THE IMPACT OF PETROLEUM PRICE VOLATILITY ON NIGERIA’S ECONOMY
ABSTRACT:
An increase or decrease in crude oil price can both be pain and gain to the Nigerian’s economy simultaneously, this is because a strong link between the country’s budgetary operations and the happenings in the international oil market exists. Therefore, this research employed the restricted vector auto regression (VAR) technique, to empirically investigate into the impact of oil price volatility on Nigeria’s economy from 1981 to 2014. Both the Augmented Dickey Fuller and Philip Perron unit root test, revealed that all the variables considered in the study are non-stationary at levels, but achieved stationary after estimating their first difference. Furthermore, majority of the variables were found to have long run relationships, justifying the need to estimate the model through the vector error correction model. The short run coefficient deduced from the VECM revealed that oil price shock price shock significantly impacts economic growth in the short run. Also, both the impulse response function and variance decomposition results confirmed the Dutch disease syndrome associated with Nigeria economy, real GDP negatively responded to oil price shock in all the periods despite the positive response of real government expenditure to oil shock in most period. This implies that economic growth is negatively affected in the long run, even though its impact on the real government expenditure seems to be positive mostly, the Pass-through effect it has on high inflation rate, declining exchange rate explains its negative effect on real GDP. In conclusion this study recommends that, for long run macroeconomic growth and performance there is a strong need for policy makers to concentrate on policy that will stabilize and strengthen the macroeconomic structure of the country with specific focus on; alternative sources of government revenue, aggressive savings from revenue proceeds in periods of oil booms, so as to withstand variations of oil shocks in future.
CHAPTER ONE
1.1. Introduction
This chapter introduces the central issue discussed in this study. A background of the study,
the problem necessitating the research, questions generated from the problem statement, the
main and specific objectives of the research, research hypothesis and the significance of the
study were all explicitly discussed.
1.2. Background of the Study
Crude oil has been one of the most important commodities and a key source of energy in the
world ever since its discovery in the 1800s. The importance of oil has risen over years to the
extent that a sudden disappearance of oil will undermine the world economy. (Suleiman,
2013).
In terms of price, it is widely known that crude oil is the world’s most unpredictable and
unstable commodity. The instability of crude oil can be traced to the Middle East crisis in
1973 which triggered the first oil shock. About 252% increment in the prices of oil was
witnessed during the crises, as oil price skyrocketed from US$3 per barrel to whopping
double digits of US$11 per barrel. Since then the prices of crude oil have been volatile and in
more recent times, changes are rapid and unprecedented. Oyeyemi,(2013) attributes the
causes of uncertainty and unpredictability in oil price to global market interaction of demand
and supply of the commodity coupled with activities of OPEC. This rapid change has
become a great concern to everybody including academics and policy makers.
In Nigeria, the agricultural sector used to be the main stay of the country’s economy before
1970, contributing about 68 percent of the Gross domestic product (GDP), employing about
70 percent of the working population and responsible for about ninety percent of foreign
exchange earnings. Following the discovery of the first well in 1956 and as crude oil became
an export commodity in Nigeria in 1958, the contribution of oil to the federal government
revenue rose from 26.3 percent in 1970 to 82.1 percent in 1974 largely on account of
increase in oil prices in the international market (Ogundipe et al, 2014). The 1973 oil price
surge brought massive income into the country’s national purse, and this led to the
dependency of the economy on the oil sector as productivity declined in other sectors thereby
making the nation a mono-product economy. For more than three decades the petroleum
industry has continued to play a pivotal role in shaping the socio-economic structure of
Nigeria as a nation.
1.3. Statement of Problem
Since the first oil shock in 1973, issues that surround oil price volatility, it impacts and
consequences on economic growth have continued to spring up and generate controversies
among economic researchers and policy makers, In more recent times changes in oil prices
have been found to be more profound, rapid and unprecedented.(Oyeyemi, 2013). While
some researchers are of the view that oil volatility promotes economic growth for net-oil
exporting countries (when there is a price increase, which increases real national income
through higher export earnings). Others argues that it undermines economic growth
especially for net-oil importing countries (which experience inflation, lower investment, fall
in tax revenues and an increase in budget deficit which will in turn reduce general welfare
level of an economy). (Oriaki and Iyoha, 2013). The impact (positive or negative) which oil
price volatility could have on any economy, depends on what part of the divide (oil
exporting/importing) such economy falls into and the nature of such price change (rise or
fall). (Oriaki and Iyoha,2013)
This trending issue has a more complicating impact on Nigeria’s economy, because the
country is both an oil exporting and importing economy. (She exports crude oil, but imports
refined petroleum products). Therefore making a conclusive statement on the impact of oil
price volatility on the Nigerian economy is difficult. Thus oil price volatility (rise or fall)
can both be pain and gain to the Nigerians economy simultaneously. The crux of this issue is
that the country has extremely relied on this commodity over the years, and there is strong
evidence that there exists a strong link between budgetary operations and the happenings in
the international oil market (price, demand and supply) which has triggered several macro-
economic shocks and challenges in the economy. For instance in 2014 when oil price fell
from a peak of US$147 to less than US$50 per barrel, the Nigerian budget witnessed
significant cuts in revenue and expenditure which in turn had a negative contagious effect on
all aspects of Nigerian’s economy.
1.4. Research Questions
The research questions generated from the statement of problems are:
1. Does Oil price shock have a significant impact on Nigeria economy?
2. Is there a long run relationship between oil price Volatility and economic growth in
Economy?
3. What kind of causal relationship exists among oil price Volatility and Economic Growth
and other macro-economic variables in Nigeria?
1.5. Objective of the Study
The main objective of this research is to examine the impact of petroleum price volatility on
Nigeria’s economic growth. Other objectives of this research are to;
1. Determine the long run implication of oil price volatility on economic growth.
2. Examine the causal relationship among oil price volatility, economic growth and other
macro-economic variables.
1.6. Research Hypothesis
• Hypothesis 1
H0: There exists no significant impact of oil price volatility on economic growth in
Nigeria.
H1: There exists a significant impact of oil price volatility on economic growth in
Nigeria.
• Hypothesis 2
H0: There exists no significant long run relationship between oil price volatility and
economic growth in Nigeria.
H1: There exists a significant long run relationship between oil price volatility and
economic growth in Nigeria.
• Hypothesis 3
H0: There exists no causal relationship among oil price volatility, economic growth and
other macro-economic variables in Nigeria.
H1: There exists a causal relationship among oil price volatility, economic growth and
other macroeconomic variables in Nigeria.
1.7. Significance of the Study
Estimating the consequences of oil price shocks on growth is of great relevance in the case of
Nigeria, this is due to the fact that the country qualifies both as a crude oil exporting nation
and refined oil product importing nation simultaneously. This study exposes the growth
implication of the dynamics and erratic fluctuation in the price of crude oil on Nigeria’s
economy. It will serve as a tool for government policies towards mitigating the negative
impact of oil volatility in Nigeria. This work may also serve reference and guide for future
research, documentation and methodological approach on Oil price volatility and Economic
growth in Nigeria.
1.8. Structure of Research
This study is divided into five chapters. Chapter one gives a general overview of the study.
Chapter two reviews various literatures related to this topic. It includes various concepts,
theoretical issues, empirical studies of research relating to this topic. The third chapter
focuses on the research methodology it includes, technique of estimation, model
specification and it also employs statistical technique in finding statistical relationship
between the variables. Chapter four involves the presentation of data, analysis and discussion
of results in chapter three. Lastly, chapter five, summarizes the major findings in this
research study, concludes and gives policy recommendations of findings.
.