This document provides background information on oil subsidy policy and discusses Nigeria's removal of oil subsidies in 2012. It led to public protests over increased costs of living and manufacturing. While subsidies on diesel were previously removed in 2006 with less opposition, subsidies on gasoline (PMS) directly impact most citizens. The document aims to evaluate the impact of subsidy removal on manufacturing firms in southeast Nigeria, an important industrial region. Subsidy removal may affect firms' operations as they rely on diesel generators for power and use diesel and gasoline to run vehicles and equipment.

1. Evaluation of the Impact of Oil Subsidy Removal on Manufacturing Firms in South East,
Nigeria
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Oil subsidy policy (also referred to as fossil-fuel subsidy policy) is one of the many policy
instruments used by governments to attain economic, social and environmental objectives in
various countries of the world. The Organization for Economic Co-operation and Development
(OECD, 2005: 58) defines subsidy as “a government action that confers an advantage on
consumers or producers, in order to supplement their income or lower their costs.” This
definition suggests that subsidy can be given either on consumption or on production. Energy
subsidies come in two main forms: those designed to reduce the cost of consuming fossil fuels;
and those aimed at supporting domestic fossil-fuel production (Burniaux, Chanteau, Dellink,
Duval, and Jamet, 2009: 83).
The World over, subsidies exist in several economic sectors, including agriculture, fisheries and
energy, petroleum etc. Governments can subsidize consumption and production by transferring
funds to recipients directly, by assuming part of their risk, by selectively reducing or increasing
the taxes they would otherwise have to pay, and by imposing mandates and barriers to trade.
Some producer subsidies can have the effect of lowering fossil-fuel prices, thereby serving
indirectly as consumer subsidies at the same time (Morgan, 2007).

2. Energy subsidies, in particular, are often used to alleviate energy poverty, serve as producer
subsidy and promote economic development by enabling access to affordable modern energy
services. Oil subsidies aimed at consumers are generally intended to keep petroleum product
prices low, in order to stimulate certain sectors of the economy or alleviate poverty, by
expanding the population’s access to energy (Saunders and Schneider, 2000; Morgan, 2007).
These types of subsidies are more common in non- OECD, former eastern bloc countries and
developing countries of which Nigeria is one. These subsidies usually take the form of price
controls (IEA, 2007) and can involve large price gaps. For example, in Iran, petroleum product
prices were kept at 10 per cent of world market prices in 2002 (Jensen and Tarr, 2002) and in
Nigeria, the current price gap according to the Nigeria petroleum product pricing company
(PPMC) for premium motor spirit (PMS) is N43/liter (N140 – N97). However, for automotive
gas oil, the subsidy had been removed and there is no price gap at the moment. Given the critical
role that energy plays in economic and social development, the reform of inefficient energy
subsidies should be analyzed in a context including their links to the three pillars of sustainable
development: economic growth, poverty reduction and environmental dimensions (IEA, 2007;
Berg, Burger, & Thiele, 2008).
When the Leaders of the group of twenty countries (G-20) met from 24th-25th September 2009
in Pittsburgh, USA, they agreed that,
“building on the efforts of many countries to reduce fossil fuel subsidies while
preventing adverse impact on the poorest, they were committed to rationalize and

3. phase out over the medium term, inefficient fossil fuel subsidies that encourage
wasteful consumption” (IEA Report, 2010: 56).
Recognizing the importance of providing those in need with essential energy services, including
through the use of targeted cash transfers and other appropriate mechanisms, they called on
individual countries to phase out such subsidies worldwide and for Energy and Finance Ministers
of the G-20 countries to develop their country implementation strategies and timeframes and
report back to the next G-20 Summit (IEA Report, 2010).
In an attempt to comply with the aforementioned global directive and fully deregulate the
downstream sector of the Nigeria economy and due to the increasing demand on the government
finances by other socio-economic factors, the federal government of Nigeria on 1st January 2012,
greeted the nation with the announcement, by the President, of the immediate removal of oil
subsidy on the Premium Motor Spirit (PMS) popularly called petrol, thereby fully deregulating
the petroleum sector of the economy. This announcement generated public rejection and massive
protests across Nigeria by labour unions and other civil society groups in Nigeria. The protests
were anchored on the premise that cost of living including cost of manufacturing, cost of
products, and cost of food items and of transportation, etc will record astronomical increase and
further impoverish the poor Nigerians. Prior to the announcement, the removal of subsidy on
PMS and the policy of full deregulation of the downstream sector had remained a topical issue in
public discourse as the government tried to make Nigerian see reasons to accept the policy. The
government including the Nigeria Chambers of Commerce, Industry, Mines and Agriculture
(NACCIMA) insisted that full implementation of the subsidy policy will bring enormous benefits
to the economy of Nigeria (Osagie, 2012). The Government also insisted that subsidy removal
will eliminate fuel smuggling across Nigeria’s boarders thereby eliminating scarcity in Nigeria.

4. These benefits notwithstanding, the federal government seems to be aware of the hardship that
will accompany the subsidy removal policy and as such promised some palliative measures to
cushion the hardship (Ekine and Okidim, 2013). Despite all these efforts by government, the
announcement still did not go down well with Nigerian because the actions that followed that
announcement indicated that the populace neither believed the explanations offered government
nor did they accept those palliative measures as enough cushion for the hardship that will
accompany the policy.
In 2006, the Olusegun Obasanjo led Administration had earlier removed oil subsidy on
Automotive Gas Oil (AGO) popularly called gas or diesel. This policy did not receive the kind of
public outcry like that of the current administration. The reason being that subsidy removal on
PMS affects directly the greater majority of the populace but subsidy removal on AGO affects
most people indirectly.
The manufacturing firms as well as organizations that make heavy use of electricity are the few
that have direct impact of the subsidy removal on Automotive Gas Oil (AGO) because they run
their generators on AGO. The Price of AGO since then had soared so high that the low and
middle income class individuals find it extremely difficult to buy the product. Even with the
obvious negative consequences, the government officials and some economic analysts maintain
that full deregulation remains the best policy for the country.
It is against this background that this study seeks to evaluate the impact the oil subsidy removal
has had on manufacturing firms in the South East of Nigeria. The study will be of great
importance to both the country and the region because the South East region is heavily endowed
with many companies and manufacturing firms which depend heavily on Automotive Gas Oil

5. (AGO) for their operations. These firms depend heavily on power generating sets for the supply
of electricity power. They also make use of their heavy duty equipments, vehicles and machines,
and all of these are powered by Automotive Gas Oil (AGO). They also depend on the premium
motor spirit (PMS) to power their vehicles. The use of all these vehicles and machines suggests
that the firms had at one time enjoyed oil subsidy; of which the removal of the subsidy now may
likely affect the firms in one way or the other.
The South East region of Nigeria is also the home to one of the major tribes in Nigeria which has
a population of about forty million people and consequently, any impact of the oil subsidy
removal on the manufacturing firms in this region will have some significant consequences on
the nation as a whole and on the region in particular. The study will also add to the body of
knowledge as there are not many literature that have evaluated the effect of oil subsidy removal
on manufacturing firms in Nigeria especially the ones located in the South East region of
Nigeria.
1.2 Statement of the Problem
The low capacity utilization of Nigeria’s state –owned refineries and petrochemical plants in
Kaduna, Port Harcourt and Warri, coupled with the sorry state of disrepair, the neglect, and
repeated vandalization of the state- run petroleum product pipelines and oil movement
infrastructure nationwide, the collateral damage of public service system and institutionalized
corruption, with the frightening emergence of a local ‘noveau riche’ oil mafia that controls, and
coordinates crude oil business in Nigeria; the refined petroleum- products pipeline sabotage, and
the theft (illegal bunkering) of petroleum products, the insatiable corrupt military task force
operatives that assist diversions of both crude oil and petroleum products, and large – scale cross
border smuggling of petroleum products, all of which are the root causes of the protracted, and

