Reporting on the causality between oil and gas consumption and economic growth in Nigeria

Int. J. Auditing Technology, Vol. 1, No. 2, 2013 143

Copyright © 2013 Inderscience Enterprises Ltd.

Reporting on the causality between oil and gas consumption and economic growth in Nigeria

Douglason G. Omotor Department of Economics, Delta State University, Abraka, P.O. Box 445, Ughelli, Delta State, Nigeria E-mail: [email protected]

Abstract: The slow pace at which the Nigerian economy grew especially in the late 1980s despite the nation’s abundant natural resources and large earnings from crude oil and gas production form one of the bases for this study. The objective is to inquire whether there is a causal relationship between data reported on energy consumption (using crude oil and gas) and economic growth. The empirical results which revealed that the variables are stable at various levels prompted the test for cointegration in order to determine whether combinations of the variables are integrated at levels. The individual combinations of the energy consumption variables are not cointegrated with real gross domestic product (GDP). The Granger causality tests also relayed no causal relations between the energy consumption using crude oil and gas and real GDP, thus affirming the ‘neutral hypothesis’. The implication of this is that energy conservative policies could be pursued in Nigeria since they may not have adverse effects on the economy

Keywords: Nigeria; reporting; oil and gas consumption; real GDP; Granger causality; Johansen cointegration tests.

Reference to this paper should be made as follows: Omotor, D.G. (2013) ‘Reporting on the causality between oil and gas consumption and economic growth in Nigeria’, Int. J. Auditing Technology, Vol. 1, No. 2, pp.143–159.

Biographical notes: Douglason G. Omotor a member of the Journal of African Economies Fellows Alumni Network (JAEFAN), Department of Economics, University of Oxford, UK, is a Visiting Scholar to the Department of Economics and Statistics, University of Benin, Benin City, Nigeria.

1 Introduction

The role of energy in the growth and economic development process of nations has been well documented in the literature (Stern, 2004; Toman and Jemelkova, 2003; Nkomo, 2005; Stern, 2010; etc.). Energy is an essential factor of production which can be used to provide heating, gives mobility and lighting and as such, it has an important bearing on the quality of life. If categorised as a sector in an economy; its development and processing create employment, enhances rural development and technology transfer opportunities (Nkomo, 2005). Energy as a complementary good equally possesses other important bearings as an economy develops. The multiple impacts range from investment

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promotion to knowledge accumulation and development on the one hand and climate change on the other hand.

The importance of energy gained more prominence following the first energy crisis in October 1973 when the Organisation of Petroleum Exporting Countries (OPEC) quadruples the price of oil from 3 to 12 US dollars from one day to another. The oil crises since then have posed serious threats to the growth process of some economies, particularly those that are oil importing; while in other economies especially oil exporting countries; it has been mixed blessings.

Although based on independent reporting; Nigerian economy is heavily dependent on the oil sector which accounts for 95% of foreign exchange earnings and about 65% of government revenues. This overdependence on the capital-intensive oil sector not only provides less than 25% of gross domestic product (GDP); it makes the Nigerian economy vulnerable to external shocks. So far, the Nigerian economy has earned over USD$596.6 billion from oil exports. This represents 96.3% of total foreign exchange earned between 1970 and 2005. 25.8% of this which amounts to US$153.1 billion was earned between 1999 and 2005 (Adenikinju, 2008). More than 90% of the oil fields which are gas-associated are located in the Niger Delta region. The associated gas produced is usually separated from the crude oil (and water) at the flow stations.

The period 2006 to 2010 of Nigeria’s energy profile in relation to Africa and the entire world is remarkable as the data disclosed (see Appendix). In 2006, Nigeria total petroleum production was 2,442.60 thousand barrels per day. This represents 23.48% of Africa’s total production; 6.82% of OPEC and 2.89% of world’s total production. Nigeria’s total oil consumption in 2006 was 312.06 thousand barrels per day, while its net exports/imports of crude oil decreased from 1,114 in 2006 to 1,132 in 2007. Nigeria’s total oil supply increased from 2,168.55 (tbd) in 2008 to 2,458.37 (tbd) in 2010.

