EFFECT OF OIL PRICE SHOCK AND SOME SELECTED MACRO-ECONOMIC VARIABLES IN SOME SELECTED NET OIL EXPORTING AND NET OIL IMPORTING COUNTRIES
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EFFECT OF OIL PRICE SHOCK AND SOME SELECTED MACRO-ECONOMIC VARIABLES IN SOME SELECTED NET OIL EXPORTING AND NET OIL IMPORTING COUNTRIES
Abstract
This issue focused on the impact of an oil price shock and some selected macroeconomic factors in net oil exporting and net oil importing countries. Nigeria is a mono-product economy, with crude oil as its principal export commodity; variations in oil prices have an impact on the Nigerian economy, particularly exchange rate movements.
The latter is particularly essential because of the country’s dual status as both an oil exporter and an oil importer, which has evolved in recent years. The study’s aims are:
To evaluate the influence of oil price shocks on some macroeconomic variables including inflation and exchange rates, to investigate the effect of oil price shocks on the real sector of the Nigerian economy, to determine the pathways via which the impact of oil price shocks transmits in the Nigerian economy.
The study used annual data from 1979 to 2014 to investigate the effects of oil price shocks on Nigeria’s macroeconomic performance. The theoretical underpinning of this study is based on Sims’ unconstrained Vector Auto Regression model (1980).
The models are used to estimate the link between changes in oil prices, the inflation rate, GDP, and the real exchange rate. Unit root tests, the Johansen co-integration approach, the variance decomposition test,
the Granger casualty test, and the Vector Auto Regression Mechanism were used to investigate the speed of variable adjustment from the short run dynamics to the long run.
Chapter one
Introduction
1.1 Background of the Study
Oil price (OP) shocks have been a major source of concern worldwide; however, oil-importing countries are the most concerned due to their reliance on imported oil. OP fluctuations undermine developing countries’ macroeconomic stability, including Nigeria, through a variety of mechanisms.
Since the 1973 oil price shocks and the subsequent slowdown, particularly in industrialised countries, research on the relationship between oil price shocks and economic activity has grown (Kose and Baimaganbetov, 2015). These research used various econometric methodologies, with varied results (Hamilton, 1983; Akpan, 2009).
A thorough examination of these research exposes a bias in their emphasis on developed oil-importing countries, leaving out developing countries. A closer look at these research reveals that, while some scholars consider oil price shocks to be a blessing, others believe they are a curse.
In another finding, Hooker (1996) claims that there is no link between oil price shocks and macroeconomic indicators. However, the topic of whether oil price shocks have a substantial role in explaining differences in economic performance in Africa remains disputed.
While this debate continues, the oil price shocks transmission channels process has yet to be definitively established in oil exporting developing economies (Akpan, 2009; Olomola, 2010), despite the fact that (Hamilton, 1983) claims that an increase in oil prices has been identified as one of the primary causes of economic recession.
As a result, this dilemma leaves us with the following objectives: to assess whether oil price shocks have a substantial impact on the economies of Africa’s oil exporting countries, as well as to find the transmission channel of oil price into the economy.
As a result, a few studies that have attempted to look at issues surrounding oil prices and economic activities in Africa, with a particular focus on the significance of oil price shocks on economic performance, have yielded inconclusive results, especially when a group of countries is considered.
Furthermore, the fact that limited studies on Africa’s oil exporting countries have not adequately addressed economic performance in connection to oil price shocks raises questions about whether oil price shocks have a substantial impact in economic performance.
However, the effect of oil price shocks on economic performance is predicted to differ between oil exporting and importing countries. For example, positive (negative) oil price shocks should be interpreted as good (bad) news for oil-exporting (importing) countries.
The price of oil has fluctuated dramatically, which has implications for the performance of macroeconomic indicators and presents significant issues for fiscal and monetary policymakers. According to Awe (2002), crude oil prices have risen on average from US $25 per barrel in 2002 to US $55 per barrel in 2004.