6. seeming too intractable severe fuel crises that have bedeviled the country relentlessly, for
close to a decade now, are all predictable outcomes of government involvement in the
downstream sector of the Nigerian petroleum industry, over the past quarter of a century. All
these evils prompted governments’ decision to remove subsidy on the petroleum products in
Nigeria.
As expected, public opinion about deregulation in Nigeria covers a wide spectrum and cuts
across all sides of the argument. Some Nigerians hold the view that deregulation cannot be
complete, whether in the downstream sector of the Nigerian petroleum industry, or indeed, in
any other sector of the national economy. However, deregulation is seen as desirable in freeing
government of its concurrent control, and involvement in the business of refining, importation,
and distribution of refined petroleum products in the Nigerian market. Another school of thought
strongly believes that the Nigerian petroleum industry must not be liberalized, or deregulated, or
privatized completely, for whatever reason, and that the status quo should remain.
However, some others insist that complete deregulation, including the total, and final
dismantling, unbundling, and subsequent wholesale privatization of all state-owned petroleum
businesses should proceed without further delay, with maximum dispatch, for the continued and
meaningful survival of the Nigerian petroleum industry in the 21st century. In short, for such
Nigerians, the benchmarks of globalization, not nationalization, dictate the tempo of the new
world order in international petroleum market transactions.
Historically, major petroleum marketing companies were the main sources of petroleum products
supply. The companies transport and distribute the products relying on their distribution and
retail outlets. These were in the era of regulation in which Nigeria pays the marketers and

7. determine prices for the products. However, this arrangement was not sustainable given that it
was dependent on the profit and market imperatives of the oil marketers and was the root causes
of the evils aforementioned. The country’s economic activities expanded such that private
companies could no longer cope with increased demand for petroleum products. This resulted in
erratic supply of petroleum products and ultimately acute scarcity of the products. The shortage
was endemic and created social and economic dislocation in the country. This market failure
made government to venture into petroleum product marketing and distribution through the
Nigeria National Petroleum Corporation (NNPC).
The concern of government to overcome this lack of policy and total dependence on oil
companies led to policy shift towards regulations. Government therefore, introduced uniform
pricing to satisfy domestic demand, strengthen self reliance and avoid a situation in which the oil
companies could hold the country to ransom. The nation witnessed adequate supply of the
products up till 1998. Thereafter due to the sustained devaluation of the naira on account of the
implementation of the SAP coupled with the non –maintenance of existing refineries domestic
production was soon neglected, making it imperative for local demand to be met through
imports. The shortages of petroleum products escalated in spite of increases in price of the
products since 1990.
The Obasanjo led administration on coming in 1999 decided to gradually withdraw the subsidy
on petroleum products to allow the mechanics of market forces to take their full course. This
again resulted to frequency increases in petroleum products prices.
The removal of oil subsidy by the federal government of Nigeria, on petroleum products has had
some far reaching consequences especially on the manufacturing firms in the country in several

8. ways. It is against this backdrop that this study seeks to investigate the impact of the government
deregulation policy of the petroleum sector on the performance of manufacturing firms in the
South East of Nigeria.
1.3 Objectives of the Study
Considering the various ways the fuel subsidy regime is perceived to have impacted people
economically, environmentally and even socially, this study therefore seeks to evaluate the
impact of oil subsidy removal on the performance of manufacturing firms in South East, Nigeria.
The study focuses on the economic impact of the oil subsidy removal and therefore has the
following specific objectives:
i. To determine whether the removal of oil subsidy on petroleum products has affected the
consumption of petroleum products among manufacturing firms in the South East Nigeria.
ii. To find out if the removal of oil subsidy on petroleum products in Nigeria has reduced
energy-intensive manufacturing and increased labour intensive production among
manufacturing firms in the South East Nigeria.
iii.To assess how the oil subsidy removal has affected the volume of production among the
manufacturing firms in South East Nigeria.
iv. To determine how the oil subsidy removal has affected the cost of production and profit of
the manufacturing firms in South East Nigeria.
v. To evaluate how the oil subsidy removal has affected efficient management of resources
among manufacturing firms in South East Nigeria.

9. vi. To determine whether the manufacturing firms in the South East of Nigeria have made
investments in alternative sources of energy following the removal oil subsidy on
petroleum products in Nigeria.
1.4 Research Questions
Drawing from the above stated problems as well as the objectives of this study, the following
research questions shall guide discussions in this work:
i. To what extent has the removal of oil subsidy on petroleum products affected the
consumption of petroleum products by manufacturing firms in South East Nigeria?
ii. How has the removal of oil subsidy on petroleum products led to the reduction in energy-
intensive manufacturing and increased labour intensive production among manufacturing
firms in South East Nigeria?
iii. How has the removal of oil subsidy on petroleum products affected the volume of
production among the manufacturing firms in South East Nigeria?
iv. To what extent has the removal of oil subsidy on petroleum products affected both the cost
of production and profit of the manufacturing firms in South East of Nigeria?
v. In what ways has the removal of oil subsidy on petroleum products led to more efficient
management of resources among the manufacturing firm in South East of Nigeria?
vi. To what extent has the removal of oil subsidy on petroleum products affected investments
in alternative sources of energy among the manufacturing firms in South East Nigeria?
1.5 Statement of Hypotheses
In order to achieve the objectives stated above and answer the research questions, and also in line
with relationships and variables in the research questions, the following hypotheses have been

10. formulated for this research. They are deliberately stated only in their normal (H0) or negative
form and will serve as the fulcrum of the study:
H1: The removal of oil subsidy on petroleum products has not significantly affected the
consumption of petroleum products by manufacturing firms in South East Nigeria.
H2: The removal of oil subsidy on petroleum products has not significantly led to the reduction
in energy-intensive manufacturing and increased labour intensive production among
manufacturing firms in South East Nigeria.
H3: The removal of oil subsidy on petroleum products has not significantly affected the volume
of production among the manufacturing firms in South East Nigeria.
H4: The removal of oil subsidy on petroleum products has not significantly affected both cost of
production and profit of the manufacturing firms in South East of Nigeria.
H5: The removal of oil subsidy on petroleum products has not led to the efficient management of
resources among the manufacturing firm in South East of Nigeria.
H6: The removal of oil subsidy on petroleum products has not significantly affected investments
in alternative sources of energy by the manufacturing firms in South East Nigeria.
1.6 Significance of the Study
This research work which centers on the evaluation of the impact of the removal of oil subsidy
on petroleum products in Nigeria is strategically important because the oil subsidy removal and
the corruption in the Nigeria oil industry have remained topical issues in public discourse. The
study is significantly different from other studies in this area as this is the first attempt to
investigate how the removal of oil subsidy has affected manufacturing firms in South East
Nigeria. The study will therefore be of great importance to various interest groups: individuals,

11. human resource managers, corporate bodies in the oil industry, the academia, investors in the oil
industry, financial and business analysts, the entire business world as well as the Federal
Government of Nigeria and her agencies.
The first individual to benefit from the outcome of this research is the researcher. Since this
research is a pre-requisite for the award of a Master of Science (M.Sc.) degree in Management,
of the University of Nigeria, upon successful completion of this research, the researcher would
have achieved a major mile stone towards obtaining the degree.
The staff and management of the manufacturing firms to be studied as well as those of other
manufacturing firms and all organizations that make heavy use of petroleum products will find
the report of this research rewarding as it will arm them well enough with information and other
data to be able to make informed decisions regarding their energy usage.
The human resource managers and consultants will find the report of this research useful as it
will provide information so dearly needed to take rightful decisions concerning their human
resources. The study will provide managers with tools for measuring the cost implication of the
labour-intensive production arising from the removal of oil subsidy on petroleum products.
Another group of individuals that will find this research very useful are those in the academia.
They include the students, scholars, academics, as well as professional researcher. They will
from time to time be faced with the challenge of conducting researches on this subject matter and
will find this research report a reference material.

