Oil is a major source of energy in Nigeria and the world in general. Oil being the mainstay of the Nigerian economy plays a vital role in shaping the economic growth and development of the country. Although Nigeria’s oil industry was founded at the beginning of the century, it was not until the end of the Nigeria civil war (1967 – 1970)  that the oil industry began to play a prominent role in the economic life of the country.  According to Genova (2003:133), Nigeria can be categorized as a country that is primarily rural, which depends on  primary product exports (especially oil products). Robinsoll (1964:219) assert that since the attainment of independence  in 1960 Nigeria has experienced ethnic, regional and religious tensions, magnified by the significant disparities in economic, educational and environmental development in the south and the north. These could be partly attributed to the major discovery of oil in the country which affects and is affected by economic and social components.


According to Falola (1999:145), oil exploration in Nigeria dates back to 1908 with the appearance of oil at Araromi in the present Ondo State. A German company – Nigeria – Butmen Corporation started this pioneering effort that was short-lived as a result of the outbreak of the 1914-1918 First World War. Another exploratory activity took off in 1937 by an Anglo-Dutch consortium that served as a forerunner of the present-day Shell D’Arcy. The exploratory activity started in 1937 after Shell D’Arcy had been awarded the sole concession rights that covered the whole territory of Nigeria. The company operated under the Mineral Oil Ordinance of No. 17 of 1914 and its amendments of 1925 and 1950 which allowed only companies registered in Britain or any of its protectorates the rights to prospect for oil in Nigeria and further provided that the principal officers of such companies must be British

Odeniyi (2005:15), asserts that oil was first discovered in Nigeria in 1908, and exploration proceeded during the 1930s in the form of the Shell-BP Petroleum Development Company of Nigeria Ltd. (Shell-BP), under the control of Shell and British Petroleum (BP). Commercial exploitation of the country’s reserves, however, did not begin until the late 1950s. According to Madujibeya (1976:284), the Nigerian government introduced its first regulations governing the taxation of oil industry profits in 1959 whereby profits would be split 50-50 between the government and the oil company in question, and the industry grew during the 1960s as export markets were developed, predominantly in the United Kingdom and Europe. By the mid-1960s, Nigeria began to consider ways in which the resources being exploited by Western oil companies could better be harnessed to the country’s development, and formulated its first agreement for taking an equity stake in one of the companies producing there, the Nigerian Agip Oil Company, jointly owned by Agip of Italy and Phillips of the United States. The option to take up an equity stake–in effect the first step toward the creation of the NNPC–was not, however, exercised until April 1971.

All crude oil produced before the mid sixties were exported because of non-availability of local refineries; while domestic demand of petroleum products was met by imports. However, the need to conserve foreign exchange, create job opportunities to some extent and other benefits derivable from setting up refineries locally prompted the government of Nigeria to establish and commission a refinery in Port Harcourt in 1965. The refinery had a processing capacity of 35,000 barrels per day, which was later increase to 60,000 bpd to meet increasing domestic demand while excess fuel oil was exported.

The demand for oil products continued to outstrip supply, which made the government to officially open the Warri refinery in 1978 with a total capacity of 100,000 bpd, thereby giving the country its present day potential capacity of 260,000 bpd. The refinery was designed to refine 50 percent Nigerian light crude and 50 percent medium crude. As the output from all the refineries will then exceed demand, there will be a surplus available for export.

Given the fact that the oil sector is a very crucial sector in the Nigeria economy, there is the dire need for an appropriate and desirable production and export policy for the sector. In Nigeria, though crude oil has contributed largely to the economy,  the revenue has not been properly used. Dickie (1966:27) asserts that  considering the fact that there are other sectors in the economy, the excess revenue made from the oil sector can be invested in them to diversify and also increase the total GDP of the economy.


The crude oil discovery and emergence of oil industry has had certain impacts on the Nigeria economy both positively and adversely. On the negative side, this can be considered with respect to the surrounding communities within which the oil wells are exploited. Some of these communities still suffer environmental degradation, which leads to deprivation of means of livelihood and other economic and social factors. Although large proceeds are obtained from the domestic sales and export of petroleum products, its effect on the growth of the Nigerian economy as regards returns and productivity is still questionable, hence, the need to evaluate the relative contributions of the oil industry on the Nigerian economy.