The Impact of Oil Price Changes on the Economic Growth of Nigeria
CHAPTER ONE
OBJECTIVES OF THE STUDY
The specific objectives of this study are
- To analyze the impacts of oil price changes on the economic growth of Nigeria.
- To measure the magnitude of this impact.
CHAPTER TWO
LITERATURE REVIEW
THEORETICAL LITERATURE
Changes in oil prices have complicated the task of policy makers and business leaders over the past three decades. Increases in inflation during the 1970s have been blamed, in part, upon rapid increase in petroleum prices. The long decline in inflation and other macro economic variables during the 1980s and 1990s have in turn been associated with decline in oil prices. Hence, a clear understanding of the strength of the empirical linkage between oil price changes and macro economic variables in key to the proper management of the economy (Leblanc and Chin, 2004). While most of the examples that come to mind are historical in nature, it would be a mistake to conclude that the impact of oil prices on the macroeconomic is now unimportant.
According to Leblanc and Chin, (2004), oil price spike a difficult problem for instance, rouse firms cost and the price they charge on their products. Holding non-energy prices constant, this tends to raise inflation and, for a given level of aggregate demand, pushes the economy towards recession, the central bank then has a choice between implementing a contrationary monetary policy to fight inflation and an expansionary policy to fight recession. In the face of supply shocks, the central bank cannot stabilize inflation and the real economy simultaneously. The implications of higher energy price fluctuation on inflation depend, in part, on how important energy is in the economy.
According to Hamilton (1996), the most obvious indicator of an oil price change is the nominal oil price. Hamilton shows that increase in the nominal price of oil cause downturns in economic activity. However, more recent information show this simple measure to have a rather unstable relationship with macroeconomic outcomes, leading subsequent researchers to employ increasingly complicated specification of the “true” relationship between oil and economy. In particular, Hamilton (1996) argued that the correct measure of oil changes depends on how the price of oil affects the economy. He further proposes a more complicated measure of oil price changes the “net oil price increase” that establishes new high relative to recent experience and increases that simply reverse recent decrease. In addition to Hamilton’s “net oil price” measure, the energy economic literature provides many alternative indicators of oil price changes. Those proposed by Ferderer (1996) and Ratti (1995) for example, focus on the fluctuation of oil prices rather than the level. Mork (1989) proposed an asymmetric relationship in which the regressor is given by the magnitude of the oil price change when oil prices increase but equal to zero when oil prices decrease. The view expressed by Darby (1983) is that oil price changes affect the macroeconomic primarily by depressing demand for key consumption and investment goods. Recent oil crisis have been characterized by widespread concerns which could well cause certain irreversible investment decisions to be postponed.
CHAPTER THREE
RESEARCH METHODOLOGY
The research will employ the singly equation technique of econometric simulation for its analysis. The merits of using this technique include its theoretical plausibility, explanatory ability, accuracy of the parameter estimate, simplicity and casting ability (Koutsoyiannis, 1977, Gujarati, 2004).
The method adopted is the Ordinary Least Square (OLS) model. The choice of this method is made because it is best suited to testing specific hypothesis about the nature of economic relationship (Studenmund, 1998).
Thomas (1994) states that OLS employs a sound statistical technique appropriate for empirical problem. OLS has become so standard that its estimates are presented as a point of reference even when result from other estimation used.
MODEL SPECIFICATION
Newbold and BOS (1997) were of the opinion that it would always pay to incorporate what is known from subject matter into the model building process. Following Micheal LeBlanc (2004) we specify the Nigeria as follows:
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULTS
The results of the ordinary least square regression conducted are hereby presented with the interpretations and comprehensive analysis of it. The analysis was conducted using PC-GIVE 8.00
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
SUMMARY
This study attempts to evaluate the impact of oil price changes on the economic growth of Nigeria. This impact is associated with something not firm or fixed since the changes are being considered and as such is not steady in action or movement. The fluctuations may not be known in advance nor can it be predicted.
Based on the empirical evidenced form a growing body academic literature clearly suggests that oil price changes dampen macro-economic growth. This movement in oil prices has complicated the tasks of policy makers and business leaders over the past three decade.
The oil sectors dominance in the Nigeria economy Gross Domestic Product (GDP) has accounted for about 55.7% between 1991 and 2003.
In addition oil sector contributed about 166.6 million naira out of the 632.0 million collected in 1980 which represent 26.3%. Hence a little oil price increase say 1% can have a large impact on the GDP say by 2%. Nigeria’s reliance on oil production for income generation clearly has serious implications for its economic policy management as a result of unstable oil prices.
CONCLUSION
There is a negative effect of oil price changes on GDP though as oil prices increase, it increases GDP of a country but once there is uncertainty in oil prices, it has a negative effect on GDP.
This will require policy makers to adopt effective and efficient policies and strategies as suggested in the research work to manage oil price changes in the economy.
POLICY RECOMMENDATION
Nigeria being on oil producing country should adopt various ways of controlling or checking price changes. A government can self insure by selling oil reserves, or by creating an oil stabilization fund. It can transfer risk abroad through the use of hedging instruments and credit market. It can also transfer risk to the private sector by say, privatizing the oil industry or changing production contracts with oil companies, or by transferring windfalls to the private sector. Also government can use a mix of these options.
The policy recommendations and directions for emphasis are:
- Sell the domestic refineries as they are and assessed to be worth.
- Supply crude petroleum to the domestic refineries at less than the international price, which already includes a profit margin for the joint ventures.
BIBLOGRAPHY
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