12. The corporate bodies as well as investors in petroleum business will find the report of this
research a veritable instrument for decision making. This is because the report will contain
information regarding investments in alternative sources of energy which might be cheaper for
the organizations to explore.
Finally, the Federal Government of Nigeria, the Federal Ministry Petroleum and other agencies
of government will also find this work a reference material for planning, controlling, directing
and for corporate decision making. It will also serve as a reference document for policy
formulation and implementation by the government and its agencies.
1.7 Scope of the Study
Although there are so many arguments for and against the removal of oil subsidy on the
petroleum products, these arguments have been captured and anchored, in this research on three
tripod stands: the economic impact, the environmental impact as well as on the social impact.
This study therefore focuses on the evaluation of the economic impact of the removal of oil
subsidy on the performance of manufacturing firms in South East Nigeria. As already stated
above, the South East region of Nigeria is the home to one of the major tribes in Nigeria which
has a population of over forty million people and consequently, any impact of the oil subsidy
removal on the manufacturing firms in this region will have significant consequences on the
nation as a whole and on the region in particular. The study will also add to the body of
knowledge as there is no literature that have evaluated the effect of the removal of oil subsidy on
manufacturing firms in Nigeria especially the ones located in the South East region of Nigeria.

13. It covers the period from 2006, the year when subsidy was removed on Automotive Gas Oil
(AGO), to 2013. Data will be sourced from a number of manufacturing firms in the region who
are registered with Manufacturers Associations of Nigeria (MAN). This because of the
researcher’s belief that firms that with MAN will be able to provide the required data for
analyses.
The dearth of relevant literature on the topic of study especially on Nigeria is the major
constraint already encountered by the researcher. The removal of subsidy on oil products appears
to be a new one in Nigeria and consequently, not many research works have been done on it.

14. References
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17. CHAPTER TWO
LITERATURE REVIEW
2.1 The Concept of Subsidy and its Removal
The concept of subsidy has plethora of definitions as there is no universally accepted
definition. A subsidy represent payments by government to suppliers, companies, producers that
have effects on reducing their costs of their products or services; aimed at making those products
or services economically accessible to the targeted group. Myers and Kent (2001) define subsidy
as a form of financial or in kind support extended to an economic sector (or institution, business,
or individual) generally with the aim of promoting beneficial economic and social outcomes.
This comes in various forms including direct (cash grants, interest-free loans), indirect (tax
breaks, insurance, low interest, depreciation write offs, rent rebates). International Monetary
Fund (2008) conceptualise subsidy as a policy interventions engendering a deviation of
consumer or producer prices from an appropriate benchmark levels. Subsidies are aimed at
altering consumption and production patterns and affecting the distribution of resources. World
Trade Organization (2006) definition spelt out conditions under which subsidy may exist: (a)
there must be a financial contribution from government or any public body where there is a
direct and potential direct transfer of funds or liabilities, foregone of government revenue,
government provides goods or services other than infrastructure or purchase of goods;
government makes payments to a funding, or entrusts or directs a private body to carry out one
or more of the type of functions illustrated in (i) to (ii) above which could normally be vested in
the government and the practice, in no real sense, differs from practices normally followed by
governments; (b) there is any form of income or price support and a benefit is thereby conferred.

18. Obokoh and Lawerence (2008), using a sample of 500 manufacturing SSBs discovered
that SSBs does not feel the positive effect of liberalisation due to improper planning and absence
investment climate. Akinlo and Odusola (2003) discovered from their study on the effect of trade
liberalisation on SSBs that there was a decrease in turn over. They attributed this to two main
reasons, Accumulated inventory due to low demand occasioned by fall in the income of the
population as a result of the subsidy removal and increase cost of production affecting the profit
potential. Ekpeyong (2002) studied the impact of structural Adjustment programme (SAP) on
SMEs in Nigerians following the high inflation. Agboli and Ukaegbu (2006) found from their
study that trade policy led to low budgetary allocation for infrastructure management by
government, leading to deplorable infrastructure and causing small scale business to spend on
those infrastructures. Sanusi and Adelaja (2003) using a simple random sampling technique to
study 200 SMEs identified inadequate finance, shortage of skilled manpower and lack of
infrastructural facilities as the major problems of SSBs in Nigeria. Olabisi et al (2007) surveyed
211 business owners to study the informal economy of Lagos state discover that the constraints
hindering small scale business growth and survival are corruption, lack of experience, poor
infrastructure, insufficient profit and low demand for product and service.
Adeola (2005) used a random sample of 50 SMEs to study the cost of power outage to
the business sector found that the poor state of electricity supply imposed significant cost on the
business sector and stated further that most SMEs fail due to their inability to finance their back
up power. David et al (1992) used the interview approach to study the characteristics of 150
small scale businesses in Nigeria and pointed out that 8 out of every 10 businesses (80%) were
failing. Eme and Okechuku (2011) used a 34 years (1973-2007) time series data to study
deregulation in Nigeria showed instability of fuel prices, high rate of inflation and

19. unemployment occasioned by the fuel subsidy removal. This also had negative effect on SSB
performance. Ismaila (2012) surveyed 1600 SMEs made up of agro allied and non-agro allied
industry and analysed the result using the Standard Package Statistical Software (SPSS) and
found that SMEs is prerequisite for employment generation in Nigeria. Anthony (2012) used the
Ordinary Least Square method (OLS) to study policy support and SMEs performance discovered
that of the three study variables, technology and financial support impact SMEs positively while
infrastructural support is negatively related to SMEs performance.
It is pertinent to understand the concept of subsidy. The World Trade Organisation
Agreement on Subsidies and Countervailing Measures (ACMS) provides a definition of subsidy.
Article 1 of the Agreement states that a "subsidy" exists when there is a "financial contribution"
by a government or public body that confers a benefit. A "financial contribution" arises where:
 a government practice involves a direct transfer of funds (e.g. grants, loans, and equity
infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);
 government revenue that is otherwise due is foregone or not collected (e.g. fiscal
incentives such as tax credits);
 a government provides goods or services other than general infrastructure, or purchases
goods; or
 a government entrusts or directs a private body to carry out one or more of the above
functions. A "benefit" is conferred when the "financial contribution" is provided to the
recipient on terms that are more favorable than those that the recipient could have
obtained from the market.
Over the years, there has been divergent view on the removal of energy subsidy. Most
authors believe that the removal of subsidy is healthy for economic growth and development.

20. This is centered on their submission that paying actual cost reveals the true cost of consumption
and leads to a greater level of efficiency in the economy. However, appropriate measures are
considered necessary so as not to affect macroeconomic variables like inflation, unemployment,
economic growth, etc. It is worth knowing that there are costs associated with subsidy removal,
mostly in the short run.
According to Nwafor et al (2006), subsidy removal without spending of the associated
savings would increase the national poverty level. This is due to the consequent rise in input
costs which will be higher and a rise in selling prices of most firms and farms. The key sector
that experience increased nominal output is the refined petroleum products sector which provide
income for an extremely low number of households.
The findings of Coady et al (2006) shows that energy subsidies are badly targeted in all
the countries analyzed which are Bolivia, Ghana, Jordan, Mali, and Sri Lanka. This even holds
true for kerosene, for which subsidies are often promoted as a way of protecting the poor.
Reflecting this, the real income burden resulting from the withdrawal of energy subsidies is
borne disproportionately by higher-income households. They said lower income households do
suffer sizable real income decreases from subsidy removal, and any credible policy strategy
therefore needs to address the mitigation of these adverse effects.
O’Ryan et al (2003), analyzed the subject matter on Chile and concluded that removing oil
subsidies could have economic and distributional effects on the economy. This is mainly because
consumption of oil is relatively large compared to other forms of power. Also, the effects on the
sectors concerned, namely oil refining and coal production are much bigger in each case.
However, the environment clearly benefits from the removal of both coal and oil subsidies as the
level of emissions are much lower in both cases.

