CRUDE OIL PRICE AND ECONOMIC GROWTH IN NIGERIAN (1986-2015)

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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