TABLE
OF CONTENTS
Title Page……………………………………………………………………………i
Certification…………………………………………………………………………ii
Dedication …………………………………………………………………………..iii
Acknowledgement……………………………………………………………………iv
Table of Contents…………………………………………………………………….vi
Abstract………………………………………………………………………………viii
CHAPTER
ONE: INTRODUCTION
1.1 Background to the Study…………………………………………………………….1
1.2 Statement of the Problem……………………………………………………………3
1.3 Research Questions………………………………………………………………….4
1.4 Objective of the Study……………………………………………………………….4
1.5 Research Hypothesis…………………………………………………………………4
1.6 Significance of the Study…………………………………………………………….5
1.7 Scope of the Study……………………………………………………………………5
1.8 Organization of the Study…………………………………………………………….5
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Review……………………………………………………………………6
2.1.1 Oil Price Shocks…………………………………………………………………….6
2.2 Oil Price Shocks and Economic Activity……………………………………………...8
2.3 Theoretical Review…………………………………………………………………..10
2.3.1 The Linear/symmetric Relationship theory of
Growth…………………………….10
2.3.2 The Asymmetry in effect theory of growth
Economics……………………………10
2.4 The Dutch Disease Syndrome………………………………………………………..12
2.4.1 Relationship between oil Price Shocks, Shock
price Movement…………………..12
on Economic growth.
2.5 Empirical Research…………………………………………………………………..14
2.6 Causes of Oil Price Shocks in
Nigeria……………………………………………….21
2.7 Limitation of previous
Study………………………………………………………...21
CHAPTER
THREE: RESEARCH METHODOLOGY
3.0 Introduction…………………………………………………………………………..23
3.1 Methodology…………………………………………………………………………23
3.2 Model of Specification……………………………………………………………….23
3.3 A Priori Expectation…………………………………………………………………24
3.4 Sources of Data………………………………………………………………………24
3.5 Measurement of Data………………………………………………………………...24
3.6 Data Analysis Techniques……………………………………………………………24
3.7 Model Justification …………………………………………………………………..25
3.8 Method of Evaluation………………………………………………………………..25
CHAPTER
FOUR: PRESENTATION AND ANALYSIS OF RESULTS
4.0
Introduction………………………………………………………………………….26
4.1 Presentation of Result………………………………………………………………..26
4.2 Discussion of Results………………………………………………………………...26
4.4 Adjusted R-Squared …………………………………………………………………27
4.5 The F-Statistic……………………………………………………………………..…28
4.6 Breusch-Godfrey Serial Correlation LM Test……………………………………….28
4.7 Test of Hypothesis …………………………………………………………………..28
CHAPTER
FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1
Summary…………………………………………………………………………….30
5.2
Conclusion…………………………………………………………………………...30
5.3
Recommendation…………………………………………………………………….31
REFERENCES………………………………………………………………………….32
Appendix
1……………………………………………………………………………….36
Abstract
This
study examines the effect of crude oil price on Nigerian economy from
(1986-2015). In this research work, Ordinary Least Squares (OLS) technique was
used and six variables were used in the empirical analysis. Hence, real gross
domestic product is assumed to be dependent variable, which depends on crude
oil price (COP), real exchange rate (REER), government expenditure (GOVTEXP),
inflation (INF) and money supply (MSP). The result reveals that crude oil price
and exchange rate are significant determinants of Real GDP in Nigeria. It is,
therefore, recommended that revenue from oil should be used judiciously in
diversifying the economy. Also, government pursuit of managed float exchange
rate is desirable to ensure a substantial increase in the external reserve
without significant damage of the exchange rate of the country.
CHAPTER
ONE
INTRODUCTION
1.1 Background of the Study:
The Nigerian economy is
an oil dependent economy, therefore, the dependency of the Nigerian economy on
oil proceeds as the major source of revenue of the country.Oil products are
derived from crude oil and they include petrol, diesel, kerosene, natural gas,
bitumen. Oil was discovered in Nigeria in 1956 at Oloibiri in the present
Bayelsa State, after a century of searching (Dharam,1991).
