ANALYSIS OF OIL PRICE SHOCK IN NIGERIA (1970-2014).
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ANALYSIS OF OIL PRICE SHOCK IN NIGERIA (1970-2014).
Chapter one
INTRODUCTION
1.1 Background of the Study
Nigeria acquired an additional US$390 billion in oil-related fiscal revenue between 1971 and 2005 (Budina and Wijnbergen, 2008). What does the nation have to show for this? Despite this windfall, Nigeria’s population is becoming increasingly destitute, and the economy has remained stagnant.
The country, like many other oil-rich countries (ORCs), performs economically below many resource-poor countries (Karl, 2004). Her oil wealth has not been used to propel her to economic success; instead, she suffers from what Robinson, Torvik, and Verdier (2006) refer to as a resource curse, a paradox of poverty amidst abundant resources.
Why? The Dutch Disease Syndrome (DDS), a structural economic imbalance caused by inadequate oil income management and possibly shocks, is often regarded as a major source of the country’s economic problems.
Windfalls from variable oil price increases/shocks overwhelmingly move across the economy, expanding the oil sector while penalising the non-oil sector (Mieiro and Ramos, 2010).
When the price of crude oil declines, the non-oil sector suffers, exacerbating the dramatic drop in economic development. Budina, Pang, and Wijnbergen (2007), on the other hand, argue that DDS alone cannot explain Nigeria’s poor growth, particularly in its non-oil sector; rather, they pinpoint oil price volatility (or shocks) and its impact on other macroeconomic factors as the source of the problem.
Prior to the commercial discovery of crude oil in 1956 (Adedipe, 2004; Odularu, 2007), the Nigerian economy was stable and developing, despite being primarily agrarian (Canagarajah and Thomas, 2001).
The comfortable scenario persisted throughout the 1960s, when agriculture dominated her economy in terms of GDP contribution and foreign exchange profits (Kwanashie, Ajilima, and Garba, 1998). The economy’s stability and gradual expansion were reversed during the era of oil-dominant economies.
The reversed position was synonymous with agriculture’s declining role. The sector’s GDP contribution decreased from 66% in 1958/59 (Kwanashie, Ajilima and Garba, 1998) to 16% in 2004 (United States Agency for International Development, 2006).
Its share of the nation’s export revenues and foreign exchange earnings fell from 86% in 1955-59 (Aigbokan, 2001) to 1.8% in 1996 (Balogun, 2001). These worrying declines have been attributed to the country’s developing oil and mining industries (Kwanashie, Ajilima, and Garba, 1998).
Balogun (2001) links this problem to inadequate public resource management and unsuitable incentives, which may have been linked to the massive inflow of oil profits in the 1970s. Crude oil is sometimes referred to as ‘black gold’ (Bamisaye and Obiyan, 2006).
The resource has reshaped the world economy in general, and Nigerian economics in particular. The impact of crude oil on the Nigerian economy has been two-sided.
It has benefitted the country in some ways while also serving as a curse in others (Ogwumike and Ogunleye, 2008). Crude oil’s contribution to GDP increased from 1.6% in 1960 to 11% in 2001 (Adenikinju 2006).
This contribution is made up of proceeds from oil exports, the sale of crude oil for domestic refining, and the sale of natural gas. However, the contribution has been restricted due to the significant engagement of foreign investors in the oil sector, resulting in the repatriation of revenues and dividends overseas (Odularu, 2007).
Crude oil also accounts for more than 90% of Nigeria’s foreign exchange profits (Adedipe, 2004; Adenikinju 2006). According to Ogwumike and Ogunleye (2008), the sector contributes more to export income than any other sector.
For example, it accounted for more than 98% of all exports from the country in 2005. Furthermore, the sector helps to provide jobs in the country (Odularu, 2007). However, the contribution has been relatively little due to poor links with the rest of the economy (Ibrahim, 2007).
As a result, the industry accounts for only 1.3% of overall contemporary sector employment in Nigeria (Odularu, 2007). Despite the positive effects of oil on the Nigerian economy, the country has not grown considerably (Odularu, 2007).
This is due to difficulties resulting from oil-related activity. As previously stated, the introduction of oil has had a negative impact on economic structure. Other industries have decreased in size and contribution to the economy, whilst the oil sector has increased in size.
For example, the US Agency for International Development (2006) draws a link between Nigeria’s strong increase in oil production in 2003 and a drop in agriculture as a percentage of GDP from 29% in 2003 to 16% in 2004. Similarly, the manufacturing sector’s contribution to GDP has declined, while the oil industry has grown (Adedipe, 2004).
Have Nigeria’s economic failures been solely and directly driven by oil activities? Ibrahim (2007), citing Perrings and Asuategi (2000), notes that there is less empirical support for the negative influence of natural resources on economic growth and development.
Thus, it is possible that Nigeria’s poor economic performance is related to reasons other than oil operations, such as policy management of the country’s oil resources.
1.2 Statement of the Problem
This study is motivated by the scarcity of research on the impact of energy shocks on economic growth in oil-exporting nations such as Nigeria, as opposed to studies on oil-importing countries (Olomola and Adejumo, 2006).
Furthermore, the study investigates the overall conclusions of several previous studies that oil price fluctuations/market disequilibria have no impact on the Nigerian economy.
Furthermore, the study disagrees with these studies on explaining the impact of oil prices on the economy using monetary variables such as monetary supply and interest rates, pointing out that their premise is based on Bernanke et al. (1997), a study that focuses on an oil importing country, the United States, rather than an oil exporting country, Nigeria.
This study aims to push the boundaries of knowledge by estimating the impact of oil price shocks on Nigerian economic growth using an aggregate demand framework that theoretically connects analytical variables, rather than simply explaining output behaviour by oil price and a slew of arbitrarily suggested variables, as previous studies have.
1.3 GOALS OF THE STUDY
1. To investigate the impact of an oil price shock on the Nigerian economy. 2. To investigate the oil price shock in Nigeria from 1970 to 2014.
1.4 RESEARCH QUESTION.
1. Does the oil price shock have a big influence on Nigeria’s economy?
1.5 Research Hypothesis
Ho: The oil price shock has had no meaningful influence on Nigeria’s economy. Hi: The oil price shock has a big influence on Nigeria’s economy.
1.6 Significance of the Study
The impact of oil price shocks on the global economy has been greater (Hamilton 2003). The price of oil has been fluctuating during the last three decades, and given its importance to the Nigerian economy, oil price shocks have had major and destabilising impacts.
Nigeria has been the continent’s largest oil producer, but attacks on oil refineries and kidnappings of foreign engineers by the Niger Delta liberation movement were claimed to be one of the causes of a spike in oil prices between 2006 and 2007.
Despite this, Nigeria’s production is generally deemed insufficient to effect international oil prices, therefore this assumption is reasonable (CBN, 2008).
1.7 Scope of the Study
This study focuses on the oil price shock in Nigeria. The investigation spans the years 1970 to 2014, during which various events disrupted the oil market’s equilibrium.
1.8 Limitations of the Study
1. Financial constraint- Insufficient funds restrict the researcher’s efficiency in accessing relevant resources, literature, or information, as well as in data collecting (internet, questionnaire, and interview). 2.
Time constraints: The researcher will conduct this study while also working on other academic projects. This will reduce the amount of time spent on research.
1.9 Definition of Terms
Oil Price: Refers to the current spot price of a barrel of benchmark crude oil. Fluctuation is an irregular rise and fall in number or amount that refers to variations along a journey from one point to another.
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