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AN EMPIRICAL INVESTIGATION OF THE CAUSAL RELATIONSHIP BETWEEN ENERGY CONSUMPTION AND ECONOMIC GROWTH IN NIGERIA

TABLE OF CONTENT
Title Page – – – – – – – – –
Dedication – – – – – – – – –
Declaration – – – – – – – – –
Certification – – – – – – – – –
Acknowledgement – – – – – – – –
Abstract – – – – – – – – –
Table of contents – – – – – – – –
List of Tables – – – – – – – – –
List of Figures – – – – – – – – –
List of Appendixes – – – – – – – –
CHAPTER ONE
1.0 Introduction – – – – – – – –
1.1. Background of the Study – – – – – –
1.2. Statement of the Problem – – – – – –
1.3. Objectives of the Study – – – – – –
1.4. Research hypothesis – – – – – –
1.5. Scope of the study – – – – – – –
1.6. Justification of the Study – – – – –
1.6.1. Limitations of the Study – – – – – –

1.7. Identification, Definition and Measure
of Variables – – – – – – –
1.7.1. Concept of Growth – – – – – – –
1.7.2. Concept Of Energy Consumption – – – – –
1.7.3. Concept Of Causality – – – – – – –
1.8. Structure Of The Work – – – – – –
CHAPTER TWO
2.0. Literature Review – – – – – – – –
2.1. Empirical Literature – – – – – – –
2.2. Theoretical Framework – – – – – –
2.3. Energy Profile Of The Nigerian Economy – – –
2.4. Structure Of Energy Consumption In Nigeria – –
2.5. Government Policies On Energy Production
And Consumption In Nigeria. – – – – –
CHAPTER THREE
3.0. Methodology – – – – – – – –
3.1. Research Methodology – – – – – –
3.1.1 Data Sources – – – – – – – –
3.2. Model Specification And Estimation Procedure – –
3.3. Test For Stationarity – – – – – – –
3.4. Causality Test – – – – – – –

CHAPTER FOUR:
RESULT AND DISCUSSION
4.1 Energy Consumption Trends between 1975-2004 – –
4.2 Pre and post Sap description of energy consumption
in Nigeria – – – – – – – –
4.3 Stationarity Results – – – – –
4.4 Causal Relationship between Energy consumption
and Economic growth – – – – – –
4.5 Estimation of the Impact of RGDP on Energy consumption
4.6 Implications of the Findings – – –
CHAPTER FIVE
5.0. Summary, Conclusions and Policy Recommendations –
5.1. Summary – – – – – – –
5.2. Conclusion – – – – – – –
5.3. Policy Recommendation. – – – – –
References – – – – – – – –
Appendices – – – – – – – –

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CHAPTER ONE
1.0. INTRODUCTION
1.1. BACKGROUND TO THE STUDY
In Nigeria, there are two sources of energy, namely the non-renewable
energy sources which comprises petroleum, natural gas, coal and fuel wood,
and the renewable energy resources which include hydro-power, solar,
biomass and wind energy.
Among these energy sources, the major energy resource consumed in
Nigeria are hydropower, petroleum, natural gas and coal. Over the years,
the consumption of these energy resources has triggered the growth and
development of the Nigerian economy. This is evident from the contribution
of energy consumption to the growth of the nations Gross Domestic Product
(GDP).
The demand for energy resource and its consumption has continued to
increase over time as its consumption is dominant in all sectors of the
economy ranging from manufacturing, mining, transportation and
distribution, communication and the service sector to mention but few.
Energy consumption plays two major roles in the Nigerian economy.
First, as in all economies – developed and developing-energy fuels economic
growth because it is an input to all economic activities. As a result, energy
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consumption has grown step by step with economic growth as measured by
the growth in the Gross Domestic Product of the country. Secondly, energy
is the major source of revenue to the government, and this revenue has been
used for developmental purposes.
Although, the relationship between energy consumption and Gross
Domestic Product is complex, an examination of the historic growth pattern
of the two variables over the years ranging from 1970 to 1990 shows clearly
that the two variables are highly correlated (Adegbulugbe, 1993).
