THE IMPACT OF OIL PRICE SHOCKS ON THE ECONOMIC GROWTH OF SELECTED FIRMS IN NIGERIA

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THE IMPACT OF OIL PRICE SHOCKS ON THE ECONOMIC GROWTH OF SELECTED FIRMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

From the center of twentieth century ahead, unrefined petroleum has become one of the main indicators of economic activity worldwide, because of its remarkable importance in the supply of the world's energy demands.

Nigeria as one of the significant providers of unrefined petroleum in the worldwide market has depended so much in the oil price in making their annual budgets.

As indicated by Odusami (2006:1), movements in the price of unrefined petroleum have significant implications for a Varity of economic activities. For instance, Hamilton (1983) demonstrated that noteworthy increment in oil  price preceded every post World War 11 recession in the U.S. Mork (1989:20) analyzed the evidence of asymmetric response of output to oil price increase and decrease and find evidence of negative correlation between oil prices increase and output growth. Lee and Ratti (1995:53) investigated the impact of genuine oil price on output and show that in long periods of economic stability, oil price shock affects output in U.S., Japan, Germany, Canada, France, UK and Norway.

It could be seen that the public has been particular concerned about oil price shock. These shocks have become one of the current affairs published on the front pages by the vast majority of the world's newspapers (particularly in US), mainly from the Yom Kippur War of October 5, 1973. Thus, the prevailing view among economists is that there is a strong relationship between the growth rate of a country and oil price shocks.

Agren (2006:4) states that the oil value impact on securities exchanges is an intriguing and significant issue, considerably more so as of late, when the world oil price has shown extraordinary precariousness, he further keeps up that amid April of 2006, the price of raw petroleum was in the area of (U.S) $70 per barrel, which is well over the price of $20 amid the vast majority of the 1990's. In an ongoing overview of oil in the Economist, Vaitheeswaran (2005:16) suggests that the explanation  for the ascent is that oil markets have seen a strange blend of tight supply, flooding demand, and money related theory.. One might also consider the unstable political situation in the Middle East. And the activities of militant groups in the Niger Delta region of Nigeria a candidate cause for the rise in oil prices.

It is imperative to bring up here as in the expressions of Jones, Leiby and Paik (2004:8) that the financial exchange has been seen as a data accumulation and preparing organization. The asset prices it establishes depend on information about future prospects as well as current conditions facing firms. The efficiency with which stock markets process information has been a subject of intense study for several decades.

If stock-price or rate-of-return forecasts cannot be improved upon by use of any of other information, the case can be made that the financial exchange is as of now utilizing all openly and secretly accessible data in the arrangement of those prices. Reasonable to expect that the stock market would absorb the information about the consequences of an oil price shock and incorporate it into stock prices very quickly. Since asset prices are the present discounted value of the future net earnings of firms, both the current and the future impacts of such a shock should be absorbed into prices and returns without having to wait for those impacts to actually occur.

There exist a couple of research works that joins oil prices to stock markets. Jones and Kaul (1996) test whether stock markets are rational in the sense that they fully adjust to the impact of oil Shocks on dividends. In their study of the U.S, Canadian, Japanese, and U.K stock markets, initially show that all the markets respond negatively to oil shocks. Huang, Masulis, and Stoll (1996) looked at the oil futures market and the stock market using daily data. Sadorsky (1999) on the other hand studies the impact of real oil price shocks on real stock returns by estimating vector auto regressions, including U.S industrial production and short interest rates. The study separates positive from negative oil shocks, and, contrary to Huang et al (1996), presents evidence that shocks to the oil price do affect aggregate stock returns Basher and Sadorsky (2004), utilizing a multifaceted exchange estimating model, find solid proof that oil value hazard impacts returns of developing financial exchanges.

1.2    STATEMENT OF THE PROBLEMS

The investigation is required by the way that Nigeria's economy in the course of the most recent two decades has been holding tight the oil continues. It has also been identified that the volatilities of these oil prices have significant implications for a variety of economic activities. This view has been very much illustrated by crafted by different creators including those of Rasche and Tatom (1981), Hamilton (1983, 1985, 1996, 2003), Burbidge and Harrison (1984), santini (1985), Gisserand Goodwin (1986), Loungani (1986), Tatom (1988), Mork (1989), Hamilton and Herrera (2004) and numerous others, who have convincingly   argued   that   oil    prices   were both noteworthy determinants of U.S financial action and exogenous to it in the post-war period.

