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An increase or decrease in crude oil price can both be pain and gain to the Nigerian’s economy simultaneously, this is because a strong link between the country’s budgetary operations and the happenings in the international oil market exists. Therefore, this research employed the restricted vector auto regression (VAR) technique, to empirically investigate into the impact of oil price volatility on Nigeria’s economy from 1981 to 2014.  Both the Augmented Dickey Fuller and Philip Perron unit root test, revealed that all the variables considered in the study are non-stationary at levels, but achieved stationary after estimating their first difference. Furthermore, majority of the variables were found to have long run relationships, justifying the need to estimate the model through the vector error correction model. The short run coefficient deduced from the VECM revealed that oil price shock price shock significantly impacts economic growth in the short run. Also, both the impulse response function and variance decomposition results confirmed the Dutch disease syndrome associated with Nigeria economy, real GDP negatively responded to oil price shock in all the periods despite the positive response of real government expenditure to oil shock in most period. This implies that economic growth is negatively affected in the long run, even though its impact on the real government expenditure seems to be positive mostly, the Pass-through effect it has on the high inflation rate, declining exchange rate explains its negative effect on real GDP. In conclusion, this study recommends that, for long run macroeconomic growth and performance there is a strong need for policymakers to concentrate on policy that will stabilize and strengthen the macroeconomic structure of the country with a specific focus on; alternative sources of government revenue, aggressive savings from revenue proceeds in periods of oil booms, so as to withstand variations of oil shocks in future.

KEYWORDS: crude oil price, Volatility, economic growth, Vector Auto Regression



1.1. Introduction

This chapter introduces the central issue discussed in this study. The background of the study, the problem necessitating the research, questions generated from the problem statement, the main and specific objectives of the research, research hypothesis and the significance of the study were all explicitly discussed.

1.2. Background of the Study

Crude oil has been one of the most important commodities and a key source of energy in the world ever since its discovery in the 1800s. The importance of oil has risen over years to the extent that a sudden disappearance of oil will undermine the world economy. (Suleiman, 2013).

In terms of price, it is widely known that crude oil is the world’s most unpredictable and unstable commodity. The instability of crude oil can be traced to the Middle East crisis in 1973 which triggered the first oil shock. About 252% increment in the prices of oil was witnessed during the crises, as oil price skyrocketed from US$3 per barrel to whopping double digits of US$11 per barrel. Since then the prices of crude oil have been volatile and in more recent times, changes are rapid and unprecedented. Oyeyemi,(2013) attributes the causes of uncertainty and unpredictability in oil price to global market interaction of demand and supply of the commodity coupled with activities of OPEC. This rapid change has become a great concern to everybody including academics and policy makers.

In Nigeria, the agricultural sector used to be the main stay of the country’s economy before

1970, contributing about 68 percent of the Gross domestic product (GDP), employing about 70 percent of the working population and responsible for about ninety percent of foreign exchange earnings. Following the discovery of the first well in 1956 and as crude oil became an export commodity in Nigeria in 1958, the contribution of oil to the federal government revenue rose from 26.3 percent in 1970 to 82.1 percent in 1974 largely on account of increase in oil prices in the international market (Ogundipe et al, 2014).  The 1973 oil price surge brought massive income into the country’s national purse, and this led to the dependency of the economy on the oil sector as productivity declined in other sectors thereby making the nation a mono-product economy.  For more than three decades the petroleum industry has continued to play a pivotal role in shaping the socio-economic structure of Nigeria as a nation.

1.3. Statement of Problem

Since the first oil shock in 1973, issues that surround oil price volatility, it impacts and consequences on economic growth have continued to spring up and generate controversies among economic researchers and policy makers,  In more recent times changes in oil prices have been found to be more profound, rapid and unprecedented.(Oyeyemi, 2013). While some researchers are of the view that oil volatility promotes economic growth for net-oil exporting countries (when there is a price increase, which increases real national income through higher export earnings). Others argues that it undermines economic growth especially for net-oil importing countries (which experience inflation, lower investment, fall in tax revenues and an increase in budget deficit which will in turn  reduce  general welfare level of an economy). (Oriaki and Iyoha, 2013). The impact (positive or negative) which oil price volatility could have on any economy, depends on what part of the divide (oil exporting/importing) such economy falls into and the nature of such price change (rise or fall). (Oriaki and  Iyoha,2013)

This trending issue has a more complicating impact on Nigeria’s economy, because the country is both an oil exporting and importing economy. (She exports crude oil, but imports refined petroleum products).  Therefore making a conclusive statement on the impact of oil price volatility on the Nigerian economy is difficult.  Thus oil price volatility (rise or fall) can both be pain and gain to the Nigerians economy simultaneously. The crux of this issue is that the country has extremely relied on this commodity over the years, and there is strong evidence that there exists a strong link between budgetary operations and the happenings in the international oil market (price, demand and supply) which has triggered several macroeconomic shocks and challenges in the economy. For instance in 2014 when oil price fell from a peak of  US$147 to less than US$50 per barrel, the Nigerian budget witnessed significant cuts in revenue and expenditure which in turn had a negative contagious effect on all aspects of  Nigerian’s economy.

1.4. Research Questions

The research questions generated from the statement of problems are:

  1. Does Oil price shock have a significant impact on Nigeria economy?
  2. Is there a long run relationship between oil price Volatility and economic growth in


  1. What kind of causal relationship exists among oil price Volatility and Economic Growth and other macro-economic variables in Nigeria?

1.5. Objective of the Study

The main objective of this research is to examine the impact of petroleum price volatility on

Nigeria’s economic growth. Other objectives of this research are to;

  1. Determine the long run implication of oil price volatility on economic growth.
  2. Examine the causal relationship among oil price volatility, economic growth and other macro-economic variables.

1.6. Research Hypothesis

• Hypothesis 1

H0: There exists no significant impact of oil price volatility on economic growth in Nigeria.

H1: There exists a significant impact of oil price volatility on economic growth in Nigeria.

• Hypothesis 2

H0: There exists no significant long run relationship between oil price volatility and economic growth in Nigeria.

H1: There exists a significant long run relationship between oil price volatility and economic growth in Nigeria.

• Hypothesis 3

H0: There exists no causal relationship among oil price volatility, economic growth and other macro-economic variables in Nigeria.

H1: There exists a causal relationship among oil price volatility, economic growth and other macroeconomic variables in Nigeria.

1.7. Significance of the Study

Estimating the consequences of oil price shocks on growth is of great relevance in the case of Nigeria, this is due to the fact that the country qualifies both as a crude oil exporting nation and refined oil product importing nation simultaneously. This study exposes the growth implication of the dynamics and erratic fluctuation in the price of crude oil on Nigeria’s economy. It will serve as a tool for government policies towards mitigating the negative impact of oil volatility in Nigeria. This work may also serve reference and guide for future research, documentation and methodological approach on Oil price volatility and Economic growth in Nigeria.  

1.8. Structure of Research

This study is  divided into five chapters. Chapter one gives a general overview of the study. Chapter two reviews various literatures related to this topic. It includes various concepts, theoretical issues, empirical studies of research relating to this topic. The third chapter focuses on the research methodology it includes, technique of estimation, model specification and it also employs statistical technique in finding statistical relationship between the variables. Chapter four involves the presentation of data, analysis and discussion of results in chapter three. Lastly, chapter five, summarizes the major findings in this research study, concludes and gives policy recommendations of findings.

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