Petroleum product which dominates the total commercial energy
consumption in Nigeria is used in transportation, namely road vehicles,
aircraft and sea vessels, including powered boats, household and industrial
consumers are the major end-users of petroleum products in Nigeria.
Although gas accounted for a negligible proportion of total energy
consumption in the 1970s and 1980s, its importance has continued to grow
since the 1990s as the numerous advantages of gas over other forms of fuel
energy becomes evident. Consequently, gas is being increasingly utilized in
power generation and industries. Gas is being supplied to the major users
such as NEPA (PHCN) via Afam, Ughelli, Sapele and Egbin thermal plants.
Other major users include Fertilizer Companies, the Nigeria Glass Industry
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in Port Harcourt, the Delta Glass Company in Ughelli and other industries
and manufacturing organizations.
Before the advent of crude oil and natural gas, coal and
hydroelectricity were the dominant forms of energy in Nigeria. In the early
1950s through the 60s and 70s coal was predominantly used in the
transportation sector. It is reported that coal was even supplied to the Ghana
transport system within this period. Hydroelectricity was the main stay of
the industrial sector during this time. But gradually the importance of coal
as a form of energy gave way to the exploration of crude oil and natural gas.
This era was called the era of the “black gold”, as crude oil took over the
centre stage of energy consumption in Nigeria. Today, it is pertinent to note
that petroleum, natural gas, coal and hydropower are the major source of
energy being consumed in Nigeria. This form of energy is the pivot in
which economic growth and development rest.
The use and conservation of energy resources had its origin in the
“limit to growth” literature of the early 1970s where sustainable
development referred not only to the survival of the human species but also
to maintaining the productivity of natural, produced and human resources
from generation to generation. A key requirement of sustainable
development will thus necessitate bringing the growth and well-being of
present generation in such a way that the ability of the future generations to
meet their own needs will not be jeopardized. The availability of safe and
sound energy as a factor of production in such developmental process cannot
be overemphasized. And as noted by Eleri (1996), the contribution of
energy in furthering development aspirations would be judged by its
compatibility with the goal of advancing growth, equity, environmental
integrity and inter temporal justice.
The Nigerian economy has witnessed two significant oil shocks in
recent times. The first oil shock, which occurred in the early 1970s, was
positive and induced a sharp increase in inflation through excessive increase
in money supply and reckless government spending. For example, while
money supply increased by 49 percent in 1974 over the 1970 figure of 23
percent, inflation soared at 33 percent over the same period as against 13.8
percent in 1970. Government expenditure increased by more than 1000
percent in 1974 over the 1970 figures of 150 percent (Babatunde and
Francis, 2001).
The second oil shock was negative and it introduced several structural
imbalances (unemployment, debt over-hang, poverty, balance of payment
deficits etc) in the economy, as the country found it difficult to control the
import culture she had acquired during the boom years. The era of the
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Structural Adjustment Programmes had its own ups and downs as the
exchange rate rigidities had its effects on the prices of energy in the country
and the revenue base of the Nigerian nation.
1.2. STATEMENT OF THE PROBLEM
The abundance of energy resources in Nigeria notwithstanding acute
shortages of energy services and failure of energy infrastructure has
excessively increased the cost of doing business in the country (see DPC,
1999). This has been exacerbated by the poor performance of utilities, waste
and political patronage. All these have rendered energy management
ineffective and have increased the pace of inequality between the rural and
urban areas as the former has suffered more neglect.
Many factors are responsible for the problems associated with the
production and consumption of energy resource. Among these are;
inadequate funding of capacity expansion of infrastructures to cater for
expanding demands and to ease the pressure on the facilities that were built
during the petrodollar boom years; inadequate funding of maintenance of the
existing facilities, leading to a gradual but effective erosion of installed
capacity with time, and poor management and administration of the facility.
All this decay has contributed to the declining economic growth of Nigeria
as well as the erosion of the social welfare of Nigerians.
This failure of energy services and energy infrastructure have made
the supply of energy inadequate, electric power supply is unreliable, from
an installed generating capacity of about 6000mw only 2200mw has been
used by year 2002. Sporadic petroleum product shortages exist, despite an
estimated production capacity of 385,000 bpd, less than 200,000 was
demanded locally all these affects the consumption of energy and they also
constitute a huge drain to the national economy.