Oil products are
basically used in industries for production of goods and services and they are
also used domestically for personal consumption in which the greater percentage
of it comes from developing countries. The
oil industry is very important to the Nigerian economy. It provides among other things the greatest
part of the foreign exchange earnings and total revenue needed for
socio-economic and political development of Nigeria.
The bulk of Nigerian
crude oil is sold unrefined and when refined, the products range from petrol to
heavy liquids for road tarring.
Government has been the
custodian of petroleum and its products in Nigeria. Though, this brought a
temporary growth in the economy, the price instability of the crude oil in the
world market has led to the downfall of Nigerians economy in various sectors,
such as the production, manufacturing and services sectors.
Oil price instability
are not a new phenomenon: it has been a dominant feature in the oil market
during the last two decades (Baumeister and Peerman, 2009). The market has been
characterized with erratic movement of oil price since the 1970; moreover,
there have been very large and sharp swings in the normal price of oil since
the collapse of oil price in 1986(Sauter and Awerbuch, 2009), For instance, CBN
statistical bulletin (2011) shows that oil receipts accounted for 82.1% in
1974, 83% in 2008 and about 90% in 2010 and in 2015 Nigeria’s total oil revenue
declined by 41.2% between January and April 2015. However, there was a marginal
uplift in oil revenue between February and March, 2015. The reduction in oil
revenue was caused by drop of crude oil prices in the international market,
which in turn, led to a fall in crude oil and gas receiptsof the nation’s
earnings respectively.
Moreover, in the late
1990’s and early 2000crude oil maintained its position as the major source of
revenue of the federation account. This was shown in the year 2003 annual
budget. Out of the estimated proved revenue of N1, 819.0214billion a total of
N120.1789billion representing 61.58% is expected to be generated from oil.
Likewise, the revenue of petrol exports from the Nigeria’s total export revenue
in 2010 was US$61,804million which is 87.6% of total export revenue; Nigeria
has an increasing proportion of impoverished population and experienced
continued stagnation of the economy (Okonjo-Iweala and Osafa-Kwaako, 2007).
However, it is
empirically established that oil price is one of the most volatile prices which
the significant impact on macroeconomic behavior of many developed and
developing economies (Ferderer, 1996; Guo & Kliesen, 2005).
Nigeria is an open
economy that has no real influence on the world price of oil, whereas, it is
greatly impacted by the effect of global oil price volatility as an importer of
refined petroleum products. The prices of petroleum products have been
increased for about thirteen occasions between 1974 and 2002 from 16.8 kobo to
N26 per litter. The effect of oil prices on the macro-economic variables has
been the subject of many studies. Most of these studies are concerned with the
developed economies while few have recently showed concern with the developing
country. Nigeria is faced with a more complicated situation in the sense that
it sells its crude oil to foreign refiners, in which a general agreement on
price set of exchange is reached beyond her control. After the oil is refined
into premium spirit, gasoline, and kerosene, it is sold back to Nigeria pegged
to the price of wholesale gasoline on an exchange. The inability of Nigeria to
refine most of her crude domestically place the country more on the importing
side, making the macroeconomics extremely vulnerable to external oil price
shocks.
Oil price volatility is
like an airborne disease which Nigeria cannot avoid; this is because it affects
every aspect of the Nigerian economy. For example, when there is an increase in
the price of fuel, transportation would increase for the core poor and small
scale entrepreneurs. This leads to an increase in the cost of goods and services,
employment becomes difficult, because employers would not want to employ since
production costs are very high and employees would agitate for an increase in
salaries and wages due to the increased cost of living. In addition to higher
petrol prices, the costs of producing electricity from petrol-powered
generators have been too high, with black market operators. The impact of oil
price volatility on Nigeria’s economy is quite complicated to analyze because
oil has been the life wire of all economic activities in Nigeria.
