Project Abstract

Oil price volatility is a critical factor that significantly affects the economy of oil-producing countries such as Nigeria. This study aims to analyze the impacts of oil price volatility on the Nigerian economy from 2000 to 2016. The period under investigation covers a time when Nigeria experienced fluctuations in oil prices due to global market dynamics and domestic factors. The research employs a quantitative approach utilizing secondary data obtained from reputable sources such as the Central Bank of Nigeria, World Bank, and International Monetary Fund. Various economic indicators such as GDP growth rate, inflation rate, exchange rate, and government revenue are analyzed in relation to oil price volatility. Statistical techniques including regression analysis and correlation studies are used to examine the relationships between oil price volatility and these economic indicators. The findings of the study reveal that oil price volatility has a significant impact on the Nigerian economy during the period under review. Fluctuations in oil prices result in uncertainties in government revenue, as Nigeria heavily relies on oil exports for its income. The volatility in oil prices also affects the exchange rate, leading to currency depreciation and inflationary pressures. Moreover, the study identifies a causal relationship between oil price volatility and GDP growth rate in Nigeria. When oil prices are high and stable, the Nigerian economy tends to experience growth, driven by increased government revenue and investment in the oil sector. Conversely, during periods of oil price volatility, the economy faces challenges such as reduced government revenue, budget deficits, and decreased investor confidence. Policy implications derived from the research suggest the need for Nigeria to diversify its economy away from oil dependency to mitigate the adverse effects of oil price volatility. Enhancing non-oil sectors such as agriculture, manufacturing, and services can help buffer the economy against fluctuations in oil prices. Additionally, improving fiscal management practices, enhancing transparency in the oil sector, and implementing structural reforms are recommended to enhance economic stability and resilience to oil price shocks. In conclusion, this study highlights the significant impacts of oil price volatility on the Nigerian economy from 2000 to 2016. The findings underscore the importance of proactive measures to manage oil price fluctuations and promote economic diversification for sustainable development in Nigeria.

Project Overview

INTRODUCTION

1.1     Background to the Study

Economic growth plays a key role in industrial innovation (Malatyali, 2016). The first fluctuations in crude oil prices that occurred in 1973s have made economists to view sudden movements in the oil price as a fundamental source of economic fluctuations, for example, Hamilton (2005) suggests that in the last few decades, nine of the ten recessions in the USA were preceded by large positive increases in crude oil price. Moreover, the very recent highs registered in the crude oil market are causing concern about slowing in the economies of many developed countries including Nigeria. The price of a barrel of Brent crude oil in European countries fell from than $100 p/b in Sept 2014 to less than $46 p/b in January 2015. Besides, the decline was the third largest over the past 30 years, has particularly interesting parallels with the episode in 1985-86, therefore, renewed interest in the impacts of fluctuating oil prices on the economy. Therefore, this relation has captured increasing attention of academic researchers such as: (Hamilton, 2009; Kilian and Vigfusson, 2011; Edirneligil and Mucuk, 2014; Ftiti et al., 2016) the most influential articles in the field, and others. The impacts of fluctuations in oil prices on economic growth and their mechanism in oil-exporting countries differ from those in the oil-importing countries (Moshiri and Banihashem, 2012).

Over the years, concerned economists have examined the possible factors that lead to oil price fluctuations. For instance, shocks to the supply arising from political events such as wars and revolutions in OPEC member countries, improvements in the technology of extracting crude oil price, and the discovery of new fields. Also important steps in this regard, for example, in Taiwan "renewable energy development plan" of the installed capacity of solar power generation capacity planned between the years 2002-2020 in accordance with the aimed to reach 10 percent (Kizgin and Benli, 2013). In addition, a shock to the oil demand for crude oil price associated with unexpected movements in the global business cycle. As well, demand shock for above ground oil inventories, reflects shifts in expectations about future shortfalls of supply relative to demand in the oil markets (Hamilton (2008)). The period includes a lot of fluctuation and two severe accidents. One crash, in recent months of 2008, the so-called worst financial crisis since the great depression. Due to the expansion of financial derivative instruments, which have often been held accountable for giving rise to the financial crisis in 2008 (Ulusoy, 2011).

