The Impacts of Oil Price Volatility on Nigeria’s Economy (2000 -2016)
Chapter One
Research Objectives
In order to achieve the broad objective of the study, the following specific objectives were investigated. The broad objective of the study is the impacts of oil price volatility on Nigeria. To achieve this objective, the study strived to;
- Determine whether there are attendant positive significant relationship exist between crude oil price and economic growth.
- Examine the effects of crude oil price volatility on government revenue, foreign exchange rate, capital importation and foreign external reserves.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
This chapter reviews the literature on interpersonal communication and conflict resolution in community development. It discusses issues arising from the topic of interest as viewed from different perspectives, with a view of giving a theoretical and empirical foundation to the study.
LITERATURE REVIEW
A significant number of studies have been reviewed to support and complement the efficacy of this study. Oil, the most internationally contributing factor of production in modern-economy, its price tends to be volatile, at least due to business cycle. Hamilton [11] using granger causality test showed that oil price changes are the cause of GDP fluctuation in US. Burbidge and Harrison [12] conduct a study using vector auto regression (VAR) on monthly data from January, 1961 to June, 1982 they found that, the effect of oil price rise on inflation in US and Canada is more than in Japan, Germany and England. Cunado and de Gracia [13] also investigate oil price impact on fifteen European countries and find mixed results. They conclude that, the use of either world oil price index or a national real price index is part of the explanation to the difference between oil prices and outputs. Moreover, they could not find any long-run relationship between oil prices and economic activity except for the United Kingdom and Ireland. Therefore, they suggest that the impact of oil price shocks on economic activity is limited to the short-run.
However, Berument and Ceylan [14] studied the effect of oil price shocks on economic growth in MENA region covering 1960-2003, they applied dynamic vector autoregressive (DVAR) model to investigate this relationship, the results show a positive effect on Iran, Iraq, Algeria, Jordan, Kuwait, Oman, Syria, Tunisia and United Arab Emirate, while on other case including Bahrain, Djibouti, Egypt, Morocco and Yemen, there was no significant relation statistically. In the same vein [15-18], investigate on the impact of oil price on economic growth and other macroeconomic variables, the studies established significant relationship among the variables using econometric analyses based on long-run and short-run frameworks.
Ayadi et al.[19] examine the effect of oil production shocks on the net-exporting country (Nigeria) using a standard VAR which includes oil production, output, real exchange rate and inflation over 1975-1995 period. The impact response show that a positive oil shock (high oil price) is followed by rise in output, reduction in inflation and a depreciation of the domestic currency. This tallies with the findings of Olomola and Adejumo [6]. Olusegun [20] investigate the impact of oil price shocks on the macroeconomic performance in Nigeria using seven key Nigeriaʼs macroeconomic variables, which are: Real GDP, CPI, real oil revenue, real money supply, real government recurrent expenditure, real government capital expenditure and real oil price. An annual data set between the periods 1970 and 2005 has been employed, johansen cointegration test indicates at least four cointegrating vectors among the variables, the forecast error variance decomposition estimated from the VAR model shows that oil price shocks significantly contributes to the variability of oil revenue and output. The study also reveals that the variability in the price level apart from its own shock is explained substantially by output and money supply shocks. Also, the variability in money supply is equally explained by price level and output.
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
Research design according to Onwumere (2005)[27] is a kind of blue print that guides the researcher in his or her investigation and analysis.The study utilized the Ex post facto design is a quasi-experimental study examining how an independent variable, present prior to the study, affects a dependent variable.A good research design must be able to control independent variables that are extraneous to the study and may influence the dependent variables in the study (Asika, 2006)[28]. In view of the above the study adopted the OLS regression
Nature and Sources of Data
The study relied firstly on the yearly secondary data covered from 1980 – 2014 and monthly secondary data that covered April 2004 to July 2015. Crude oil prices were collated from Bloomberg database. Foreign external reserves, real exchange rate (USD/Naira) and capital importation were collated from Central Bank of Nigeria statistical database, while total government revenue was collated from the Office of the Accountant General, Ministry of Finance. The oil prices include monthly closing spot prices of the Brent (USD/barrel); monthly closing spot prices of the West Texas Intermediate Cushing (USD/barrel) and OPEC basket monthly average crude oil prices (USD/barrel). The economic variables are real exchange rate, foreign external reserves, capital importation (which is made up of foreign direct investment in the form of equity and other capital; foreign portfolio investment in the form of equity, and other investments such as trade credits, loans, currency deposits and other claims) and government revenue.