Oil being the mainstay
of the Nigerian economy plays a vital role in shaping the economic and
political destiny of the country. Although Nigeria’s oil industry was founded
at the beginning of the century, it was not until the end of the Nigeria civil
war (1967-1970) that the oil industry began to play a prominent role in the
economic life of the country. Oil was discovered in Nigeria in 1956 at Oloibiri
in the Niger Delta after half a century of exploration. Nigeria joined the
ranks of oil producers in 1958 when its first oil field came on stream
producing 5,100 bpd. After 1960, exploration rights in onshore and offshore
areas adjoining the Niger Delta were extended to other foreign companies.
Since oil was
discovering in commercial quantity in Nigeria, oil has dominated the economy of
the country. In Nigeria, oil accounts for more than 90 percent of its exports,
25 percent of its Gross Domestic Product (GDP), and 80 percent of its
government total revenues. Thus, a small oil price changes can have a large
impact on the economy. For instance, a US$1 increase in the oil price in the
early 1990s increased Nigeria's foreign exchange earnings by about US$650
million (2 percent of GDP) and its public revenues by US$320 million a year.
Nigeria’sreliance on oil production for income generationclearly has serious
implications for its economy.
Oil prices
traditionally have been more volatile thanmany other commodity or asset prices
since WorldWar II. The trend of demand and supply in the global economy coupled
with activities of OPECconsistently affects the price of oil. The recentchanges
in oil prices in the global economy are sorapid and unprecedented. This is
partly due toincreased demand of oil by China and India.However, the current
global economy melt downsuddenly counteracted the skyrocketing oil price. Atthe
beginning of the crisis oil price crashed below$40/b in the world market which
had seriousconsequences on Nigeria fiscal budget which led tothe downward
review of the budget.
Today oil priceis oscillating between $60/b
and $75/b. This rapidchange has become a great concern to everybodyincluding
academics and policy makers; therefore, a study of this kind is timely.Oil
prices have witnessed profound fluctuations andthis has implications for the
performance ofmacroeconomic variables, posing great challenges for policy
making. The transmission mechanismsthrough which oil prices have impact on real
economic activity includes both supply and demandchannels. The supply side
effects are related to thefact that crude oil is a basic input to production
andconsequently an increase in oil price leads to a rise inproduction costs
that induce firms to lower output.
Oil price changes also
entail demand side effects onconsumption and investment. Crude oil prices
haveincreased on average from US $25 per barrel in 2002to US $55 per barrel in
2005. An increase inpetroleum prices tends to have a contractionaryimpact on
world demand and growth in the short-term.The present study is motivated by the
fact thatNigeria relies heavily on crude oil export revenues;this has severe
implications for the Nigerian economygiven the current wide swings in oil
prices in theinternational oil market. It is therefore vital toanalyze the
effect of these fluctuations on theNigerian macro economy and possibly trace
thechannels of transmission of oil price shocks to theNigerian economy.Against
this background, this paper seeks to examinethe effect of the trend of shock in
oil prices in Nigeriaand its impact on economic growth.
1.2. Statement of the Problem
Crude Oil is a key source of energy
in Nigeria and in the world. Oil being an important part of the economy of
Nigeria plays a strong role in influencing the economic and political fate of
the country. Crude oil has generated great wealth for Nigeria, but its effect
on the growth of the Nigerian economy as regards returns and productivity is
still questionable (Odularu 2007).
The most important
problem confronting Nigeria today is the price of oil and its attendant
consequences on economic wellbeing of its citizen. This is because Nigeria does
not have control over oil product, as a result of her inability to
independently refine its crude oil into petroleum products. For instance, the
major reason for the fuel shortage is the collapse of the country’s four oil
refineries in Port Harcourt, Warri and Kaduna. Though the government claims
that it has spent a whooping sum on their repairs, yet the country still relies
mainly on importation of refined fuel.
In fact, a cartel has developed in
the elite class which makes millions of dollars of profit from fuel importation
and artificial scarcity of petroleum products. Nigeria’s inability to attain
sustainable development, certain level of full employment, poverty reduction,
solve the unfavorable balance of trade, inflation and high debt ratio, are all
linked to its high dependence on oil as it major source of revenue, and
negligent of agriculture and other sectors in a comprehensive and sincere
diversification policy.