The US Energy Information Administration (EIA) reported Nigeria’s estimated proven natural gas reserves in 2010 to be 185.28 trillion cubic feet (tcf). These estimates make Nigeria the ninth largest natural gas reserve holder in the world and the largest in Africa (see Figure 1). Although a significant portion of Nigeria’s natural gas is processed into liquefied natural gas (LNG), the country currently flares more natural gas than any other country in the world.

Figure 1 Top proven natural gas reserve holders, 2011 (see online version for colours)

Source: Oil and Gas Journal (2012)

Reporting on the causality between oil and gas consumption 145

In terms of gross natural gas production, Nigeria is ranked 27th in world’s production of natural gas and 45th in consumption. Production and consumption of natural gas unlike crude oil has been on the increase. In 2010, Nigeria produced 2,391.53 billion cubic feet of Africa’s share of 14,063.03 (bcf) and world’s 141,627.5 (bcf) and consumed 385.64 (bcf) in 2006 and 433.49 (bcf) in 2008 (Oil and Gas Journal, 2012).

Gas flaring has both economic and environmental consequences. In one recent study by the World Bank, it was estimated that Nigeria lost about $2.5 billion to gas flare between 1970 and 2006. Gas flaring also results to loss of soil fertility, flora degradation, wildlife migration, etc., especially in communities close to oil facilities and flare cities. The toxic nature of flared gas constituents also has potential health risk effects. Such health risks include respiratory disorder such as asthma, bronchitis, and abnormal birth effects. Other environmental consequences of gas flaring include acid rain, emission of greenhouse gases (carbon dioxide, sulphur, etc.); distortion of natural ecology and noise pollution.

The beneficial uses of natural gas other than its revenue accruals are well articulated in the literature. Natural gas is used for fuelling of power plants. It has a lower capital costs, produces less pollution than other fossil fuel plants and more efficient. Natural gas is also used in residential homes for warming, air-conditioning, etc. In terms of industrial uses, natural has a wide range of applications. It is used as an input in manufacturing of numerous manufactures including, pulp and paper chemicals, glass, treatment of waste materials, industrial heating and cooling, metals, etc. With the increasing concern about the world’s pollution and air quality, the awareness on the use of natural gas vehicles (NGVs) is gaining wide acceptance.

In 2004, Nigeria’s energy consumption was dominated by oil (58%), while natural gas and hydroelectricity accounted for 34% and 8% respectively. This notwithstanding, share of oil in Nigeria’s energy mix has been declining. For instance, between 1984 and 2004, the oil share of Nigeria’s energy mix fell from 77%; while natural gas consumption increased from 18% to 34%. Increased hydroelectricity has been marginal, while coal, nuclear and other renewable either contribute insignificantly to the energy-mix or not at all (http://www.PRS/NewCABs/V6/Nigeira/Full.html).

In 2006, total energy consumption for Nigeria was approximately 1 quadrillion Btu (see Figure 2). The country’s energy consumption mix was dominated by oil (53%), followed by natural gas (39%) and hydroelectricity (7%). As earlier observed, coal, nuclear and other renewable are currently not part of Nigeria’s energy consumption mix, with the exception of biomass often used to meet rural heating and cooking needs (http://www.eia.doe.gov, 2009). The US EIA further reported that in 2010, Nigeria’s estimated total energy consumption was about 4.4 quadrillion Btu (111,000 kilotons of oil equivalent; see Figure 2). Traditional biomass and waste accounted for 82% of the total energy consumption; while oil and natural gas accounted for 13% and 4% respectively. The high percent share of traditional biomass and waste was due to their use in meeting with off-grid heating and cooking needs particularly in rural areas.

Crude oil production in Nigeria has on the average been on upward trajectory. In 2010, crude oil production averaged 2.05 million bb/d and rose by 0.08 million bb/d to 2.13 million bb/d in 2011. These levels are relatively lower than the 2.63 million bb/d peak recorded in 2005 (see Figure 3). The significant decline was due to the increased violence from militant groups which sought a redistribution of the oil wealth and greater local control of the sector. This forced many oil companies to withdrew staff, shut down production at onshore and shallow offshore fields. At some occasions, the oil companies

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were left with no option but to declare force majeure on oil shipments. In 2009, an amnesty programme was implemented and this led to decreased attacks making possible for some companies to carry-out repairs on damaged oil facilities.

