerian people.
    It is therefore hoped that the outcome of this study will be able to provide insight to the lingering problems engulfing the Nigerian economy and thus profile some measures to overcoming them to the government and relevant policy makers.
1.10    STATEMENT OF THE RESEARCH PROBLEM
    The issue of oil subsidy removal is an aged long one in the Nigerian context. For the past three decades, several governments in the country have attempted to completely removed the subsidy due to the damages it has had on its fiscal policies (Adenikinju, 2009). From a political economy perspective, subsidy removal is difficult because it impacts a broad spectrum of Nigerian households. Despite the majority of the subsidies benefiting wealthier households, lower and less volatile fuel prices are popular to all population segments. Hence, attempts to remove the subsidy have always generated opposition from consumers. Moreover, there is the presumption that any price increase will fuel inflation and reduce economic welfare (Adenikinju, 2009). Nonetheless, the subsidy on imported refined oil was abolished on January 1, 2012 under the justification that corruption had greatly swelled the cost of providing cheap fuel (Rice, 2012). This led the price to rise by more than double. Nigerians took to streets, led by the trade union and civil society. After more than two weeks of strikes, the government introduced a new subsidy that lowered the price from 140 to 97 Naira per liter. Although a new subsidy was introduced, the refined oil price has remained more than 50 percent higher than 65 Naira per liter, its price before the first attempt at removing the subsidy.
    Now that the fuel subsidy has been finally removed by the Buhari’s administration, several fears have been allay as to the plight of the ordinary citizens, the poor, the jobless and the low income earners given this recent action under taken by the government. Although many countries in the past have taken similar actions and were able to manage well the savings from the subsidies removal, but it is not certain whether the Nigeria government has the moral standing, integrity and ability to management the proceeds from the subsidy removal in such a way as to trickle down to the benefit of the poor in the streets of Nigeria in view of the past and current endemic virus of corruption among government officials and policy makers in the country.
    It is on the basis of this and many more that this study seeks to specifically investigate in an empirical manner the effect of the supposedly removal of oil subsidy on personal income in Nigeria. It is believed that one of the greatest sufferers in this regard is the personal income earners, as increase in petroleum pump price weakens the overall purchasing power of their income as well as their other domestic obligations.
1.11    RESEARCH QUESTIONS
    The study seeks to provide answers to the following salient research questions:
(i)    What is the relationship between oil subsidy removal and personal income in Nigeria?
(ii)    Do taxes affect personal income in Nigeria?
(iii)    Is there any significant relationship between inflation rate and personal income in Nigeria?
1.12    OBJECTIVES OF THE STUDY
The objectives of the study are to:
(i)    Determine the relationship between oil subsidy removal and personal income in Nigeria.
(ii)    Examine whether taxes affect personal income in Nigeria.
(iii)    Determine whether there is any significant relationship between inflation rate and personal income in Nigeria.
1.13    HYPOTHESES OF THE STUDY
The followings are the hypotheses to be tested in the course of this study:
(i)    There is no significant relationship between oil subsidy removal and personal income in Nigeria.
(ii)    Taxes do not have any significant impact on personal income in Nigeria.
(iii)    There is no significant relationship between inflation rate and personal income in Nigeria.
1.6    SIGNIFICANCE OF THE STUDY
    The results of this study will be relevant to various stakeholders such as the policy makers, the government, households, workers, corporate organizations and the petroleum regulatory agency in Nigeria (NNPC).
    With respect to the policy makers and the government, it will provide them the relevant information that would guide them in formulation appropriate policies and programmes that will better the lots of the average Nigerian and the economy at large; knowing fully well that the effect of oil subsidy removal results in high cost of living, such as high prices of goods and services, high transportation, reduction in the disposable income of households and high cost of production.
    Lastly, it will also provide viable data source and enhance the knowledge of researchers, academia and students in management sciences on the impact of oil subsidies removal on personal income tax and thus stimulate their interest in this area. Such interest could lead to further researches which may seek to verify the results of this study or to replicable the study using, different methodology.
1.7    SCOPE OF THE STUDY
    The study is a Nigerian specific study and an annual time series data, covering a period of 34 years (1981 to 2014). Relevant data shall be sourced from the Federal Inland Revenue, Federal Bureau of Statistics and the Central Bank of Nigeria Statistical Bulletin (2015). The reason for the choice of this period is due to the fact that the regime of Obasanjo and Goodluck Jonathan witnessed the most frequent and highest petroleum price hike in the history of Nigeria.
1.8    LIMITATION OF THE STUDY
    Ordinarily, no study is without limitation and this one is not an exemption. The sources of data employed in the study poses a level of limitation since data collected from three major sources are likely to give different information.
    Again, access to these various sources was very difficult as their officials were reluctant to disclose and release the data because it was claimed to be a classified data.
    Finally, one cannot guarantee a 100% accuracy of the data used, its measurement, as well as the method of data analysis. However, effort will be made to ensure that errors are minimized so that the results obtained are valid and reliable with respect to the data used.