21. Nigeria has been a large producer of oil, importing the bulk of its needs either in the form of
petroleum products even though she has four domestic refineries. In 2004, as the world oil price
rose, the total cost of subsidies increased sharply. By 2005, fuel price increased by 50% as a
result of subsidy removal but series of mitigation measures were also introduced that were
transparent and easily monitorable. These included the immediate elimination of fees at
government‐run primary and junior‐secondary schools, and a programmes to improve public
transport. There was opposition to the increases but there was general acceptance of the policy
(Bacon and Kojima 2006).
In Nigeria, the government bears part of the production cost of fuel through subsidies
basically to alleviate the high cost on the masses and to reduce production cost of goods and
services. The local refineries in the country produce about 13 million liters of refined petroleum
products daily. However, daily domestic consumption is about 30 million liters. The shortfall of
17 million liters is imported so as to meet daily demand. The imported products are not sold at
their full landed cost as it is subsidized. In 2003, the government stated that for each liter of
petroleum products, N12 is spent as subsidy. This implies an explicit subsidy of N74 billion or
about 1.42% of GDP.
Expenditure on fuel subsidy has increased over the years. It cost the government N1.3
trillion (about $8.38 billion) in the 2010 fiscal year, which accounts for about 25 per cent of the
entire budget expenditure for the year under review. By the end of the year, the approved
amended and supplementary budget amounted to N5.159 trillion (about $33.2 billion).
Investigations revealed that fuel subsidy incurred by the Federal Government may have exceeded
the N1 trillion mark by the end of the third quarter, with indications that payments to petroleum
products marketers may surpass 2010 levels at the end of the year.

22. Government regulates the sale of Premium Motor Spirit (PMS) and House Hold
Kerosene (HHK), selling both at N55 and N40.90k per litre, respectively at the depots of the
Petroleum Products Marketing Company (PPMC), a subsidiary of the state-owned Nigerian
National Petroleum Corporation (NNPC). The Petroleum Products Pricing and Regulatory
Agency (PPPRA) allots quarterly imports quotas to the NNPC and petroleum products marketers
and pay both parties the difference between the landed cost and the approved pump prices.
Checks however revealed that the petroleum products marketers have turned the subsidy
payment regime into a huge profiteering enterprise ripping the state of hundreds of billions each
year under bogus subsidy claims for petroleum products they neither imported nor delivered to
the pumps.
Three quarters through 2011, independent checks revealed that outstanding subsidy
payments amounts to over N1 trillion, while ongoing racketeering surrounding kerosene supply
and distribution appears set to raise subsidy payment claims to an increase by the end of the year.
According to the PPPRA pricing template, even though petrol is sold at N55.90k and N65 per
litre, ex-depot and pump price respectively; if deregulated, consumers would have to pay
N138.20k per litre. Essentially, the subsidy element on current petrol price is N82.30k per litre.
Similarly, although ex-depot and pump prices of HHK is N40.90k and N50 per litre respectively;
if deregulated, consumers would have to pay N151.15k per litre. Essentially, the subsidy element
on current kerosene price is N110.25k per litre.
It can be deduced from the literature that several countries were faced with the problem
of removing fuel subsidies at different times and some succeeded as a result of the strategies that
were adopted. If the proposed fuel subsidy removal is successful, prices of petroleum products
would increase in the short run. In the medium to long term, investments in development of

23. infrastructure would increase, jobs would be created, technology would be domiciled and under
such circumstance, the Gross Domestic Product (GDP) of the country will grow increasingly.
The success of this will however depend on the sincerity of the government and her ability to
channel the funds back into the economy for developmental projects.
2.2 Empirical Literature
Since most macro variables are highly trended, deterministic trends are used in unit root
tests and in the estimation of the models with cointegration techniques. The implication of
allowing for deterministic trend is that if the model is shocked, after some departures from the
trend, the variables would return to their trend values. Cointegration techniques ensure this by
estimating the model so that the residuals are stationary. Therefore, shocks have no permanent
effects on the trend in the equilibrium relationships. Ventosa-Santaularia and Gomez (2007)
proved that it is incorrect to carry out standard hypothesis testing on the deterministic trend
parameter estimated with Dickey-Fuller (DF)-type tests when there is a unit root since the
limiting distribution of its t-statistic is neither asymptotically normal with unit variance nor
nuisance-parameter-free when the innovations are not independent and normal distribution. The
Cointegration approach can only accommodate a deterministic trend and deterministic seasonal
dummies. In contrast Harvey (1997) argued that unless the time period is fairly short, these
trends cannot be adequately captured by straight lines. In other words, a deterministic linear time
trend is too restricting. Harvey suggests that time series models should incorporate slowly
evolving stochastic instead of deterministic trends. Such models are known as the unobserved
components models or structural time series models. Models with stochastic trends i.e., structural
time series models are useful in some instances. Firstly, it may be hard to identify multiple
structural breaks in the deterministic trend when the sample size is small. Secondly, in structural

24. time series models, standard classical methods of estimation can be used to estimate the effects
of additional explanatory variables (Rao 2007)
In standard economic models, individual decision-making is based on the assumptions of
rational behaviour and self-interest, according to which individuals make choices that maximize
their well-being or utility under the constraints they face. These assumptions are often supported
by empirical evidence: people facing policy incentives will respond generally in a manner
consistent with Global Journal of Arts Humanities and Social Sciences Vol.2, No.4, pp.53-71,
June 2014 Published by European Centre for Research Training and Development UK welfare
maximisation. The main economic factors driving energy demand in households are prices and
income. It is also known from basic economic theory that there is a close link between price
elasticity and substitution possibilities. A household facing higher energy prices can typically use
a whole array of different ways to lessen the impact of the price increase on their budget.
Because these substitution possibilities vary across households the price elasticity’s varies across
the population. Therefore demand for energy is generally quite price-inelastic. Income is a key
driver of energy demand, if the relative price of energy increases, the reductions of demand are
expected (Huntington, H. 1987). Pricing will induce a change in consumption decisions. It is
widely accepted among analysts that the quantity demanded of a good or service has an inverse
relationship with the price. This general perception derives as much from common sense as from
economic theory and basic data observation. Given the significance of this phenomenon,
economists have developed a specific concept called price elasticity which measures the relative
change (%) in quantity demanded for a good or a service, in response to a relative change (%) in
price. Price elasticities can be useful for studying the expected demand growth of a good or
service, and for analysing the impact of different government actions with respect to prices such

25. as tariffs, taxes or consumption-related subsidies. The positive link between the consumption of
a good or service and the income is also widely acknowledged. That is the relative change (%) in
quantity demanded which results from a relative change (%) in the income.
Petroleum products demands like any other commodities are a multivariable relationship,
that is it is determined by many factors simultaneously. The traditional theory of demand has
concentrated on four of the determinants the price of petroleum products, price of other energy,
income of the consumers and habit. The traditional theory of demand examines only the final
consumers demand for durable and non durables. It is partial in its approach in that it does not
examine the demand in other markets. The serious difficulties that associate with such estimating
function are the aggregation of demand over individual and over commodities makes the use of
index numbers inevitable. Furthermore, there are various other estimation problems which
impair the reliability of the statistically estimated demand functions. The most important of these
difficulties arise from simultaneous change of all determinants, which makes it extremely
difficult to assess the influence of each individual factor separately. However, there has been a
continuous improvement in the economic technique. There is a considerable economic literature
on energy demand. Although the first empirical papers can be traced back to the 1950s, the
energy crises of the 1970s led to a subsequent larger interest .One of the most comprehensive
surveys of energy demand modelling was prepared by Bohi (1981) for the Electric Power
Research Institute. (EPRI). The overall purpose of the study was to examine price elasticities, the
study is an excellent overview of demand modelling since price elasticities are usually output
derived from an overall analysis of demand determinants. An update of this study was prepared
in 1984 by Bohi and Zimmerman. Madlener (1996) attempts to update the earlier Bohi work, as
well as breaking the existing econometric literature into a number of useful different categories.