Figure 2 Total energy consumption in Nigeria, by type (2006 and 2010) (see online version for colours)

Source: EIA International Energy Annual 2006

Figure 3 Nigeria’s oil production and consumption (1995–2011) (see online version for colours)

Note: Nigeria consumed about 9,000 short tons of coal in 2010. Source: US Energy Information Administration

In case of resource exports, Nigeria exported most of its 2.17 million bbl/d of oil production (approximately 1.9 million bbl/d were exported) to the USA in 2008. Of this, 990,000 bbl/d (44%) was exported to the USA, making Nigeria the 5th largest foreign oil supplier to the USA. Additional importers of Nigerian crude oil include Europe (25%),


Brazil (7%), India (11%) and South Africa (4%). Figure 4 is the pie chart of Nigerian oil export in 2008. In 2007, Nigerian exports of LNG to the USA were 95 Bcf, making it the third largest source of LNG imports to the USA after Trinidad (447 Bcf) and Egypt (115 Bcf).

Figure 4 Breakout of Nigerian oil exports in 2008 (see online version for colours)

Source: US Energy Information Administration

In recent times however, efforts have been concentrated on the development, exploration, exports and consumption of crude oil and gas for fiscal objectives and electricity generation to drive the economy. A reform strategy to ensure an efficient and effective domestic and industrial utilisation of natural gas within the shortest possible time and at an affordable price has been put in place. The Gas Master Plan has been developed and approved for implementation by the Federal Executive Council (Usman, 2008). Other economic reform programmes in which some progresses seem to have been achieved are the National Economic Empowerment and Economic Development Strategy (NEEDS) and in recent times, the 7 Point Agenda of President Musa Yar’adua administration which is embedded in NEEDS. NEEDS is aimed at accelerating economic growth, reducing poverty, and achieving the Millennium Development Goals (MDGs). One derivative of NEEDS is the 5.6% real GDP estimated growth in 2006; inflation decelerated to 8.6% in 2006 from over 17% in 2005, while non-oil sector grew by 8.9% in 2006, reserves in months of imports grew by 14.3% in 2006 from 10.1% in 2005.

As regards the country’s GDP valued at current prices, it rose by 23.39% from N18.57 trillion in 2006 to N22.91 trillion in 2007. The effect resulted in increased value of total goods and services produced by N4.34 trillion. The National Bureau of Statistics estimates that real GDP was stable at 81.9% between the third and fourth quarters of 2007, while oil share of GDP growth rate recorded an increase of 0.1% as against a decline rate 0.3% recorded in the preceding year.

In the financial sector, some progress has been achieved in the reform exercise. Exchange rate stability, increase in foreign reserves accumulation, and improvement in the management of debt profile. For instance, at the end of 2006, the National Assembly approved an expenditure of 1.4 billion US dollars ($) to liquidate the external debt owed

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to the London Club (Anyanwu and Erhijakpor, 2008). These remarkable achievements are not unconnected partly with the increase in world oil prices and demand. Although the current global economic crisis has led to some reversals of these indices; they are thought to be minimal as foreign exchange earnings are still on the trajectory of increase.

In all these achievements and positive developments as Anyanwu and Erhijakpor (2008, p.4) rhetorically noted:

“…Nigeria (still) does not display the same dynamism in terms of growth rates as other leading emerging markets such as India and China. Nigeria’s annual GDP growth rates are still unimpressive. “…The sizable oil windfall, of course, presented spending room, but also complicated macroeconomic (management) and led to extreme dependency on oil – a highly volatile source of income.” (p.4, p.17)

