IMPACTS OF OIL PRICE VOLATILITY ON NIGERIA ECONOMY (2000-2016).
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IMPACTS OF OIL PRICE VOLATILITY ON NIGERIA ECONOMY (2000-2016).
Chapter one
INTRODUCTION
1.1 Background for the Study
Economic expansion has a significant impact on industrial innovation. The first fluctuations in crude oil prices in the 1970s prompted economists to regard sudden movements in the oil price as a fundamental source of economic fluctuations.
For example, Hamilton (2005) claims that nine of the ten recessions in the United States were preceded by large positive increases in crude oil prices in the last few decades.
Furthermore, recent highs in the crude oil market have raised concerns about the slowing of several industrialised countries’ economies, including Nigeria’s. The price of a barrel of Brent crude oil in European countries dropped from more than $100 per barrel in September 2014 to less than $46 per barrel in January 2015.
Furthermore, the decrease was the third largest in the previous 30 years, with particularly striking parallels to the incident in 1985-86, reigniting interest in the effects of fluctuating oil prices on the economy.
As a result, this relationship has piqued the interest of academic researchers such as Hamilton (2009), Kilian and Vigfusson (2011), Edirneligil and Mucuk (2014), and Ftiti et al. (2016), who have published some of the most prominent publications in the subject.
The effects of oil price changes on economic growth, as well as the mechanisms behind them, differ between oil-exporting and oil-importing countries.
Over the years, concerned economists have investigated the various factors that contribute to oil price variations. For example, supply shocks caused by political events such as wars and revolutions in OPEC member nations, technological advances in crude oil extraction, and the discovery of new fields.
Important efforts in this respect include, for example, Taiwan’s “renewable energy development plan” for installed solar power generation capacity between 2002 and 2020, with a target of 10% (Kizgin and Benli, 2013).
Furthermore, unexpected shifts in the global business cycle have caused a shock to crude oil demand and price. Furthermore, demand shocks for above-ground oil stockpiles reflect shifts in oil market expectations regarding future supply deficits relative to demand (Hamilton 2008).
The period is marked by significant fluctuation and two serious accidents. One crash occurred in the late months of 2008, the so-called worst financial crisis since the Great Depression. Because of the proliferation of financial derivative instruments, which were frequently blamed for causing the 2008 financial crisis (Ulusoy, 2011).
The second oil price drop has seen prices fall from over $100 per barrel in June 2014 to roughly $30 per barrel recently. The drop in oil prices creates significant issues for fiscal, monetary, and structural policy.
However, oil price shocks cause uncertainty and impede effective fiscal management of oil revenues. According to Erdoğan (2011), businesses seeking capital benefit from uncertainty as it lowers compliance costs.
Changing oil prices have an impact on global economic performance as well as any country’s economy. The effects of this are positive or negative depending on the nature of the relationship between the oil-exporting and oil-importing economies (Le and Chang, 2015), and an increase in oil prices contributes to a transfer of wealth from oil-importing to oil-exporting countries.
Studying the relationship between crude oil price shocks and economic performance is important for investors to make informed investment decisions and for policymakers to better manage financial markets.
Marketable securities are temporary assets bought or sold for organisations, and evaluating their fair value is crucial (Erdoğan et al., 2016). They can serve as a signal of increasing accounting standards.
Hierarchical structure may be effective in detecting theoretical descriptions of financial markets and in the search for economic factors influencing specific groups of stocks (Ulusoy et al., 2012). This study will look at the effects of oil price volatility on the Nigerian economy from 2000 to 2016.
1.2 Statement of Problem
It is no longer news that the recent drop in crude oil prices, which began in July 2014, is having a significant impact on Nigeria’s economic activities, including foreign reserves, currency crises, declining government revenue, and a major threat to meeting financial obligations, as shown to the right.
This implies that there will be a big outpouring of policies among policymakers, as well as contributions from academia. These policies have resulted in the necessity to diversify our economy towards once-thriving sectors, the elimination of subsidies, the fight against corruption, and the reduction of government operations and costs.
This study revealed two fundamental research problems. The first step is to establish when agents anticipate that the impacts of shocks will be lasting; shocks feed into their expectancies, increasing shock persistence.
Similarly, when agents assume that the impact of shocks are merely temporary, prices soon recover to their previous levels. Second, the study topic is to determine how oil price volatility affects four key economic variables in Nigeria (total government revenue, capital imports, currency rate, and foreign exchange reserves). Against this backdrop, the researcher tries to investigate the effects of oil price volatility on the Nigerian economy between 2000 and 2016.
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