Chapter Four
Data Analysis
The general objective of the study is to examine the impact of crude oil price volatility on Economic growth in Nigeria. As stated in chapter one the two specific hypotheses are analyzed.
The regression results are analyzed below.
CHAPTER FIVE
Summary of Findings
The findings from this study revealed that the current negative global oil shock has significant negative impact on the Nigeria economic growth. Specifically, the results revealed that the current shocks result in USD/Naira exchange rate depreciation, serious depletion of Nigeria’s external foreign reserves, steep downward trend in government revenue, and reduction in capital inflows. These findings clearly show that Nigerian economy is extremely vulnerable to global commodity price shocks as a result of over-dependent on oil.
Growth theorists have steadily identified a causal relationship between crude oil shocks and economic growth addressed under two streams;
- oil price shocks hinder economic growth; and
- a circular relationship such that oil price shocks could hinder or stimulate economic growth.
The first line argued that oil shocks increase uncertainties, which could adversely affect economic planning and projections, thus hindering economic growth (Narayan and Liu, 2014[29]; Shahbaz, Tiwari, Ozturk and Farooq, 2013[30]). That is, since the events are unpredictable, they could cause large-scale private sector defaults, trigger distressed assets sales, high bank insolvency, depletion of external reserve, currency crisis and loss of market confidence. In contrast, the second line argued that oil price shocks could hinder or promote growth depending on whether the country is an oil importer or oil exporter. In their view, increasing oil price stimulates oil exporting economies and hurts oil importing economies, while decreasing oil price could stimulate the economies of oil importing countries and hurt oil exporting economies.
Conclusion
The nation is yet to succeed at breaking the chain of poverty despite her abundant endowment of oil resource. The problem is caused by many factors. However, the focus of this research is identification of the impact of oil price volatility on the growth of the Nigerian economy. This study finds that oil price volatility does not have a positive impact on the economy (contrary to the findings of some earlier studies) but oil price itself does. While increase in price positively affect the economy through its contribution to export revenues (and government revenues), surges in oil price induce or worsen uncertainty in the economy through its effect on fiscal instability and vulnerability of budget implementation. This negatively affects the economy, The reason for this is that, in spite of numerous problems facing the nation (locally and globally – among theglobal factors is the fluctuations in oil prices arising from global events), the country‟s GDP has been, virtually always, on the rise; and the Nigeria‟s economic growth has suffered severely leading to poor standard of living.
Recommendations
Notwithstanding, the country should diversify its export revenue base as a means of minimizing reliance on crude oil and petroleum product. Some of these include; fiscal prudence, reform in budgetary operations, export diversification, revival of the non-oil sector of the economy, accountability and corporate governance. This will further shield the economy from the impact of oil price shocks on the economy, and thus prevent the negative effect of the shocks from attaining a statistical significant level. Some other recommendations are as follows:-
- Need for Structural Reforms: The reform should be targeted at eliminating structural rigidities, enhance production, and promote global competiveness. Such reforms should aim at fashioning institutions to prevent politicians from violating inter-temporal budget constraints, and more generally, from engaging in short-sighted, time inconsistent policies that in the end stymie economic growth.
- Tax Authorities Must Retrieve Their Legitimacy from Economic Agents in Order To Augment Government Revenue Sources: Increasing income tax (as currently practiced in some states of the federation) and the clamor to increase value-added-tax (VAT) is a wrong approach. It is counterfactual to increase the burden during an economic recession.
Need for A National Technology Development Plan: The need for a national technology development plan. Apart from the undiversified structure of the Nigerian economy and declining oil prices, a critical technology gap predisposes the country to external shocks. Concerted effort towards mass skills acquisition in the form of technology transfer is imperative for global competitiveness.
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