As the economy moves round the business cycle, oil and gas as the major drivers of the economy have also had their attendant groove of boom and bust both in terms of production and consumption. For instance, a total value of 57,753.7 million cubic metres (MMmz) of national gas was produced in 2006, while consumption of natural gas stood at 1,310,102.5 tons in 2006 representing a decline of 5.4% compared to 2005 recorded level. The decline is attributed to vandalisation of pipeline conveying gas. In 2006, Nigeria’s aggregate crude oil production, including condensates, averaged 2.23 million barrels per day (mbd) or 813.95 million barrels. Aggregate consumption stood at 8,342.354.89 thus representing a decline by 20.1% from its 2005 level. The decline in aggregate consumption was attributed to shortage in supply due mainly to poor performance of domestic refineries and militants vandalisation of crude pipes. The question this paper seeks to answer is, if the economic growth of the Nigerian economy is led by production/consumption of oil and gas or the other way round?

The many important reasons for studying the relationship and causality between oil and gas consumption and economic growth are not farfetched. First, if it is empirically established that a causal link exists, and for that matter, that causality runs from energy consumption to economic growth, then the current debate about global warming and the need to reduce Greenhouse Gas Emissions by conserving energy consumption to help reduce emissions gains more credence. Second, if following first, the causal link is greater for developing countries; then any restraint on energy consumption will have lager effects on these countries compared to the more affluent industrialised countries (Chontanawat et al., 2006). In this wise, it can tolerantly be argued that policy of energy consumption cut should be undertaken sustainably by the industrialised world in order to avoid inhibition of less developed nations from developing. From these, it is imperative that empirical studies of energy consumption and economic growth is frost from being conclusive as individual country results may relatively depend on the structure and dynamics of the economy, its stage of economic development among other factors.

The objective of this study is to verify the causal relationship between the consumption of oil and gas versus economic growth. The results are expected to guide in the long-term energy policies to be developed by Nigeria. The rest of the paper is divided into five sections. Following the Introduction, Section 2 reviews some recent related literature, while Section 3 presents the data and methodology. The results are reported in Section 4 and Section 5 concludes the paper.


2 Review of literature

Although the empirical literature on the causality between economic growth and energy consumption is expanding, there are only a small number of studies which specifically address the causal relationship between oil and gas consumption and economic growth. The strong interdependence and causality between economic growth and energy consumption is a stylised economic fact, yet the direction of causality between economic growth and energy consumption is not clearly defined and remains controversial. Two strands of thought exist in the literature on the energy consumption-economic growth relationship. The first strand holds the view that energy consumption as a primary source of economic growth plays a vital role in achieving socio-economic and technological progress and also complements the role of labour and capital in the production process (Ebohon, 1996; Squalli and Wilson, 2009). The second strand argues that energy plays a minimal or neutral role in economic growth process (Yu and Choi, 1985). This view is based on the contention that energy consumption is neutral on the path to economic growth because it contributes a minimal proportion of a country’s GDP.

Series of empirical studies that have set out to determine the relationship and direction of causality between energy consumption and economic activities for developing as well as for the developed countries employed several techniques of causality (Granger, 1969; Sims, 1972; Hsiao, 1981; among others). The overall findings vary significantly with some studies concluding that causality runs from economic growth to energy consumption, some others conclude otherwise; while the rest either find bidirectional causality or ‘neutral impact of energy on growth’ (Žiković and Vlahinić-Dizdarević, 2011). Conclusively, the findings have been mixed as well as their economic implications. According to Jumbe (2004), if causality runs from energy consumption to GDP, it implies that an economy is energy dependent and hence is a stimulus to growth. What this means is that a cut in energy use may negatively affect economic growth or impair economic performance, which could cause a fall in income and employment (Chontanawat et al., 2006). In this case energy is a limiting factor in economic growth (Stern, 2000). If causality runs from GDP to energy consumption, it implies that an economy is not energy dependent. According to Masih and Masih (1997) and others, implementing energy conservative policies may not adversely affect growth and employment. Whereas if there is no causality in either direction, also referred to in the literature as ‘neutral hypothesis’, it connotes energy consumption is not correlated with GDP. Jumbe (2004) noted that in this case, energy conservative policies could be pursued without adverse effects on the economy. Table 1 modestly reports the summary of studies that were conducted in the year 2000 and afterwards.

