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PROJECT TOPIC AND MATERIAL ON CRUDE OIL PRICE FLUCTUATIONS AND ECONOMIC GROWTH IN NIGERIA (1985-2015)
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- Name: CRUDE OIL PRICE FLUCTUATIONS AND ECONOMIC GROWTH IN NIGERIA (1985-2015)
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Oil prices traditionally have been more volatile than many other commodity or asset prices since World War II and has have a lot implications on major macroeconomic variables such as inflation, money supply, capacity utilisation and economic growth to mention a few. This paper investigated the growth implications of crude oil price fluctuation in Nigeria. Empirical analysis was conducted by applying the multiple regression of the ordinary least square technique to the annual data on the Nigeria economy for the period 1985 -2015. The model was found to be significant and most of its estimates are as expected. The study revealed that a little shock in the price of crude oil in the global oil market in the current period will produce a long–term effect on economic growth in Nigeria. The study suggested the need for the policy makers to diversify the productive base of the economy to other sectors such as Agriculture, Manufacturing, Tourism and other service oriented sectors to open up a wider spectrum for inflow of income to the economy and break the overdependence of the economy on oil sector.
1.1 Background to the Study
Crude oil is a very profitable commodity, and has resulted in the economic development of many of the countries that produce it for export. Among other things, it has also led to the increase of their political power among other nations. This is because this commodity is an essential one in our technologically advanced age. But the socio-economic situation in Nigeria and especially in oil producing communities is a totally different story. Nigeria has been criticized in recent years, in terms of her economic performance. This is attributable to the worst and most prolonged economic crisis it has battled with over the past decades. A quick glance at the structure of the Nigerian economy will reveal its precarious nature in terms of fiscal imbalances, poor export performance, high levels of account deficits, large and growing external debt, stagflation, rising degree of terrorism, alarming deterioration in basic social and economic infrastructures and a host of other negative economic indices. The most noted of the absurdities is the over-reliance of the economy and its fate on one sector (the oil industry), and on one commodity export (crude oil). Hardly could anything be written about the political economy of Nigeria without reference to its history of oil production. Crude oil as an energy source since its discovery in the 1800‟s has been vitally important to the world economy. According to Hathaway (2009) the importance of oil has risen to the extent that in a world suddenly without oil, all the major distribution systems that allow economic transactions on a more than local basis would fail and the world economy would collapse.
One of the most important driving forces of the global economy is the crude oil and changes in the price of this oil will have significant effects on economic growth and the well-being of the population around the world. The urbanization and modernization of the global economy has led to the increase in the demand for oil because oil is the life blood of the economy (Eryigit, 2009). As a result of the daily use of oil by everyone, it leads to an increase in the demand for it. To this effect, the oil market has constantly experience change which will always continue to be so, because oil is so vital to the world economy and its market is really universal (El-badri, 2011) as cited in (Ogundipea, Ojeagaa&Ogundipea, 2014). As a commodity, oil has distinctive features which include its exclusive role as both the common natural heritage of a country and the driven force of global economic growth, its deplorability and price volatility nature, its enclave nature, high capital intensity, a resulting boom–bust cycles, technological sophistication, and the extraordinary profits generation which is been accrue to the state and its private players.With these combined factors, it gives rises to what is called ‘‘the paradox of plenty’’ or the ‘‘resource curse’’ (Karl, 2005).
Crude oil is a major source of foreign exchange earnings and the dominant source of revenue for the Nigerian government. According to (Yuan, Liu and Huang, 2014) oil price shocks have had an attendant multiplier effect on crude oil and economic activity. The Nigerian economy has been completely reliant on oil and the basis upon which government budgeting, revenue distribution and capital allocations are determined. Volatility is an upward and downward movement of oil prices globally. This assertion thus translates that these oil prices are exogenous because it’s determined by external influences that somewhat stagnate the Naira and Nigeria cannot moderate the causes of these oil price slides. Nigeria’s exports of oil at a time of peak prices – have enabled the country to post merchandise trade and current account surpluses in recent years. Reportedly, 80 percent of Nigeria’s energy revenues flow to the government; 16 percent cover operational costs, and the remaining 4 percentgoes to investors (Atukeren 2003).However, the World Bank has estimated that as a result of corruption 80 percentof energy revenues benefit only 1 percent of the population.
