American recession and impact on the oil industry of Nigeria
Wang liancheng Student ID:S07640
Mathematics School
Research Paper Supervisor : Dr. Sekou Conde
Minzhu University of China
2007-2008 Academic Year
Abstract: This paper first introduce the background of the recession, including the conception of recession, the reasons of causing recession, and the Current crisis in the US, then through discussing the relationship between the US and Nigeria, and the role of oil industry of Nigeria in her economy, the writer conclude the influence of the US recession to the oil industry of Nigeria.
Key words: recession, Nigeria, economic, oil, influence.
I. the background of American recession
1) what is a recession?
A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down.
2)What causes it?
An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment. The economy and the stock market are closely related. The stock markets reflect the buoyancy of the economy.
3)Current crisis in the US
The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the US. Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. Major banks have landed in trouble after people could not pay back loans.The housing market soared on the back of easy availability of loans. The realty sector boomed but could not sustain the momentum for long, and it collapsed under the gargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shaky ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of the economy. The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansion on record. From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000. The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock prices crashed.
II. how about the economic relationship between the US and Nigeria?
Nigeria is the largest U.S. trading partner in sub-Saharan Africa, based mainly on the high level of petroleum imports from Nigeria. Total two-way trade was valued at $30.8 billion in 2006, a 19% increase over 2005. Leading U.S exports to Nigeria were machinery, wheat, and motor vehicles. Leading U.S. imports from Nigeria were oil and rubber products. Nigerian exports to the United State under the African Growth and Opportunity Act (AGOA), including its Generalized System of Preferences (GSP) provisions, were valued at $25.8 billion during 2006, a 15% increase over 2005, due to an increase in oil exports. Non-oil AGOA trade (leather products, species, cassava, yams, beans, and wood products) totaled $1.4 million in 2006, almost double the amount in 2005. The United States was the largest foreign investor in Nigeria. In June 2006, the United States met with Nigeria under the existing Trade and Investment Framework Agreement (TIFA) to cooperate on investment issues and to develop a strategy for Nigeria to diversify its export base, especially in manufactured goods. Under the TIFA, the United States and Nigeria pledged to work together on critical issues such as World Trade Organization (WTO) Doha Development, intellectual property rights, and trade capacity building. The U.S. goods trade deficit with Nigeria was $25.7 billion in 2006, an increase of $3 billion from $22.6 billion in 2005. U.S. goods exports to Nigeria in 2006 were $2.2 billion, up 38% from the previous year. U.S. imports from Nigeria were $27.9 billion in 2006, up from 15% from 2005. Nigeria is currently the 50th-largest export market for U.S. goods. The stock of U.S. foreign direct investment (FDI) in Nigeria in 2005 was $874 million, down from $2.0 billion in 2004. U.S. FDI in Nigeria is concentrated largely in the mining and wholesale trade sectors [1]..
III. What role does the oil industry play in the economy of Nigeria?
Nigeria is rich in mineral wealth, with petroleum and natural gas being the country’s major mineral products.Nigeria’s economic growth primarily comes from the country’s oil sector. Nigeria is the largest oil producer in Africa.Approximately two thirds of Nigeria’s production capacity is located onshore, while one-third islocated offshore.On April 21, 2007, Nigeria held presidential elections, marking the first time in Nigeria’s history that the country passed control from one civilian government to another. During the 16 months preceding the election, militant activity in the Niger Delta (especially near Warri and Port Harcourt) has severely impacted Nigeria’s oil production potential by shutting-in an estimated 20 percent of total production. The Nigerian economy is heavily dependent on the oil sector, which accounts for 95 percent of the country’s total export revenues. In 2004, Nigeria’s energy consumption mix was dominated by oil (58 percent), followed by natural gas (34 percent) and hydroelectricity (8 percent). Coal, nuclear and other renewables are currently not part of the country’s energy consumption mix. Between 1984-2004, the share of oil in Nigeria’s energy mix has decreased from 77 percent to 58 percent. Natural gas consumption increased from 18 percent to 34 percent. Hydroelectricity has seen a slight increase as well from 5 percent to 8 percent.(show in Fig1)
Fig1
Nigeria is the world’s eighth largest exporter of crude oil and the country is a major oil exporter to the United States. In 2006, Nigeria’s total oil exports reached an estimated 2.15 million bbl/d. Nigeria shipped approximately one million bbl/d or 42 percent of its crude exports to the United States in 2006. Additional importers of Nigerian crude oil include Europe (19 percent), South America (7.6 percent), Asia and the Caribbean. Despite shut-in production, major importers of Nigerian crude have experienced little to no decrease in Nigerian crude imports over the past 15 months. The steady exports suggest that the new production capacity additions (approximately 545,000 bbl/d) have mostly offset shut-in production.
Nigeria's refining capacity is currently insufficient to meet domestic demand, forcing the country to import petroleum products. According OGJ, Nigeria's state-held refineries (Port Harcourt I and II,Warri, and Kaduna) have a combined nameplate capacity of 438,750 bbl/d, but problems including sabotage, fire, poor management and a lack of regular maintenance contribute to the current operating capacity of around 214,000 bbl/d. To increase refining capacity, the Nigerian government is granting permits to build several independently-owned refineries. Oando, a leading petroleum-marketing company in Nigeria, is considering building a refinery in Lagos. The refinery would be built in two phases, with each phase providing 180,000 bbl/d of refining capacity.Nigeria is trying to privatize state entities by selling NNPC's four oil refineries, petrochemicals plants, and its Pipelines and Products Marketing Company (PPMC). IOCs have shown little interest in investing in refinery privatization. However, the Nigerian government recently opened negotiations with Libyan, Indian, and Chinese investors. As of March 2007, Mittal Steel of India was looking to purchase a controlling stake in the Port Harcourt Refinery Company (PHRC),although, no deal has officially been signed[2]..
Petroleum is the leading mineral produced in Nigeria; it is found in the Niger delta, in the bights of Benin and Biafra, and on the Bakassi peninsula along the Cameroon-Nigeria border, a disputed area where the two countries have been involved in clashes. (In 2002 the International Court of Justice awarded the peninsula to Cameroon, but the decision has yet to be implemented.) Petroleum production on an appreciable scale began in the late 1950s, and by the early 1970s it was by far the leading earner of foreign exchange. The growing oil industry attracted many to urban centers, to the detriment of the agricultural sector. In the 1980s a decline in world oil prices prompted the government to bolster the agricultural sector. Nonetheless, both refinery capacity and agriculture have not kept pace with population growth, forcing the nation to import refined petroleum products and food [8]..
IV. what is the influence of American recession to the oil industry of Nigeria?
Fig2
Fig2 shows us the comparation between the Nigeria’s oil production and consumption from 1986 to 2006. We can see that Nigeria’s production is increasing when her consumption is relative steady. That’s to say the oil consumption requirement of Nigeria is relative small, she will expand the production in order to increase her revenue. But America’s recession cuts most oil exports of Nigeria. [...]
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