Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The Growth Implications of Oil Price Shock in Nigeria

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The Growth Implications of Oil Price Shock in Nigeria

Article excerpt

Abstract

Oil prices traditionally have been more volatile than many other commodity or asset prices since World War II and has have a lot implications on major macroeconomic variables such as inflation, money supply, capacity utilisation and economic growth to mention a few. This paper investigated the growth implications of crude oil price shock in Nigeria. Empirical analysis was conducted by applying the multiple regression of the ordinary least square technique to the annual data on the Nigeria economy for the period 1979-2010. The model was found to be significant and most of its estimates are as expected. The study revealed that a little shock in the price of crude oil in the global oil market in the current period will produce a long-term effect on economic growth in Nigeria. The study suggested the need for the policy makers to diversify the productive base of the economy to other sectors such as Agriculture, Manufacturing, Tourism and other service oriented sectors to open up a wider spectrum for inflow of income to the economy and break the overdependence of the economy on oil sector.

Keywords: crude oil prices, economic growth, oil revenue, government expenditures.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Oil being the mainstay of the Nigerian economy plays a vital role in shaping the economic and political destiny of the country. Although Nigeria's oil industry was founded at the beginning of the century, it was not until the end of the Nigeria civil war (1967-1970) that the oil industry began to play a prominent role in the economic life of the country. In the period between 1960 and 1966, Agriculture contributed about 58 percent to the country's Gross Domestic Product (GDP) and employed over 60 percent of her work force. But in the 1970s Agriculture lost its pre-eminent position to Mining and particularly to Petroleum due to occurrence of oil boom in the period (i.e.1970s). Oil was discovered in Nigeria in 1956 at Oloibiri in the Niger Delta after half a century of exploration. Nigeria joined the ranks of oil producers in 1958 when its first oil field came on stream producing 5,100 bpd. After 1960, exploration rights in onshore and offshore areas adjoining the Niger Delta were extended to other foreign companies.

Since oil was discover in commercial quantity in Nigeria, oil has dominated the economy of the country. In Nigeria, oil accounts for more than 90 percent of its exports, 25 percent of its Gross Domestic Product (GDP), and 80 percent of its government total revenues. Thus, a small oil price changes can have a large impact on the economy. For instance a US$1 increase in the oil price in the early 1990s increased Nigeria's foreign exchange earnings by about US$650 million (2 percent of GDP) and its public revenues by US$320 million a year. Nigeria's reliance on oil production for income generation clearly has serious implications for its economy.

Oil prices traditionally have been more volatile than many other commodity or asset prices since World War II. The trend of demand and supply in the global economy coupled with activities of OPEC consistently affects the price of oil. The recent changes in oil prices in the global economy are so rapid and unprecedented. This is partly due to increased demand of oil by China and India. However, the current global economy melt down suddenly counteracted the skyrocketing oil price. At the beginning of the crisis oil price crashed below $40/b in the world market which had serious consequences on Nigeria fiscal budget which led to the downward review of the budget. Today oil price is oscillating between $60/b and $75/b. This rapid change has become a great concern to everybody including academics and policy makers; therefore a study of this kind is timely.

Oil prices have witnessed profound fluctuations and this has implications for the performance of macroeconomic variables, posing great challenges for policy making. …

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