Energy supplies to all sectors of the Nigerian economy have been very
unreliable over the years. For example, most manufacturing, industrial and
communication companies operating in Nigeria had to have in place active
power generation facilities to compliment the very unreliable power supplies
from the national grid. As such, manufacturing companies operating in the
country have had to channel a significant portion of investible funds,
available to them to provide on site standby power supplies, thus diverting
the resources needed to fund their core manufacturing business. This has
negative ramification for domestic productivity, not to talk of the ability to
compete internationally in a continuously changing global market.
These alternative sources of power supply have greatly increased the
cost of production and subsequently an increase in the prices of goods and
services. The increase in the prices of goods and services only reduce the
standard of living of the people and this poses a serious problem to the
economy. It is worth noting that firms that could not meet these rising cost
of production had to close down thus worsening the unemployment situation
of the country. Available data from the CBN statistical bulletin showed that
unemployment rate increased from 99934 in 1990 to about 190328 in the
year, 2000.
The continual increase in the prices of petroleum products had its own
turn on the economy; this has generated inflation and high cost of
transportation and distribution of goods and services. The society is always
at the receiving end when such rigidities are dominant in the economy as the
country’s poverty level rises.
Besides the above economic losses, the financial resources required
(mostly in foreign exchange) to maintain existing capital stock of the energy
supply system (power plants, refineries, coal mines, transmission and
distribution net work, pipelines etc) and expansion is a serious problem to
contend with. Secondly, depending on the composition of future energy
23
consumption mix, increased level of energy consumption may create a
conflict between the two roles played by energy in the national economy.
In view of the above situation, it is observed that the inadequate
supply of energy resource and its low consumption has led to a decline in
economic activities which also translates into poor economic growth and
development. Will it then, not be out of place to state that it is impossible
for energy consumption and growth to have a relationship? Sequel to that is
it the growth of the economy that causes increase in energy consumption or
is it energy consumption that causes growth?
Nevertheless, the need to establish the relationships between the use
of energy resource and economic growth or output has occupied a central
place in the literature (see Kraft and Kraft, 1978). The need to establish this
relationship is evident in the contradictory results of some studies (see
Akarca and Long, 1979; Yu and Choi, 1985). While some studies aptly
demonstrate that development of energy resources can lead to economic
growth through the multiplier effect and by providing the infrastructure to
facilitate economic growth, others (e.g. Yu and Hwang, 1984; Cheng, 1996)
found no evidence of causality between growth and energy consumption.
The implication is that when such relationships are not established,
conservation of energy resources has the tendency to hamper meaningful
24
growth efforts. Considerable efforts have been made to establish the demand
function for energy or subsidizing domestic energy consumption in Nigeria
(Ikporukpo 1978; Adenikinju 1996). The present study hopes to fill the gap
by using Nigerian data to establish the causal relationship between growth
and energy consumption make an impact analysis of energy consumption on
economic growth or otherwise as well as undertake a trend analysis for
energy consumption and growth. Energy consumption will also be
disaggregated to estimate the impact of each component of energy on
economic growth.
1.3. OBJECTIVES OF THE STUDY
The objectives of the study are:-
a) To undertake a trend analysis of energy consumption vis-à-vis
economic growth (1975-2004).
b) To establish the causal relationship between energy
consumption and economic growth.
c) To examine the impact of energy consumption on the growth of
the Nigerian economy from 1975 to 2004.
25
1.4. RESEARCH HYPOTHESIS
Three research hypotheses derived directly from the research
objectives were tested. These hypotheses are:
1. Ho: Energy consumption does not granger causes economic
growth.
Ha: Energy consumption granger causes economic growth.
2. Ho Economic growth does not granger causes energy
consumption.
Ha: Economic growth granger causes energy consumption.
3. Ho: There is no significant relationship between energy
consumption and economic growth.
Ha: Alternatively, there is a significant relationship between
energy consumption and economic growth.
These hypotheses are stated symbolically as follows:
Ho: Bo = O
Ha: B1 ≠ O
The t-statistics and f-test were used to test the individual and combined
statistical significance of the estimated parametric coefficients respectively.