The elasticity of a change
in oil price on macroeconomic variables is so perfect that economy response to
even mere speculations. Thus persistent oil shocks could have severe
macroeconomic implications like fluctuation in the GDP which may induce
challenges with respect to policy making. In addition, the revenue from oil is
the pivot for government budgets and subsidies. In spite of oil price
volatility and fall in revenues in recent times, the attempts by government to
continue with petroleum subsidy is still a source of challenge in terms of
budget deficit.
Hence, it appears that
oil price volatility poses a significant problem to macroeconomic stability and
sustainable development in Nigeria. The problem is compounded by decades of
corruption in the oil sector, poverty, unemployment, processing and
distribution costs, social conflicts in oil-producing areas resulting to
pipeline vandalism, oil theft, kidnapping of expatriate oil workers, disruption
in petroleum product supply and demand
From the period of the
oil boom of the 1970s till now, Nigeria has neglected her strong agriculture
and light manufacturing bases in favor of unhealthy dependence on crude oil.
New oil wealth has led to a concurrent decline of other sectors in the economy
and has fueled massive migration to cities and led to increasingly wide spread
poverty especially in rural areas. Nigeria’s job market has witnessed very high
degree of unemployment, small wage and pitiable working environments (Adedipe,
2004 and Odularu 2007).
Between 1970 to 2000,
Nigeria’s poverty rate increased from 36 percent to just fewer than 70 percent
and it is believed that oil revenue did not seem to add to the standard of
living at this time but actually caused it to decline (Martin and Subramanian,
2003).
Oil price fluctuations
have received important considerations for their presumed role on macroeconomic
variables. Higher oil prices may reduce economic growth, generate stock
exchange panics and produce inflation which eventually leads to monetary and
financial instability.
Thus, it is on this
note that this research seeks to find out the effect of oil price on exchange
rate volatility and its effects on the Nigerian economy, as well as suggest
methods of minimizing the adverse effects it can produce on the economy as a
whole.
1.3 Research Questions
·
Does
crude oil pricehave any significant impact on Nigerian economy?
1.4 Objectives of the Study
·
To
investigate the impact of crude oil price on the Nigerian economy.
1.5 Research hypothesis:
H0: Crude oil price
shock has no significant impact on Nigerian economy.
H1: Crude oil price
shock has significant impact on Nigerian economy.
1.6 Significance of the Study:
The research is on the ticket to
find out the impact of crude oil price in Nigerian economy and to find measures
that will help to question the effects of crude oil price in Nigeria.
Over the past few years
the price of oil has been volatile and given the role in the Nigerian economy,
oil price volatility also plays a significant role in the determination of
macroeconomicvolatility. By implication, the Nigerian economy is vulnerable to
both internal shocks and external shocks. It is the tendency of macroeconomic
variables such as GDP, inflation, exchange rate, interest rate etc. to be
unstable and weak in terms of withstanding shocks.However, many problems have been militating against the continued growth
of the sector.
Also in the words of
Adedipe (2004) the oil price influences government policy and exchange rate in
Nigeria. Although a wealth of literature exists relating oil price and exchange
rate to Nigeria. This project seeks to analyze crude oil price in Nigeria and
whether or not it has animpact on economic growth in Nigeria, little focus on
the effect of the oil price on exchange rate in significant influence on oil
price volatility in Nigeria.
Thus,
this study is of great benefit to the government and policy makers. It
reemphasizes the need to diversify and promote the growth of other sectors of
the economy, in other to increase economic growth and improve the standard of
living for Nigerians
1.7 Scope of the Study
This study is concerned with crude
oil price in Nigerian economy. TheAnalysis covers the period from 1986-2015.
1.8 Organization
The
organization of the study will be arranged into five chapters: Chapter one focuses
on introduction of the study, Chapter two contains the literature review, Chapter
three contains the methodology, source of data, model estimation and the model
to be used for the research work, Chapter four is for the presentation and discussion
of results. Finally, the chapter five concludes with the recommendation and
summary of the research work.
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