3 Data and methodology

This study uses Nigerian time series data of real GDP growth and oil and gas consumption for the period 1970–2008. As earlier noted studies which specifically address the causal relationship between oil and gas consumption and economic growth are scanty generally and mute in the case of Nigeria.

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Table 1 Recent studies on reporting causality of energy consumption and economic growth

Author Country Period Method Finding

Soytas and Sarı (2003) Turkey 1950–1992 VECM EC → EG

Oh and Lee (2004) Korea 1970–1999 VECM EC → EG

Shiu and Lam (2004) China 1971–2000 ECM EC → EG

Climent and Pardo (2007) Spain 1984–2003 Multivariate cointegration

EC → EG

Gelo (2009) Croatia 1953–2005 VAR and Granger causality

EC → EG

Stern (2000) USA 1948–1994 Cointegration (Multivariate)

EC ← EG

Aqeel and Butt (2001) Pakistan n.d. Hsiao’s Granger causality

EC ← EG

Yoo (2006) Thailand 1971–2002 Modern time-series techniques

EC ← EG

Lise and Montfort (2007) Turkey 1970–2003 OLS and ECM EC ← EG

Adeniran (2009) Nigeria 1980–2006 Cointegration EC ← EG

Asafu-Adjaye (2000) Philippine 1971–1995 Cointegration and ECM

EC ↔ EG

Yang (2000) Taiwan 1954–1997 Granger causality EC ↔ EG

Erdal et al. (2008) Turkey 1970–2006 Cointegration EC ↔ EG

Omotor (2008) Nigeria 1970–2005 Cointegration Hsiao causality

EC ↔ EG

Akan et al. (2010) Turkey 1970–2007 Cointegration and ECM

EC ↔ EG

Nondo et al. (2010) COMESA 1980–2005 Panel-based ECM EC ↔ EG

Altınay and Karagöl (2004) Turkey 1950–2000 Unit root and causality tests

EC 0 EG

Jobert and Karanfil (2007) Turkey 1960–2003 Cointegration and Granger causality

EC 0 EG

Constantini and Martini (2010)

OECD 1960–2005 FMOLS VEC cointegration

Mixed

Constantini and Martini (2010)

Non-OECD 1960–2005 FMOLS VEC cointegration

Mixed

Source: Erdal et al. (2008); and Author

The data were obtained from the Central Bank of Nigeria: Statistical Bulletin, Special 50th Anniversary Edition. The real GDP is denominated in Nigerian Naira (billion N). Oil consumption is measured in thousand barrels of crude oil (total production as sum of export and domestic consumption, since vagaries of the international market has a contemporaneous feedback on the domestic economy). Gas consumption is measured in MMmz. Two measures of gas consumptions are used; total production and utilisation (total production less flared) since the Nigerian Government is taking bold steps to halt gas flaring by 2015. The descriptive statistics of the variables are presented in Table 2. Although the correlations coefficients are not reported, the series are individually weakly correlated with real GDP.


The series of studies summarised in Table 1 shows that a wide range of methodologies have been employed in studying the causality relationship between energy consumption and economic growth since the last decade. In this study, the Granger causality test is employed in the form defined hereafter. Table 2 Descriptive statistics

Mean Maximum Minimum Std. Dev. Obs. (1970–2008)

LGAS 10.17322 11.53249 8.990815 0.579271 39 LGASC 8.393063 10.71788 4.276666 1.655146 39 LGDP 20.83981 21.86661 20.31801 0.347871 39 LOILC 11.13427 12.00914 9.411974 0.730923 39 LOILT 13.4221 13.73146 12.88838 0.208741 39

Source: Author’s calculations

‘Granger-causality’ as applied in this study implies causality in the prediction (forecast) sense and not in a structural sense. It begins with the premise that ‘the future cannot predict the past’, thus if event B occurs after event A, then event B cannot cause A (Granger, 1969). This concept is applied along the illustration in Chontanawat et al. (2006) in the context of a bivariate model consisting of two equations as follows:

1 1 11 1

n mt i t j t ti j

y y gα β γ ε− −= == + + +∑ ∑ (1)

and

2 1 1

n mt i t i j t j ti j

g g yα δ ϕ− −= == + + +∈∑ ∑ (2)

where

gt ln(Gt)

yt ln(Yt)

Gt energy (oil or gas as the case may be) per capita

Yt real GDP per capita.