According to Ujunwa (2015) the recent oil price shock (large fall in oil prices) has been attributed to factors such as higher than expected supply, weakness in global demand for oil, driven largely by improvements in production technology, particularly the shale technology in the United States, steady rise in production of countries not belonging to the Organization of Petroleum Exporting Countries (OPEC), the faster than expected recovery of production in some stressed OPEC producers (Iran for instance); OPEC‟s November 2014 decision to maintain production level despite the sharp decline in prices, which clearly shows that the trend might not abate soon.
Oil price changes, volatility have been a very controversial topic among different scholars. External shocks can be defined as a large unanticipated change in world economic conditions which impacts upon a national economy. Shocks could come in different forms such as a shift in the terms of trade, a slowdown in the growth of world export demand and an increase in interest rates set by world financial markets. Oil shocks are of great concern to most economies because a sudden hike in prices has been found to cause a fall in global output. Oil price shocks could also be defined as a large boost in the relative international price of oil. Nordhaus (2007), defined oil-price shock as an inward shift in the supply curve for crude oil that is triggered by political events exogenous to the oil market and the macro economy.
An oil price shock may have real effects, as a higher oil price may affect output through the aggregate production function by reducing the net amount of energy used in the production. In addition, aggregate demand, of which investment is a major part, may also change in response to energy price changes. An oil price increase will typically lead to a transfer of income from the oil importing countries to the oil exporting countries. This reduction in income would cause rational consumers in oil importing countries to cut back on their consumption spending and investment, hence, reducing aggregate demand and output. However, to the extent that the increase in income in the oil exporting country will increase demand from the additional income transferred to them from the oil importing country, the global effect would be minimized. The level of demand may also change due to actions taken by government in response to change in oil prices. To illustrate this point, to offset the increase in the general price level that might have been observed after the second oil price shock, several countries pursued tight monetary policy, which may itself have lowered real activity (Bjornland, 2000)
Gross Domestic Product (GDP) is the most widely used measure of economic output. GDP is generally defined as the market value of the good and services produced within the geographical region of a country. Economic growth is an increase in the total amount of production and wealth in an economy. However, according to investopedia, economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal terms which include inflation, or in real terms, which are adjusted for inflation.Over the last several years, oil prices fluctuate significantly. In 2009 the average crude oil price was around #53 and in the first quarter of 2010 it rose to the Average of #70.Within this period and before, Crude oil prices had been fluctuating at least three times in every month.
These frequent fluctuations affect the overall economic performance globally at least in the short term. This is because of the increase in worldwide consumption and reliance on oil. When the price of crude oil is high, the exporting countries experience increase in revenue which if manage well lead to economic growth, while importing countries typically undergo declining in economic growth. Despite the increase in oil prices which induce more revenue and economic growth to the exporting countries, the importing countries who are resource poor usually perform economically better than the majority of the resource rich countries, this is because the oil importing countries who lack the oil resource tend to invest on other sectors whose commodity prices do not fluctuate. How much crude oil price change affects a country depends on the share of the Oil revenue in the National Income, the degree of dependence on imported Oil and the ability of final consumers to substitute or reduce the consumption of Oil. Logically, the Larger and longer the Oil price increase the bigger the macro-economic impact (Aghalino and Eyinla, 2009; Omoweh, 2005).
For net oil exporting countries, an increase in oil price generally lead to direct increase in the real national income, though some part of this gain will be utilized to offset the losses possible to occur when the trading partners demand for import reduces due to economic recession. In the case of net importing countries, an increase in the crude oil prices lead to inflation, increase in input cost, reduction in tax revenues, and increase in budget deficit because of the rigidities in government spending which subsequently leads to increase in interstate due to resistance to real decline in wages. These effects are more severe when the price increase is more sudden and more pronounced. They are also magnified by the impact of higher prices on consumer and business confidence. Nigeria, having relied more on crude oil export earnings which account for more than 90 per cent of its total export earnings and also constitute up to 70 per cent of the government revenues in its annual budget, is becoming more vulnerable to negative implications due to the frequent changes of the oil prices at international market. Therefore, it is imperative to analyse and understand the effects of these changes on the country’s macro-economy with a view to have effective policy measures in addressing and preventing the re-occurrence of any severe implications from oil price fluctuations in the future. It is in view of this expectation, that this research work makes a critical assessment of the crude oil priced fluctuations and the economic growth in Nigeria for the 30year period 1985 – 2015 and to shed further light on related questions as well as draw broad logical conclusions.