26. These include studies associated with log-linear functional forms, transcendental logarithmic
(translog) functional forms, qualitative choice models (also known as discrete choice models),
household prod uction theory (end-use modelling) and pooled time series – cross sectional
models. A first Global Journal of Arts Humanities and Social Sciences Vol.2, No.4, pp.53-71,
June 2014 Published by European Centre for Research Training and Development UK general
approach consists of estimating the energy using aggregate demand analysis model on prices and
income (GDP) and climate conditions (Narayan and Symth 2005; Hondroyians 2004). The
second group uses micro economic data to estimate the demand for energy goods (Hanemann
1984; Bernard 1996; Baker 1995 and Vaage 2000). Allowing some additional explanatory
variables as the stock of durable goods (heating systems stock of electric appliances, etc) housing
(size, age of house, insulation etc) and household characteristic (number of members age, income
etc).Though literature has a long standing on energy demand; there is still a paucity of research
on energy demand in Africa and Nigeria in particular. Previous studies have concentrated on
aggregate approach. Also the fact that some of these studies have been done long ago makes a
new study in this area very imperative. In addition the review studies focus on cointegration
approaches.
Iwayemi et al (2007) using multi variable cointegration approach for 1977 to 2006 annual
data confirm the conventional wisdom that energy consumption responds positively to changes
in GDP and negative respond to change in energy price. Gasoline has the highest long run
income elasticity followed by total energy demand. The lowest long run income elasticity has
recorded by diesel in absolute terms. In similar run, kerosene has the highest long run price
elasticity followed by diesel in absolute term. Onwioduokit and Adenuga (1998) employed
cointegration techniques to estimate elasticities for proportions of GDP contributed by

27. agriculture, manufacturing and services. Their empirical findings reveal that urbanization was
one of the principal factors that have a positive impact on the consumption of liquefied
petroleum gas and premium motor spirit. De vita et al., (2006) using database of end-user local
energy data and Auto Regressive Distributive Lag (ARDL) bound testing approach to
cointegration to estimate the long-run elasticities of Namibian energy demand function at both
aggregate level and by type of energy (electricity, petrol and diesel) for the period 1980 to 2002,
their result shows that energy consumption respond positively to GDP and negatively to price
and temperature. However, previous studies in Nigeria do not model intercept as random trend.
As a consequence, the price effects obtained may not be accurate and may lead to a wrong
assessment on the effectiveness and costs of energy policies. Thus create an important gap to be
filled in this study.
2.3 Theoretical Framework Classical Political Economy
Classical Political Economy is a strand of bourgeois political economy and has been
pioneered by Adam Smith (1776), Thomas Malthus and David Ricardo (1817).The central
argument of classical political economy is liberation, both individual and market-wise which
culminates to social harmony and maximization of social welfare. The Classical Political
Economy theorists advocate freedom of individuals and market and frowns at state interference
in market operations, calling for the deregulation of the economy which operates through market
forces. This freedom according to the theorists will ensure not only social harmony but also the
maximization of social welfare. According to Frieden and Lake (1995) classical political
economy is concerned with how both market and politics are made better off by ensuring that
people enter into voluntary exchanges with others. When there are no restrictions to trade, there
is more freedom to operate and invest. The fundamental assumption of classical political

28. economy is that economic freedom will culminate in the attainment of highest possible welfare.
A free market relieved of all factors of monopolistic tendencies, which in the long run at would
at least serve the interest of greatest number of people. In addition, the classical theorists also
assume that liberation creates rational individuals whose investments have multiplier effects on
the society. Sabine (1973) emphasised laissez faire which constitutes the ring around which the
tenets of liberal political economy revolves. The self-regulating economy advocated by liberal
leaves a minimal role to the government. Adam Smith (1776), a core proponent of the theory,
contends that the role of the state should be limited to providing law and order - that is creating
necessary conducive ambience for market competition. For Smith, any further state intervention
would “prove inefficient at best, oppressive at worst”. This explains why the liberal gives
primacy to economics and the production of wealth in the organization of society. From the
foregoing, it can be seen that liberals believe in the relative liberalization of political and
economic spheres of economic activities (Akindele; Obiyan; Olaopa and Asaolu; 2003) The
classical political economy advocates for liberalization and deregulation of the oil industry
through subsidy removal, regulation of the downstream sector, privatization of the refineries and
relaxation of laws and controls that limit private participation in petroleum business. This
according to the theory will guarantee utilization of human potential for investment and ensure
maximum welfare of the citizenry. By extrapolation, fuel subsidy removal would finally
actualize the objective of ending perennial fuel scarcity and maintaining sustainable fuel supply
across the polity. Also, deregulation of the sector would open it up for foreign investments, and
the incidents of petroleum products smuggling and inefficiencies in the sector (Eme and
Onwuka, 2011). This will improve investment in the oil sector with trickled down effects that
will culminate into improved welfare and high living standard for Nigerians.

29. 2.4 The Role of the Manufacturing Sector in the Economic Growth in Nigeria
It has been argued that the fastest trend through which a nation can achieve sustainable
economic growth and development is neither by the level of its endowed material resources, nor
that of its vast human resources, but technological innovation, enterprise development and
industrial capacity (Olamade et al 2014). For instance, despite its poor natural resources, and the
hurdles it faced from 1920s chronic inflation, Germany has effectively exploited the
manufacturing sector and rose up to become the largest economy in Europe and the fourth largest
in the world.
In the modern world, manufacturing sector is regarded as a basis for determining a
nation's economic efficiency (Amakom, 2012). However, after the discovery of crude oil in
Nigeria in the late 1950s, the nation has shifted from its pre-eminent developing industrial
production base and placed heavy weight on crude oil production (Englama, et al. 2010); not
only has this jeopardized its economic activities, it also aggravated the nation's level of
unemployment. Nigeria as a giant of Africa has for long been regarded as a nation blessed with
abundant human and material resources; however, the underutilization of these potentials has
amplified widespread poverty, low standard of living at individual level and rising
unemployment in the country as a result of incessant mono-economic practice and drastic neglect
of other sectors of the economy such as agriculture, tourism, mining and the manufacturing
industry.
In spite of the country's vast oil wealth, the World Bank Development Indicators (2014)
has shown that majority of Nigerians are poor with 84.5 per cent of the population living on less
than two dollar a day based on a survey conducted in 2010 up from 63.1% reported in 2004

30. survey. The United Nations Human Development Index (2014) also ranks Nigeria 152 out of 187
countries, which is a significant decrease in its human development ranking of 151 in 2004; and
World Bank Development Indicators (2012) placed Nigeria within the 47 poorest countries of
the world. The issue of poverty can be easily traced to mono-economic practice and
underutilization of the nation’s endowed resources, especially in manufacturing sector
(Akinmulegun and Oluwole, 2013), which could have opened up windows of opportunity in job
creation and economic development.
Putting the country back on the path of recovery and growth will require urgently
rebuilding deteriorated infrastructure and making more goods and services available to the
citizenry at affordable prices. This would imply a quantum leap in output of goods and services.
Ogbu (2012) states that no other sector is more important than manufacturing in developing an
economy, providing quality employment and wages, and reducing poverty. Increasing
productivity should be the focus because many other countries that have found themselves in the
same predicaments have resolved them through productivity enhancement schemes. For instance,
Japan from the end of the World War II and the United States of America from the 1970s have
made high productivity the centre point of their economic planning and the results have been
resounding. Also, middle income countries like Hong Kong, South Korea, Singapore and India
have embraced boosting productivity schemes as an integral part of their national planning and
today they have made significant in-roads into the world industrial markets.
Given the importance of high productivity in boosting economic growth and the
standards of living of the people, it is necessary to evaluate the role and performance of the
Nigerian manufacturing sector. In the light of the foregoing, there cannot be another appropriate

31. time to evaluate the role of the Nigerian manufacturing sector in the economic growth and the
development of the country than now.
T The history of industrial development and manufacturing in Nigeria is a classic
illustration of how a nation could neglect a vital sector through policy inconsistencies and
distractions attributable to the discovery of oil (Adeola, 2005). However, Ogbu (2012) argues
that the country’s oil industry is not a major source of employment, and its benefit to the other
sectors in the economy is limited since the government has not adequately developed the
capacity to pursue the more value-added activities of the petrochemical value chain. As a result,
the oil industry does not allow for any agglomeration or technological spillover effects, Ogbu
(2012) stresses.
From a modest 4.8% in 1960, manufacturing contribution to GDP increased to 7.2% in
1970 and to 7.4% in 1975. In 1980 it declined to 5.4%, but then surged to a record high of 10.7%
in 1985. By 1990, the share of manufacturing in GDP stood at 8.1% but fell to 7.9% in 1992;
6.7% in 1995 and fell further to 6.3% in 1997. As at 2001 the share of manufacturing in GDP
dropped to 3.4% from 6.2% in 2000. However, it increased to 4.23% in 2013 (CBN, 2013) which
is less than what it was in 1960. Currently, Nigeria’s manufacturing sector’s share in the Gross
Domestic Product (GDP) remains minuscule (CBN, 2013). Compare that to the strong
manufacturing sectors in other emerging economies, where structural change has already
occurred and where millions have been lifted out of poverty as a result: manufacturing
contributes 20 percent of GDP in Brazil, 34 percent in China, 30 percent in Malaysia, 35 percent
in Thailand and 28 percent in Indonesia (Ogbu, 2012). The more recent experiences of the East
and Southeast Asian economic transformations demonstrate that diversification into

32. manufacturing and industrial production facilitated by what Arthur Lewis calls the “intelligent
governments” are critical to poverty reduction.
However, Nigeria has no effective industrial policy that promotes manufacturing; at least
not in the sense of policy which provides practical solutions to the difficulties encountered by
incipient entrepreneurs or emerging manufacturing firms. It is in the light of the foregoing that
this study seeks to evaluate the role of the manufacturing sector in the Nigerian economy.