In equation (1), g causes y if the current value of y is forecasted by including the past values of g than by not doing so. Thus, if g causes y, then g helps to predict y. In equation (2), y causes g if the current value of g is forecasted by including the past values of y than by not doing so. Consequently, if y causes g, the y helps to predict g.

To conduct the Granger causality test, series that belong to the variables as relatively recent developments in time series analysis have shown, need to be stationary. Equations (1) and (2) as initially formulated by Granger used levels of variables which may not be stationary. In order to ensure the series used in the analyses are stationary, with the development of the unit root testing and cointegration, equations (1) and (2) are reformulated to reflect these developments; in case after checking for unit roots of the series, they are non-stationary at levels but integrated of order one or I(1) as:

1 1 1


y y gα β γ ε− −= =Δ = + Δ + Δ +∑ ∑ (3)

152 D.G. Omotor

and

2 1 1


g g yα δ ϕ− −= =Δ = + Δ + Δ +∈∑ ∑ (4)

where ∆ is the first differenced operator, so that the variables series are introduced in differences to ensure they are I(0) stationary. In this version, causality is formulated in terms of changes in the variables and Granger-causality is evaluated on the basis of the significance of the ∆gt–j terms and ∆yt–j terms as presented respectively in equations (3) and (4).

According to Engle and Granger (1987), a linear combination of two or more non-stationary series (with the same order of integration) may be stationary. If found that such two or more integrated variables cointegrate, then the series are considered cointegrated and long-run equilibrium relationships exist. As such, equations (3) and (4) can be augmented as follows:

1 1 1 1 1

n mt t i t i j t j ti j

y EC y gα ϑ β γ ε− − −= =Δ = + + Δ + Δ +∑ ∑ (5)

and

2 2 1 1 1

n mt t i t i j t j ti j

g EC g yα ϑ δ ϕ− − −= =Δ = + + Δ + Δ +∈∑ ∑ (6)

where EC is the error correction term from a cointegrating equation of the form yt = γgt + ECt and consequently is I(0).What this implies is that, if a pair of I(1) are cointegrated, there must be Granger-causality in at least one direction, thus to avoid miss-specifying the model, it is pertinent to include the EC term to equations (3) and (4). In this form, as Chontanawat et al. (2006) further explained, there are two possible sources of Granger-causality; for the ∆yt equation, causality arises either through the lagged ∆g terms if γj ≠ 0 or through the ECt–1 term, if ϑ1 ≠ 0 (implying a long run relationship); and for ∆gt equation, Granger-causality arises either through the lagged ∆y terms if ϕt ≠ 0 or through ECt–1 term, if ϑ2 ≠ 0.

We investigated the cointegration of various bivariate series by testing the linear combination of any two series of the energy consumption (oil and gas) and economic growth was stationary. This was preceded by first conducting the unit roots test using the Augmented Dickey-Fuller (ADF) (Dickey and Fuller, 1979) and Phillips-Perron (PP) (Phillips and Perron, 1988) tests.

The most commonly used test for cointegration is the multivariate test based on the autoregressive representation of Johansen (1988) and Johansen and Juselius (1990). We apply the Johansen maximum likelihood approach which provides two different likelihood ratio tests (trace statistic and maximum eigenvalue) to determine cointegration and the number of cointegrating equations. Cointegration implies that causality exists between the variables but does not indicate the direction of causal relationship (Erdal et al., 2008).


4 Empirical results

Following the steps outlined in the previous section, we begin by performing unit root tests on the variables using EViews software package. Table 3 reports the ADF and PP tests of gas produced (GAS), gas utilised or consumed (GASU), crude oil consumed domestically (OIL), total crude oil produced (OILT) and real GDP. Results of the PP test indicate that all variables except OIL and GDP are stationary at levels, although they are integrated at first difference at 1% significant level.

The mix results further gave credence for performance of a cointegration tests using the Johansen approach in order to determine whether the series are cointegrated in their various combinations. The cointegrating results are reported in Table 4.

