NIGERIA’S DOWNSTREAM OIL SECTOR DEREGULATION AND EFFICIENT PETROLEUM PRICING: AN ERROR CORRECTION MODEL (ECM) APPROACH

Abstract

The paper examines deregulation of downstream oil sector and optimal petroleum pricing in Nigeria. Log linear error correction model was adopted to examine how Custom and excise duties (CED), petroleum profit tax (PPT),) and crude oil production (COP) had impacted on petroleum pricing (PR) in Nigeria. Unit root test was carried out on each of the variables to determine their level of stationarity. Three of the variables were however found stationary after first difference and one after second difference, and then it was safe to proceed with Johansen Cointegration Test. The integrated variables were then used for the regression analysis. The cointegration result showed that the variables used in the model have a long term, or equilibrium relationship between them. The result showed that with deregulation of the downstream oil sector, the amount of levies on importation of petroleum would hike the price of domestic sales of petroleum. This shows that, deregulation would discourage the importation of refined fuel and as such it would encourage foreign direct investment in the oil and gas sector. More so, the result showed that the quantity of crude oil production in Nigeria has been far below the optimal capacity and has contributed positively to petroleum pricing increase over the years in Nigeria. The study thus recommends that appropriate policy that would facilitate economic prosperity for an average citizen in Nigeria through petroleum price reduction should be adopted. The caveat issue to keep in mind is that the petroleum downstream sector deregulation should produce efficiently, effectively and equitably, which could result in durable infrastructures and optimal petroleum pricing for sustainable development of the national economy.