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36. CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter discusses the method and procedures that shall be employed in carrying
out the research. They include research design, study population, sample size, sampling
technique, data gathering method, sources of data, instruments for data collection,
description of questionnaire, validity and reliability of instruments, method of data analysis,
instrument for data analysis, model specification and model estimation technique.
3.2 Research Design
In this study, a cross sectional survey design involving the survey of existing data
(secondary sources) shall be adopted. Two major approaches would be used in the previous
related studies to evaluate the impact of oil subsidy removal on manufacturing firms in South
East, Nigeria from 1973-2014. This study shall adopt the two methods. The study shall make
use of secondary data to investigate the aggregate impact of oil subsidy removal on
manufacturing firms in South East, Nigeria from 1973-2014 in line Bernard (1995); Brief and
Zarowin (1999); Barth, Beaver and Landsman (2000) and Beisland (2009).
3.3 Population of the Study
The population of the study consists of all the manufacturing firms in South East, Nigeria
as at 2014.
3.4 Sample Techniques and Sample Size
Simple random sampling technique shall be used in this study to elicit data from the
respondents. The procedure of the hybrid involved first purposively selecting the

37. manufacturing firms active manufacturing activities and then randomly selecting the them.
Purposive sampling technique shall be adopted by selecting a sample unit based on specific
criteria and generalization of result is limited to those who have met the criteria. The
following were the conditions:
1) The manufacturing firm was a registered dealing member in the Nigerian Stock
Exchange at the time of the study;
2) The manufacturing firm has a stock broker who trades in the Nigerian Stock
Exchange and individual who has shares in Nigerian Stock market.
The study shall focus on 25 manufacturing firms listed on the Nigerian Stock
Exchange during the period - 1973 to 2014 operating in South East Nigeria. The sample size
was limited to 25 manufacturing firms in South East (5 from each state) because of non
availability of data. Panel data shall be used to overcome the problems associated with missing
data (Negash, 2008). The panel data of 25 manufacturing firms over a period of 41years. The
manufacturing firms shall be selected based on the following criteria:
1. The manufacturing firm is listed on Nigerian Stock Exchange during the period
and
2. The manufacturing firm has the basic financial statement data.
3. In each manufacturing firm 12 respondents are to be selected
This initial sample is supported by Taro Yemane sample selection method (Guilford
and Frucher, 1973) as stated below:
According to Taro Yemane, n = N / [1 + (Ne2)],
Where: n is the sample size, N is the population,

38. e is the error limit (0.05 on the basis of 95% confidence level).
Therefore, n = 300 / [1 +300(0.052)]
n = 300/ 1.75 = 171.43
n = 172
Based on afore calculation, the sample size of 172 with error limit of 5% is considered
appropriate for this study.
3.5 Data Description
Panel data will be used in this study for hypotheses (1)-(3). This is the combination of
time series with cross-sections to enhance the quality and quantity of data in ways that would
be impossible using only one of these two dimensions (Gujarati, 2003). The repeated
observations of enough cross-sections and panel analysis permit the study of dynamics of
change with short time series.
While most research in this area has concentrated almost absolutely on explaining price
by book value and reported earnings, our focus is on the relation between share price, book
value, earnings and dividends. Proxies for accounting information used in this study included
earnings-per-share (EPS), dividends-per-share (DPS) and net book value per share (Brief and
Zarowin 1999; Callao, Cuellar and Jarne 2006 and Chang et al, 2008). The length of
observations may vary- they could be daily, quarterly, yearly- but yearly observations were used
in this study, which is the most typical measure used by researchers (Barth, Beaver and
Landsman, 1998; Barth et al, 2000; Francis and Schipper, 1999 and Beisland, 2009). For
survey of user’s opinion, the researcher shall collect data through a questionnaire administered
to workers and operators – the Managers, Financial Analysts, Accountants and individuals.

39. 3.6 Sources and Data Gathering Method
In this study, both primary and secondary data would be used. The primary data
shall be collected through survey questionnaires administered on the respondents. Related
literature shall be reviewed before the questionnaire is formulated (see Appendix 1). The
secondary data - earnings-per -share, dividends and book value were obtained from the
Nigerian Stock Exchange Factbook, Annual Financial Reports of companies quoted on
the Nigerian Stock Exchange and the Nigerian Stock Market Annual. The data of share prices
were collected from the Nigerian Stock Exchange database. Only companies with at least a
number of the accounting figures such as annual earnings, book value, share information and
total assets or shareholders equity were included.
Questionnaire shall be used in this study to elicit data from respondents on creative
accounting and value relevance of various items of financial statements. The questionnaire has
six sections that contain a combination of closed and open-ended questions. The first section
is to collect bio-data of respondents. It contains data on respondent - investor, sex, age,
qualifications, profession and work experience. Sections B - F contain information on value
relevance of various items of financial statements as stipulated by Companies and Allied
Matters Act 1990 and the subsequent amendments -profit and loss account, balance sheet, value
added statement, cash flow statement and other items of financial statements - for investment
decision making in Nigerian. The users of accounting numbers were asked to rank each item
based on the attached scale of perceived relevance of accounting data by the user. A five-point
Likert-type scale was used following Myburgh (2001). The scales adopted are: Very Large
Extent (5); Large Extent (4); Moderate Extent (3) Low Extent (2) and Very Low Extent (1).
Respondents specified their choices by ticking one of these alternatives.

40. 3.7 Validity of Research Instrument
Validity tests would be carried out to check the ability of the research instrument to
measure the variables it was intended to measure. Both face validity and content validity
shall be employed. Face validity involves an analysis of whether the instrument appears to be
on a valid scale and contained the important items to be measured. Content validity on the
other hand, evaluates the degree to which a test appears to measure a concept analysis of the
items in order to ensure an adequate coverage of the scope of study by the measuring
instrument. To achieve this, the questionnaire shall be given to the supervisor and experts in the
field to review the content and appropriateness of the questions in relation to the stated
objectives of the study.
3.8 Reliability of Research Instrument
To ensure stability, dependability and predictability of the research instrument,
reliability test shall be conducted. Reliability of the research instrument is checked to determine
if the scale consistently reflects the construct it was measuring. It has to do with accuracy,
precision or consistency of a measuring instrument. Methods of reliability test are test retest,
spilt halves and alternate form among others. Test- retest reliability measures the stability of the
research instrument (Gronlund and Linn, 1990). This shall be done by administering the
research instrument twice on the same set of respondents at different times. It intends to
determine the extent to which a measure, procedure or instrument yields the same result on
repeated trials. Split halves method evaluates the internal consistency of the instrument.
In this method, research instrument was split into two equivalent halves and the test
score correlated together. The alternate form method tests the reliability of research instrument