The Johansen tests indicate that the series in their various individual combinations with GDP using no intercept and no trend are not cointegrated. As a result of this revelation, we invoke causality test at levels in the spirit of Granger traditional form. Table 3 Results of unit root tests

ADF statistic PP statistic

Levels First differences

Levels First differences Variables GAS –2.951** –4.689* –2.97** –6.37* GASU –2.014 –5.121* –3.52** –6.792* OIL –2.266 –6.699* –2.553 –11.641* - OILT –2.293 –5.461* –3.06*** –5.962* GDP –0.405 –3.873* 0.581 –5.623*

Notes: The ADF and PP tests use intercept and no trend. *Implies significance at 1%; **significance at 5%; while, ***significance at 10%.


Table 4 Results of Johansen cointegration tests

Series Eigenvalue Likelihood ratio

5 % critical value

1 % critical value

Hypothesised no. of ce(s)

GDP 0.179915 7.356967 15.41 20.04 None OILC 0.00049 0.018124 3.76 6.65 At most 1 GDP 0.152213 6.117597 15.41 20.04 None GASU 0.00215 0.007945 3.76 6.65 At most 1 GDP 0.342823 15.97869 15.41 20.04 None* GAS 0.011982 0.446028 3.76 6.65 At most 1 GDP 0.277189 12.1419 15.41 20.04 None OILT 0.003546 0.131452 3.76 6.65 At most 1

Notes: *(**) Denotes rejection of the hypothesis at 5% (1%) significance level. L.R. rejects any cointegration at 5% significance level.


154 D.G. Omotor

The results of pair-wise Granger causality test carried out using the variables at levels in order to determine the direction of causality between OILC and GDP, GASU and GDP, GAS and GDP and OILT and GDP are presented in Table 5. According to the obtained results, there is no causality in either direction, for all the series in their various combinations with GDP. This is referred to in the literature as ‘neutral hypothesis’ connoting that energy consumption is not correlated with GDP. The implication of this as Jumbe (2004) noted is that energy conservative policies could be pursued in this instance without adverse effects on the economy. Table 5 Pair-wise Granger causality

Null hypothesis: Obs. F-statistic Probability Implication

OILC does not Granger cause GDP 37 0.54255 0.58652 EC 0 EG GDP does not Granger cause OILC 1.4165 0.25736 EC 0 EG GASU does not Granger cause GDP 37 0.69773 0.50512 EC 0 EG GDP does not Granger cause GASU 0.18694 0.83039 EC 0 EG GAS does not Granger cause GDP 37 1.61852 0.214 EC 0 EG GDP does not Granger cause GAS 3.31416 0.06919 EC 0 EG OILT does not Granger cause GDP 37 1.74577 0.19072 EC 0 EG GDP does not Granger cause OILT 1.26123 0.29701 EC 0 EG


5 Conclusions

The Nigerian economy as reported by empirical evidence is heavily dependent on the oil sector which contributed 95% of its foreign exchange earnings, 65% government earnings but less than 25% of the country’s GDP. Nigeria is ranked 27th in world’s production of natural gas and 45th in gas consumption. In recent times, efforts have been geared toward the development, exports and consumption of crude oil and gas for fiscal objective and electricity generation. Part of the reform exercise is ensuring that there is effective utilisation of natural gas for domestic and industrial purposes at an affordable price. Despite the laudable reforms in the oil and gas sector, GDP growth rates are still unimpressive and hence the question of determining the degree of association and causality between oil and gas consumption on the one hand and economic growth on the other hand.

The paper provides empirical insights in the reporting of the causal relationship between the consumption of oil and gas and economic development using relatively recent Nigerian annual time series data for the period 1970–2008. Some of the variables are stationary at levels while others are integrated only after first differencing; thus prompting us to test for cointegration of the variables using their individual combinations with GDP. The Johansen tests for cointegration revealed that the individual combinations of the various energy consumption variables with GDP are not cointegrated. Consequently we invoked the spirit of Granger-causality to determine the direction of causality. The causality results confirm the neutral hypothesis for energy consumption and economic development using Nigerian data, that is GDP has a neutral effect on energy consumption and vice versa. The implication is that energy conservative policies


could be pursued in Nigeria without adverse effects on the economy. This partly provides empirical support for a call to halt gas flaring which degrades the environment on the one hand and the desire to reduce both oil dependency and CO2 emissions on the other hand in the quest for sustainable economic development.

