Full Project – THE IMPACTS OF OIL PRICE VOLATILITY ON NIGERIA ECONOMY (2000-2016)

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CHAPTER ONE

                                     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 (Erdoğan, 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 (Erdoğan 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.

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Full Project – THE IMPACTS OF OIL PRICE VOLATILITY ON NIGERIA ECONOMY (2000-2016)