41. by administering the same measuring instrument on different dimensions of the same
variables. This study employed split halves method to measure the degree to which the items
that made up the scale were all measuring the same essential attribute. This was estimated
with correlation coefficients (Pearson r) and Cronbach’s coefficient alpha. Correlation
coefficients range from 0.00 to 1.00. Correlation coefficient of 0.00 means no correlation.
While correlation coefficient of 1.00 means perfect correlation. Cronbach’s coefficient alpha is
the measure of scale’s internal consistency.
Table 3.1: Reliability tests for the Survey Scale
Number Type of Reliability Test Value Remarks
1 Cronbach’s Alpha 0.934 Very Reliable
2 Split-half Part 1 =0.865 Very Reliable
Part 2 =0.920 Very Reliable
3 Correlation Between
Forms
0.719 Very Reliable
4 Spearman-Brown
Coefficient
Equal Length=0.836 Very Reliable
4 Unequal
Length=0.836
Very Reliable
5 Guttman Split-half 0.826 Moderately reliable
Source: Field Study (2015)
The result of reliability test of survey questionnaire is as shown in table3.1. The
Cronbach’s coefficient alpha which is the most common measure of internal consistency of
scale is 0.934. It shows average correlation among the items of the scale. As a result, all
questions without scale were excluded from reliability test. Other items of financial statements
were not measured because they contain various different items of financial report. Split-half

42. test and other tests were meant to corroborate Cronbach’s coefficient alpha. Split-half
reliability test gives a value of 0.865 and 0.920 for each of the two halves respectively.
Correlation Between Forms is 0.719; Spearman-Brown Coefficient Equal length is 0.836 and
unequal length is 0.836 and Guttman Split-half 0.826. Each and every one of these tests
shows that the instrument is very reliable.
3.9 Data Analysis Techniques
In this study, our method of gauging information content of various social research
panel as stated in model equations where Ordinary Least Square, Random Effects Model
and Fixed Effects Model (FEM). OLS would be used as a basis of comparison with the
previous studies. However, using traditional Ordinary Least Square (OLS) alone may produce
spurious regression problem that can lead to statistical bias (Granger and Newbold, 1974). This
is because an implicit assumption underlying regression analysis involving time series data is
that such data are stationary and since time series are not stationary. In other words, it is an
assumption that is unlikely to hold in practice.
Specifically, we believe that, it is the deviation of the characteristics of social research
data from the assumptions of the applied methods and the misuse of statistical indicators that
led to contradicting inferences in this literature. Therefore, random effects and fixed effects
were adopted to prevent these problems. Random effects also called a variance components
model is used in the analysis of panel data when one assumes no fixed effects (that is no
individual effects). The fixed effects model is a special case of the random effects model
(Christensen, 2002). Conceptually, a variable's effects might be treated as random effects if the
levels of the variable that are included in the study as a sample drawn from some larger
(conceptual) population of levels that could (in principle) have been selected. Instead of

43. thinking of each unit as having its own systematic baseline, the researchers thought of
each intercept as the result of a random deviation from some mean intercept. The intercept
was a draw from some distribution for each unit, and it was independent of the error for a
particular observation.
3. 10 Model Specification
In order to find the impact of oil subsidy on the registered and listed manufacturing firms
in South East, Nigeria, Ohlson (1995) model was used. The objective here is to show empirically
the extent to which the removal of oil subsidy affects registered and listed manufacturing firms
in South East, Nigeria. In line with this, the study formulated the following equations to find the
multiple regression results using the Ohlson (1995) Model.
Model: For the Impact of Oil Subsidy Removal on Manufacturing Firms in South East,
Nigeria
ROSPP = f( CPPMFt + REiILiPMFt + VPPMFt + CPPMFt + EMRMFt + IAEMFt)
Where:
ROPP = Removal of Oil Subsidy on Petroleum Products
CPPMF = Consumption of Petroleum Products by Manufacturing Firms in
REiILiPMF = Reduction in Energy-Intensive and increased Labour- Intensive
Production among the Manufacturing Firms
VPPMF = Volume of Petroleum Products among the Manufacturing Firms
CPPMF = Cost of Production and Profit among the Manufacturing Firms
EMRMF = Efficient Management of Resources among the Manufacturing
Firms

44. IAEMF = Investments in Alternative Energy by the Manufacturing Firms
t = Time dimension
The equation can be expressed in explicit form as follows:
Yt = α + β1 CPPMFt + β2 REiILiPMFt + β3 VPPMFt + β4 CPPMFt + β5 EMRMFt + β6
IAEMFt + et
Where; Y is the dependent variable; β0, β1, β2, β3 , β4, β5 are regression coefficients with
unknown values; CPPMF, REiILiPMF, VPPMF, CPPMF, EMRMF and IAEMF are the
explanatory variables e is a random error component.
α = The intercept
β = The coefficients of independent variables
ε = Statistical error
APriori Expectation is such that β >0 (i =1-3).
Decision rule: If the regression coefficient is positive and the calculated t-value is greater than
the tabulated value, it is an indication that there is positive relationship between the independent
and dependent variables. The coefficient of determination (R2) is to be used to measure the rate
at which the independent variable is explained by dependent variables. Finally, if the Durbin
Watson test is approximately two (2), it shows the absence of autocorrelation.
a). The Assumptions of Correlation Analysis

45. Assumption 1: The correlation coefficient r assumes that the two variables measured form a
bivariate normal distribution population. That is, Joint probability distribution is bivariate
normal- relationship among variables linear
Assumption 2: The correlation coefficient r measures only linear associations: how nearly the
data falls on a straight line. It is not a good summary of the association if the scatterplot has a
nonlinear (curved) pattern. This can be checked for by examining scatterplot for evidence of
non-linearity
Assumption 3: The correlation coefficient r is not a good summary of association if the data are
heteroscedastic. That is • Non-parametric tests can be used when these assumptions are violated,
(Ezejunlie and Ogono, 2009).
b). The Assumptions of Simple regression Analysis
1) The sample must be representative of the population for the inference prediction.
2) The error is assumed to be a random variable with a mean of zero conditional on the
explanatory variables.
3) The independent variables are error-free. If this is not so, modeling may be done using
errors-in-variables model techniques.
4) The predictors must be linearly independent, i.e. it must not be possible to express any
predictor as a linear combination of the others. (Multicollinearity)
5) The errors are uncorrelated, that is, the variance-covariance matrix of the errors is diagonal
and each non-zero element is the variance of the error, (Ezejunlie and Ogono, 2009).
c) Problems multicollinearity

46. If ones goal is simply to predict Y from a set of X variables, then multicollinearity is not
a problem. The predictions will still be accurate, and the overall R2 (or adjusted R2) quantifies
how well the model predicts the Y values. If the ones goal is to understand how the various X
variables impact Y, then multicollinearity is a big problem.
One problem is that the individual P values can be misleading (a P value can be high,
even though the variable is important).
The second problem is that the confidence intervals on the regression coefficients will be
very wide. The confidence intervals may even include zero, which means you can’t even be
confident whether an increase in the X value is associated with an increase, or a decrease, in Y.
Because the confidence intervals are so wide, excluding a subject (or adding a new one) can
change the coefficients dramatically – and may even change their signs, (Ikeagwu, (2008).
Methods of Detecting and Solving Multicollinearity Problems
The best solution is to understand the cause of multicollinearity and remove it.
Multicollinearity occurs because two (or more) variables are related – they measure essentially
the same thing. If one of the variables doesn’t seem logically essential to your model, removing
it may reduce or eliminate multicollinearity. Or perhaps you can find a way to combine the
variables. For example, if height and weight are collinear explanatory variables, perhaps it would
make scientific sense to remove height and weight from the model, and use surface area
(calculated from height and weight) instead, (Weisberg, 2005).
One can also reduce the impact of multicollinearity. One way to reduce the impact of
collinearity is to increase sample size. You'll get narrower confidence intervals, despite

47. multicollinearity, with more data. Even better, collect samples over a wider range of some of the
X variables. If you include an interaction term (the product of two independent variables), one
can also reduce multicollinearity by "centering" the variables. To do this, compute the mean of
each independent variable, and then replace each value with the difference between it and the
mean. For example, if the variable is weight and the mean is 72, then enter "6" for a weight of 78
and "-3" for a weight of 69, (Kutner, Nachtsheim and Neter, 2004).
d) SPSS (Statistical Package for the Social Sciences) shall be for statistical analysis in this
study . Statistics included in the base software are:
 Descriptive statistics: Cross tabulation, Frequencies, Descriptive, Explore, Descriptive Ratio
Statistics
 Bivariate statistics: Means, t-test, ANOVA, Correlation (bivariate, partial,
 diction for numerical outcomes: Linear regression
 Prediction for identifying groups: Factor analysis, cluster analysis (two-step, K-means,
hierarchical), Discriminant, (DeMaris, 2004)
Table 3.2: Summary of Dependent and Explanatory Variables
Proxy Description of Independent
and Explanatory Variables
Code Signs
DV Removal of Oil Subsidy on
Petroleum Products
Dependent variable ROSPP =
Ho1 Consumption of Petroleum
Products by Manufacturing Firms
Explanatory variable CPPMF +
Ho2 Reduction in Energy-Intensive
and increased Labour- Intensive
Production among the
Manufacturing Firms
Explanatory variable REiILiPMF +