1.2 Statement of the Problem
It is trite rule that countries endowed with an abundance of natural resources should prosper.Yet over many years, it has been observed that developing nations rich in oil, gas, or mineralresources have been disadvantaged in the drive for economic progress.Crude oil price fluctuation has had certain impacts on the Nigerian economy, both positively andadversely. On the negative side, when there is a decrease in the price fluctuation, it affects the economy negatively but when there is an increase in crude oil price it affects the economy positively Ayadi, (2016). Crude Oil is a key source of economy in Nigeria and the 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 economic growth is still questionable (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).
Higher oil prices may reduce economic growth, generate stock exchange panics and produce inflation which eventually leads to monetary and financial instability. It will also lead to high interest rates and even a plunge into recession (Mckillop, 2004). A sharp increase in the international oil prices is generally regarded as the factors of discouraging economic growth (Jin, 2008). A very good example is the period of the global financial crisis, the price of oil fell by about two thirds from its crest of $147.0 per barrel in July 2008 to $41.4 at end of December 2008. Before the crises, oil price was high, exchange rate was stable but with the dawn of the global financial crisis (GFC) oil price crashed and the exchange rate caved-in, depreciating by more than 20 per cent. Since oil price fluctuations directly affect the inflow of foreign exchange into the country, there is a need to investigate if it has direct impact on the economic growth (Englama, 2010).
The problem of this study is that the impact of crude oil on the growth of the Nigerian economy is still questionable which may be as a result of fluctuations in crude oil prices, going by the low level of development in the country. Exchange rate is one of the contributing factors to the fluctuations in crude oil prices which sometimes results to high inflation rate;Hence the need to econometrically evaluate crude oil price fluctuations and economic growth in Nigeria.
1.3 Objectives of the Study
In the light of this study, the major objective will be to assess critically, the effect of crude oil price fluctuations oneconomic growth in Nigerian. Specific objectives are:
- To ascertain the effect of crude oil price fluctuations on the Nigerian economy
- To ascertainif there is a sustainable long-run relationship between crude oil price fluctuations and economic growth in Nigeria.
- To ascertain the effect of inflation on the Nigerian economy
- To ascertain the effect of exchange rate on Nigerian economy
1.4 Research Questions
- Does crude oil price fluctuations have any effect on the growth of Nigerian economy?
- Is there a sustainable long-run relationship between crude oil price fluctuations and economic growth in Nigeria?
- Does inflation have any effect on Nigerian economy?
- What is the effect of exchange rate on Nigerian economy?
1.5 Research Hypotheses
This study will be guided by the following research hypotheses
H01:Crude oil price fluctuations does not have any effect on the growth of Nigerian economy
H1:Crude oil price fluctuations have an effect on the growth of Nigerian economy
H01:There is no sustainable long run relationship between crude oil price fluctuations and the growth of Nigerian economy
H1: There is a sustainable long run relationship between crude oil price fluctuations and the growth of Nigerian economy
H01:Inflation does not have any effect on the growth of Nigerian economy
H1:Inflation hasan effect on the growth of Nigerian economy
H01:Exchange rate does not have any effect on the growth of Nigerian economy
H1:Exchange rate has an effect on the growth of Nigerian economy
1.6 Scope of the Study
This research work covers the effect created on economic growth by crude oil price fluctuations. The study is as such a comparative one. The time period is from 1985-2015. The reason of choosing this time period is because between these periods, crude oil prices have been fluctuating from time to time. The price has not been fixed for a long time.
1.7Significance of the Study
This study is significant and justifiable because of the numerous benefits derivable from its completion. These benefits include; First and foremost, the research work will be useful to Nigerian policy makers by assisting them in understanding clearly the impact of policies made on crude oil price on standard of living of the common man. Secondly, this research work on completion could assist students of related discipline in their course of study. Also, researchers and the general public would benefit from this research work in the course of their research. This is because this study will throw more light on the effect of crude oil price fluctuations on the Nigerian economy.
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