Regardless of more than 30 years of research since the principal major post¬war oil emergency in 1973, non of such work has been done in a creating nation like Nigeria and very little has been done on an oil trading economy, which Nigeria likewise have a place.

Since oil plays prominent role in Nigerian economy, one would anticipate that adjustments in oil price should be associated with change in stock price.  Altogether, it could be contended that if oil influences genuine monetary exercises, it will influence income of organizations or firms through which oil is a direct or indirect cost of operation.

Along these lines, an expansion in oil price will cause expected winning to increment on account of oil exporting countries, and this would realize a prompt increment in stock price if the stock market effectively capitalizes the cash flow implications of the oil price increases. If on the other hand, the stock market is inefficient, stock returns might be slow as is the case with Nigeria.

This research therefore, is to determine the impact of these oil price shocks on the Nigerian stock market and how to make the stock market more efficient to handle oil price shock.

1.3     OBJECTIVES OF THE RESEARCH

In view of the recognized research issue, the accompanying destinations were set for the exploration.

The essential goal of this research is to determine the impact of oil price shocks on the growth of Nigerian stock market. The optional goals include:

i)                   To decide the connection between oil price and value of share traded.

ii)                To find out how oil price shock transmits to the growth of  Nigerian economy

iii)           To find out how the Nigerian stock market could efficiently handle the oil price shock effect in order not to slow stock returns.

1.4    THE RESEARCH QUESTIONS

In the light of the above objectives, the researcher considers the following research questions as pertinent in addressing the various issues raised in this work.

i.                   Does oil price shock have noteworthy effect on the Nigerian stock market?

ii.                 What kind of relationship exists between oil price shock and value of share traded?

iii.              How does oil price shock transmit to stock market?

1.5     STATEMENT OF RESEARCH HYPOTHESIS

The following propositions are formulated for this study.

1.     Oil price shock does not have significant impact on the Nigerian stock market.

2.     There is no significant relationship between oil price shock and value of share traded.

3.     The shock in crude oil prices does not transmit to the Nigerian stock market.

1.6     SCOPE OF THE STUDY

The issue of oil price shock is such that it affects all the macroeconomic factors in all economic fulcrums in Nigeria, but this research will be restricted to finding out the impact of oil price shock on the Nigerian stock market.

This study covered period of thirty two years (1979 to 2010). During this period, the companies stock quoted at the Nigerian stock exchange market will be considered.

Because of time and space, the study is limited to Nigerian stock market only five economic variables. However, the work gave an insight into the impact of oil price shock on other emerging economies and developed ones.

1.7     LIMITATION OF THE STUDY

According to Clements and Hendry (1995), the limitations of any study are in the nature of constraints and bottlenecks, which could have created deficiencies, restrictions, biases, prejudices and   confinements to the conduct and findings of the study. This study was limited by the following factors:

i.                   The high cost of sourcing information and data from various visual libraries, international journals and internet archives.

ii.                 The unwillingness of the stock market officials and staff of various companies whose stocks are quoted in Nigerian stock exchange market in releasing useful and detailed information to the researcher.

iii.              In certain cases, gratifications are demanded for information to be given, where the gratification was not forthcoming then the information was withheld.

1.8    SIGNIFICANCE OF THE STUDY

The study is of great significance to various stakeholders in Nigerian economy for various reasons.

Findings and recommendations in this thesis will be a guide to the investors in the capital market who will love to reduce the level of their risk by understanding the various factors that affect the stock price in the market.

It is believed to be of immense benefit to the Nigerian government and policy makers whose annual budget is based on anticipated crude oil price benchmark.

The study will also be of great benefit to directors of various companies, especially those whose activities are affected or determined by the oil prices.

The research work would also be useful to the various scholars in the field of finance and economics as well as future researchers who may wish to share ideas with the researcher or to advance further on the study or use the work as source of secondary data for their future works.

The study will fill the gap that exist in the study of oil price shock and the stock market as it will be the first of such work to be carried out in Nigeria as an emerging economy and supplier of crude oil in the International market.

Finally, this study is also significant to the researcher in the sense that it will widen his scope of the knowledge of both oil price shock and Nigerian stock market. This study also is a requirement for the award of Ph.D in Banking and finance.

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