26
1.5. SCOPE OF THE STUDY
The study covered the period 1975 to 2004. The period has been
chosen principally because as at 1975, the importance of agriculture to the
economy gradually gave way to crude oil exploration. The study period also
witnessed the aftermath effects of the first oil price shock which generated a
substantial increase in oil exploration, prices and consumption all over the
world. The study period 1975 – 2004 was also broken into two, the pre-SAP
(1975 to 1985) period and the post-SAP (1986-2004) periods. This was used
to x-ray the effects of SAP policies on energy consumption in Nigeria.
1.6. JUSTIFICATION OF THE STUDY
The justification of this study is premised on the importance of energy
to the economy of Nigeria most especially in the present circumstance of
energy paradox – scarcity in the midst of plenty which the nation has been
facing for sometime now.
Based on the series of contradictory results obtained from some
studies as regards the relationship between energy consumption and growth
and the causal effect between the two variables which some study found no
evidence of causality between them, the need to conserve energy for future
27
use as the activity of man revolves round energy made it imperative to
establish a relationship between energy consumption and economic growth.
The importance of energy to any economy cannot be over
emphasized. Energy is used in almost all sectors of the economy ranging
from mining, transport, agriculture, manufacturing industry, electricity
generation and so on. Energy use has in one time or the other accelerated
the growth of the economy. The establishment of a causal relationship
between energy consumption and growth which this study hope to achieve
will go a long way in repositioning the economy towards the conservation of
the energy resource so as to ensure the continuous functioning of the
different sectors of the economy and the attainment of sustainable
development. This will also ensure that citizens will continue to have a
steady flow of income, improvement in the standard of their living and the
overall development of the economy.
1.6.1. LIMITATIONS OF THE STUDY
The main limitation of the study will relates to the usual limitations
with official data, namely, reliability. Data to be used are official data
published by the Central Bank of Nigeria (CBN) which diverge significantly
28
from those published by World Bank and International Monetary Fund
(IMF) and OPEC. This discrepancy in data constitutes a problem.
1.7. IDENTIFICATION, DEFINITION AND MEASUREMENT OF
VARIABLES
1.7.1. Concept of Growth
There is need for us to distinguish between growth and development.
Growth refers to an increase in an economy’s capacity to generate more
goods and services. It results in an outward shift of the economy’s
production possibility frontier. Development on the other hand is growth
plus structural shift. Therefore, growth is part of development.
Growth can be measured using the Gross Domestic Product (GDP) of
a country. However, growth in nominal GDP does not constitute real
growth. Nominal GDP at factor cost has to be deflated by the Consumer
Price Index (CPI) to obtain real GDP. This study applies real GDP as a
proxy for growth.
1.7.2. CONCEPT OF ENERGY CONSUMPTION
Energy has been conceived as a source of power such as fuels, diesel,
gas, electricity etc. which can be used to drive machines for production and
manufacturing purposes. It is the ability of energy to drive machines which
is used for productive purposes makes it imperative for it to be conserved,
29
since its conservation will ensure that production, manufacturing, transport
and distribution will be sustained over time.
The sustainability of energy is fundamental to the economic growth of
a nation since energy is the driving force for increased output of goods and
services and the overall welfare of the individuals in a country. Therefore,
any energy form that is used up for such purposes is said to be consumed.
Total energy consumption which is a combination of total coal,
hydropower, petroleum and natural gas consumed within the study period is
measured in tones of coal equivalent. This is further deflated by the
consumer price index to obtain real energy consumption.
1.7.3. Concept of Causality
The nature of econometrics is to look at the cause and effects of two
or more variables. The correlation coefficient is used in assessing the
relationship between variable and not the cause and effect. Therefore
causation is not the same with correlation. Causation is a central problem in
econometrics.
In 1969, C.W.J. Grange in his study titled “Investigating causal
relations by econometric methods and cross-spectral methods”, he tried to
establish some mechanism in looking at the causal relationship between

variables i.e. Does in looking at the causal relationship between variables i.e.
Does X causes Y or Does Y causes X? He used his name to qualify his
work by using X Granger causes Y or Y Granger causes X.

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