48. Ho3 Volume of Petroleum Products
among the Manufacturing Firms
Explanatory variable VPPMF +
Ho4 Cost of Production and Profit
among the Manufacturing Firms
Explanatory variable CPPMF +
Ho5 Efficient Management of
Resources among the
Manufacturing Firms
Explanatory variable EMRMF +
Ho6 Investments in Alternative Energy
by the Manufacturing Firms
Explanatory variable IAEMF +
Source: Field Study (2015)

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51. Appendix I
Research Questionnaire
8th September, 2015.
Dear Respondent,
The primary objective of this questionnaire is to obtain information on a study
"Evaluation of the Impact of Oil Subsidy Removal on Manufacturing Firms in South East,
Nigeria". Kindly complete this questionnaire as honestly as you can. I wish to assure you that
your answers will be treated with strict confidence and used mainly for the aforementioned
academic purpose.
Your anticipated co-operation is highly appreciated.
Yours sincerely,
The Researcher

52. ResearchQuestionnaire
Topic: "Evaluation of the Impact of Oil Subsidy Removal on Manufacturing Firms in
South East, Nigeria".
Section A: Personal Data
Please tick appropriate response or fill the gap
1. Name of Company...........................................................................
2. Sex of the Respondent: Male Female
3. Age: Below 20yrs 21-35yrs 36-50yrs
4. Highest Academic Qualification:
HND B.Sc./B.A. MBA/M.Sc./MA PhD Other(specify)………………….
5. Professional Qualifications: ......................................................
6. Profession: Investment Adviser Stock broker Portfolio Manger Accountant
Financial Consultant Other(specify)………………….
7. Work experience 1-5yrs 6- 10yrs Above 11 - 15 yrs
above 16yrs
Please tick  as appropriate.
Scale: Very Large Extent (5) Large Extent (4) Moderate Extent (3) Low Extent (2) Very Low
Extent (1)
Section B: Removal of Oil Subsidy and its Impact
To what extent has the removal of oil subsidy on petroleum products affected the consumption of
petroleum products by manufacturing firms in South East Nigeria? With reference to:
S/N. Cost of Production and Profit 5 4 3 2 1
8. Turnover
9. Gross profit
10. Net operating expenses
11. Profit after tax
12. Earnings per share
13. Dividend per share
14. Dividend cover
Consumption of Petroleum Products 5 4 3 2 1
15. Very efficient and regular
v

53. 16. Efficient and regular
17. Inefficient but not regular
18. Inefficient but regular
19. Very Inefficient and Irregular
Volume of Production 5 4 3 2 1
20. Value added from operations
21. Bought-in materials and services
22. Gross value added
23. Retained volume for future growth
24. Employees and enjoy enough volume
S/N. Efficient Management of resources 5 4 3 2 1
25. Planning
26. Organising
27. Controlling
28 Coordinating
29 Staffing
30 Decision-making
31 Budgeting
Reduction in Energy-intensive and Increase in Labour-
intensive
32 Very high employment of equipment and capital
33 Very high employment of equipment and labour
34 Increase in Employment capacity
Please tick  as appropriate.
Scale: Very Large Extent (5) Large Extent (4) Moderate Extent (3) Low Extent (2) Very Low
Extent (1)
S/N. Impact of Oil subsidy removal on manufacturing firms in South
East
5 4 3 2 1
35. To what extent has the removal of oil subsidy on petroleum
products affected both the cost of production and profit of the
manufacturing firms in South East of Nigeria?
36. To what extent has the removal of oil subsidy on petroleum
products affected both the cost of production and profit of the
manufacturing firms in South East of Nigeria?

54. 37. How has the removal of oil subsidy on petroleum products led to the reduction in energy-
intensive manufacturing and increased labour intensive production among manufacturing firms
in South East Nigeria?
i. Strong Positive Reaction ii. Positive Reaction iii. Strong Negative Reaction
iv. Negative Reaction v. No reaction
38. How has the removal of oil subsidy on petroleum products affected the volume of
production among the manufacturing firms in South East Nigeria?
i. Strong Positive Reaction ii. Positive Reaction iii. Strong Negative Reaction
iv. Negative Reaction v. No reaction
39. In what ways has the removal of oil subsidy on petroleum products led to more efficient
management of resources among the manufacturing firm in South East of Nigeria?
i. Strong Positive Reaction ii. Positive Reaction iii. Strong Negative Reaction
iv. Negative Reaction v. No reaction
Please list the ways.
40. Please write your general comments about the value relevance of accounting information in
Nigeria for investment decisions
………………………………………………..…..……………….………………………

55. Appendix I: Annual Average Market Prices per kg of in Port Harcourt (2001-2012)
Year Price (N) Rice Yam Garri Beef Meat
2001 25 76.08 87.00 69.16 206.91 232.66
2004 48 105.79 85.29 72.66 318.75 281.87
2005 75 127.70 120.25 91.90 536.21 305.99
2006 75 164.50 170.10 96.60 791.66 376.66
2007 70 173.45 185.36 111.83 826.79 478.00
2008 70 192.50 292.00 123.50 877.00 1088.27
2009 65 192.33 300.00 98.50 481.00 456.00
2010 65 190.61 250.48 121.52 482.46 428.52
2011 65 170.61 138.49 126.79 958.08 994.20
2012 97 210.50 350.29 68.80 1250.00 1400.00
Table 2.1: Removal of Oil Subsidies in Nigeria from 1973-2012
Year President Justification by government Old price New price
1973 Yakubu Gowon 6.00k 8.45k
1976 Murtala Mohammed 8.45k 9.00k
1978 Oct 1, Olusegun Obasanjo 9.00k 15.37k
1982 April 20 Shehu Shagari 15.30k 20.00k
1986 March,31 Ibrahim Babangida Devaluation of the Naira 20.00k 39.50k
1988 Apri,10 Ibrahim Babangida
Subsidy is a burden to
government’s purse 39.50k 42.00k
1989 Dec,19 Ibrahim Babangida 42.00k 60.00k
1991 March,6 Ibrahim Babangida 60.00k 70.00k
1993 Nov,8 Ernest Shonekan
Subsidy is primary budgetary
burdens 70.00k N5.00
1993, Nov,22 Sani Abacha To gain public support N5.00 N3.25
1994 Oct,2 Sani Abacha N3.50 N15.00
1994 Oct,4 Sani Abacha Response to labour and public N15.00 N11.00
resistance
1998 Dec,20
Abdulsalami
Abubakar N11.00 N25.00
1999 Jan,6
Abdulsalami
Abubakar Response to labour and public N25.00 N20.00
resistance
2000 June,1 Olusegun Obasanjo To eliminate waste N20.00 N30.00
2000 June,8 Olusegun Obasanjo
Respond to labour and public
resistance N30.00 N22.00
2002, Jan,1 Olusegun Obasanjo Free government funds N22.00 N26.00
2003 June 06 Olusegun Obasanjo
Encourage foreign and local
investment in upstream sector N26.00 N40.00
2003 Oct,1 Olusegun Obasanjo
Respond to labour and public
resistance N40 N34
2004 May,29 Olusegun Obasanjo N34 N50.00

56. 2005 Aug Olusegun Obasanjo N50.00 N65.00
2007 May,27 Olusegun Obasanjo N65 N75
2007 Umoru Musa Yar’adu Compassion for Nigerians N75 N65
2012 Jan, 1 Goodluck Jonathan N65 N141
2012 Feb Goodluck Jonathan
Respond to labour and public
resistance N141 N97
2015 Goodluck Jonathan
Political consideration to win
elections N87 N87
Source: Computed from Various Sources, 2015 (By the Researcher)