A basic limitation of this study is its short time period and quality of the annual data used. It is suggested that future researches which investigate energy-development causality apply longer time and higher frequency data in form of quarterly and monthly series.

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Appendix

Reporting Nigeria’s energy profile in relation to Africa and the world

Table A1(a) Total carbon dioxide emissions from the consumption of energy (million metric tons)

2006 2007 2008 2009 2010

Africa 1,062.36 1,097.51 1,158.05 1,115.91 1,145.16

Nigeria 103.15 100.71 100.62 74.14 80.51

World 28,885.31 29,590.45 30,318.02 29,777.69 31,780.36

Source: http://www.eia.gov/cfapps/ipdbproject

Table A1(b) Total coal consumption (thousand short tons)

2006 2007 2008 2009 2010

Africa 210,650.82 216,892.99 228,666.78 217,218.17 217,208.25

Nigeria 8.82 8.82 12.13 8.82 8.82

World 6,719,144.70 7,014,933.61 7,327,553.89 7,318,283.13 7,994,703.20


158 D.G. Omotor

Table A1(c) Total electricity net consumption (billion kilowatt hours)

2006 2007 2008 2009 2010

Africa 491.86 521.61 525.15 532.01 NA Nigeria 14.86 19.26 18.14 17.66 20.38 World 16,388.49 17,110.48 17,419.95 17,313.58 NA


Table A1(d) Total petroleum consumption (thousand barrels per day)

2006 2007 2008 2009 2010

Africa 3,039.07 3,121.18 3,189.18 3,271.07 3,400.78 Nigeria 284.47 268.94 269.13 272.00 279.00 World 85,161.78 85,847.31 85,462.96 84,710.91 87,231.05


Table A1(e) Dry natural gas consumption (billion cubic feet)

2006 2007 2008 2009 2010

Africa 2,899.68 3,079.07 3,615.93 3,384.02 3,553.64 Nigeria 385.64 374.34 433.49 146.56 175.52 World 102,689.02 106,107.41 109,711.26 105,295.28 112,606.72


Table A1(f) Total oil supply (thousand barrels per day)

2006 2007 2008 2009 2010

Africa 10,214.64 10,511.37 10,637.18 10,502.94 10,768.07 Nigeria 2,442.25 2,352.76 2,168.55 2,211.42 2,458.37 World 84,390.09 84,261.89 85,356.27 84,318.11 86,751.40


Table A1(g) Total primary coal production (thousand short tons)

2006 2007 2008 2009 2010

Africa 275,662.28 278,395.35 283,295.12 281,271.28 285,839.26 Nigeria 8.82 8.82 8.82 8.82 8.82 World 6,773,563.6 7,052,922.4 7,459,614.9 7,545,745.5 7,984,899.86


Table A1(h) Total primary energy production (quadrillion Btu)

2006 2007 2008 2009 2010

Africa 35.12 36.11 37.01 36.13 NA Nigeria 6.35 6.31 5.93 5.71 6.38 World 465.82 472.81 488.55 484.15 NA



Table A1(i) Gross natural gas production (billion cubic feet)

2006 2007 2008 2009 2010

Africa 12,967.48 13,650.69 14,472.41 13,657.86 14,063.03 Nigeria 2,182.47 2,415.55 2,565.211 1,836.03 2,391.53 World 127,138.79 131,476.61 136,769.64 134,318.87 14,1627.479


Table A1(j) Proved reserves of natural gas (trillion cubic feet)

2006 2007 2008 2009 2010

Africa 485.84 484.43 489.63 494.08 495.25 Nigeria 184.66 181.9 183.99 184.16 185.28 World 6,130.72 6,216.03 6,219.27 6,289.15 6,637


Reporting on the causality between oil and gas consumption and economic growth in Nigeria

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