Short-term increases in petroleum prices have a contractionary influence on global demand and GDP. Crude oil prices have risen sharply in recent years, reaching a record nominal high of US $147 in mid-2005 before falling sharply to $87 in 2012, $46 a barrel since 2014, and $41.95 in 2016.
Nigeria, although being the world’s sixth largest oil producer, is extremely exposed to global oil price changes. This is especially true given Nigeria’s weak macroeconomic situation and reliance on crude oil proceeds.
Based on this, the researcher wishes to explore the influence of an oil price shock and some selected macroeconomic variables in some selected net oil exporting and net oil importing countries.
Statement of the Problem
The study is driven by the fact that Nigeria relies substantially on crude oil export income, which has various consequences for the Nigerian economy given the volatility of oil prices in the international oil market.
As a result, it is critical to examine the impact of these changes on the Nigerian macroeconomic system, as well as the pathways through which an oil price shock may be transmitted to the Nigerian economy.
It’s natural that some investors feared the battle in Iraq would cause oil prices to surge. However, so far, oil prices have not risen as much as projected. The explanation is simple: while the US has a strategic interest in Iraq’s future, it is also benefiting from a major domestic oil boom.
This reduces the demand for Iraqi oil, which has only recently begun to make inroads into the market. Furthermore, Iraq only produces approximately 3.2 million barrels per day. That alone is insufficient to have a long-term impact on global oil supplies.
Indeed, with U.S. oil output expected to rise and Saudi capacity still available, supplies have not been significantly affected. We do not expect this to change much, either.
Oil price surges are often short-lived, and any increase caused by the situation in Iraq will be no exception. The supply is ample, which is always what determines the price of oil in the end.
Objectives of The study
The study’s aims are:
To investigate the influence of oil price shocks on some macroeconomic variables such as inflation and exchange rates.
To explore the effect of an oil price shock on the real sector of the Nigerian economy.
To determine the mechanisms through which the impact of oil price shocks is transmitted in the Nigerian economy.
Research Question
Are there any effects of oil price shocks on macroeconomic factors such as inflation and the exchange rate?
Is the real sector of Nigeria’s economy affected by the oil price shock?
Are there any mechanisms via which the impact of oil price shocks is transmitted in Nigeria’s economy?
Research Hypotheses
To ensure the study’s success, the researcher developed the following research hypotheses:
H0: oil price shocks have no substantial effect on several macroeconomic variables, such as inflation and currency rates.
H1: Oil price shocks have a major effect on some macroeconomic indicators, such as inflation and the exchange rate.
H02: There are no notable effects of the oil price shock on the real sector of the Nigerian economy.
H2: The oil price shock has a significant impact on the real sector of the Nigerian economy.
H03: There are no channels via which the impact of oil price shocks is transmitted in the Nigerian economy.
H3: There are channels via which the impact of oil price shocks penetrates into the Nigerian economy.
Significance of the Study
The study will be very important to students, the Nigerian government, and policymakers. The study will provide a good understanding of the impact of an oil price shock and some selected macroeconomic factors in some net oil exporting and net oil importing countries.
Nigeria is heavily reliant on oil, and price drops have a significant impact on the economy. The investigation will provide insight into the answer. The study will also act as a reference for other researchers who would engage on the similar issue.
Scope of the Study
The study’s scope includes the influence of an oil price shock and some selected macroeconomic factors in some selected net oil exporting and net oil importing countries.
Limitations of the study
Financial constraints- Insufficient funds tend to restrict the researcher’s efficiency in accessing relevant resources, literature, or information, as well as in data collecting (internet, questionnaire, and interview).
Time constraints: The researcher will conduct this investigation while also working on other academic projects. This will reduce the amount of time spent on research.
a) AVAILABILITY OF RESEARCH MATERIAL: The researcher has insufficient research material, which limits the investigation.
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