The second crash experienced in the oil price has declined sharply over $100 per barrel since June 2014 to around $30 pb recently. The decline in oil price poses considerable challenges for fiscal, monetary and structural policy. However, the shocks in oil price create uncertainty and undermine effective fiscal management of oil revenues. According to costs (ErdoÄŸan, 2011) businesses seeking capital, uncertainty affecting the cost of capital is beneficial because it eliminates and reduces compliance costs. Changing oil prices have an effect on the global economic performance and the economy level of any country. The effects of this is positively or negatively dependent on the nature of the relation between oil-exporting economy and oil-importing economy (Le and Chang, 2015) that higher oil revenues play an oil price increase contributes to a transfer of wealth from oil importing to oil-exporting countries (Balcilar and Ozdemir, 2013). Studying the relationship of between crude oil price shocks and economic performance is significant for investors to take necessary investment decisions and for policy makers to regulate financial markets more effectively. Marketable securities, which can be considered as an indicator of accounting standards increase refers to temporary investments that are bought or sold for companies, the evaluation of the fair value method of marketable securities is another important issue (ErdoÄŸan et al., 2016). Hierarchical structure may be useful in the detection of the theoretical description of financial markets and in the search of economic factors affecting special groups of stocks (Ulusoy et al., 2012). This study will examine the impacts of oil price volatility on Nigeria economy 2000-2016.

1.2 Statement of the Problem

It is no more news that the recent fall in crude oil prices that began in July 2014 is seriously affecting the economic activities of Nigeria and also in the areas like foreign reserves, currencies crisis, declining government revenue, and majorly possesses a threat to meet financial obligations as at the right. The implication of this is that it brings a large out pour of policies among policy makers and contributions from the academia. These policies have brought about the need to diversify our economy towards once thriving sectors in the economy, removal of subsidy, the war on corruption and reduction of government activities and government related cost. This study identified two basic research problems. First is the need to determine when agents believe that the effects of shocks will be permanent, shocks feed into their expectations, and the persistence of shock is thus large. In the same vein, when agents believe that the effects of shocks are only temporary, prices quickly return to their initial position. Secondly, the research problem is the need to understand the effect of oil price volatility on four fundamental economic variables (total government revenue, capital importation, exchange rate and foreign exchange reserves) in Nigeria. It is against this background that the researcher seeks to examine the impacts of oil price volatility on Nigeria economy from the year 2000-2016.

1.3   Research Objectives

The general objective or main objective of this study is to examine the impacts of oil price volatility on Nigeria economy from the year 2000-2016. The specific objectives are:

i) To understand the reasons for oil price volatility in the international market from the year 2000-2016

ii) To examine the influence of oil price volatility on Nigeria economy from the year 2000-2016

iii) To investigate the other source of government revenue as an alternative to oil price volatility in Nigeria

1.4   Research Questions

The following are some of the questions which this study intends to answer:

i) What are the reasons for oil price volatility in the international market from the year 2000-2016?

ii) What is the influence of oil price volatility on Nigeria economy from the year 2000-2016?

iii) What are the other sources of government revenue as an alternative to oil price volatility in Nigeria?

1.5  Research Hypotheses

To achieve the above objectives and provide answers to the research questions, the following hypotheses were formulated and stated in a null form;

i) There is no positive and significant relationship between oil price and economic growth”.

ii) There is no positive effect of crude oil volatility on government revenue, foreign exchange rate, capital importation and foreign external reserves

1.6   Significance of the Study

The recent crashing of global oil prices is attracting heated debate among policy makers and academics because of the effect on global output, inflation and economic stability. Nigeria represents a good case study for exploring the effect of exogenous oil price shock on oil exporting countries because of her dependence on crude oil earnings, and the challenges currently confronting the government. The significance of the study therefore is its contribution to literature as well as methodology and the economic importance of oil price uncertainty to growth for oil exporting countries like Nigeria. Thus, the findings of this study are beneficial to the government, policy makers, the private sector and academia.

1.7   Scope of the Study

The focus of the study is Nigeria, and it estimates the impact of crude oil prices on Nigeria’s Economic Growth. The study covered the period of 2000 to 2016. The yearly figures on GDP, Per-capita Income and Crude oil prices and the monthly average prices of Brent, West Texas Intermediate (WTI) and OPEC basket were used as proxies for crude oil prices, while foreign exchange rate, foreign external reserves, government revenue and capital importation were used to proxy economic indicators.