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CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Between 1971 and 2005, Nigeria received an additional US$390 billion in oil-related fiscal revenue (Budina and Wijnbergen, 2008). What does the country have to show for it? Despite this windfall, Nigeria’s population is becoming increasingly destitute, and the economy has remained stagnant (Okonjo-Iweala and Osafo-Kwaako, 2007). The country, like many other oil-rich countries (ORCs), underperforms many resource-poor countries in terms of economic performance (Karl, 2004). Her oil wealth has not been used to propel her to economic success; instead, she suffers from a resource curse, a paradox of poverty in the face of abundant resources, as described by Robinson, Torvik, and Verdier (2006). Why? The Dutch Disease Syndrome (DDS), a structural economic imbalance originating from inadequate management of oil revenue and possibly related shocks, is often regarded as a bane of the country’s economic position. Windfalls from variable oil price surges/shocks sweep heavily across the economy; they grow the oil sector while penalizing the non-oil sector (Mieiro and Ramos, 2010). When the price of crude oil falls, the non-oil sector suffers as a result, resulting in a dramatic drop in economic growth. However, Budina, Pang, and Wijnbergen (2007) argue that DDS alone can not explain the poor growth of the Nigerian economy, particularly in the non-oil sector; rather, the problem is oil price volatility (or shocks) and its impact on other macroeconomic factors. The Nigerian economy, though predominantly rural (Canagarajah and Thomas, 2001), was stable and gradually developing prior to the commercial discovery of crude oil in 1956 (Adedipe, 2004; Odularu, 2007). Agriculture continued to have a dominating position in her economy in terms of contribution to GDP and foreign exchange earnings well into the 1960s (Kwanashie, Ajilima and Garba, 1998). In the era of oil dominance, the economy’s stability and gradual growth were reversed. The opposite scenario was associated with a fall in agriculture’s role. The sector’s contribution to GDP fell from 66 percent in 1958/59 (Kwanashie, Ajilima, and Garba, 1998) to 16 percent in 2004 (Kwanashie, Ajilima, and Garba, 1998). (United State Agency for International Development, 2006). Its contribution to the country’s export revenues and foreign exchange earnings fell from 86 percent in 1955-59 to 1.8 percent in 1996 (Aigbokan, 2001). (Balogun, 2001). These alarming declines have been attributed to the country’s burgeoning oil and mining industries (Kwanashie, Ajilima and Garba, 1998). Balogun (2001) links this problem to bad public resource management and ineffective incentives. This, in turn, could be linked to the massive inflow of oil revenues in the 1970s. The term “black gold” has been used to describe crude oil (Bamisaye and Obiyan, 2006). The resource has reshaped the world economy and, in particular, the Nigerian economy. Crude oil has had a two-edged impact on the Nigerian economy. It has benefited the country in some ways while also proving to be a scourge in others (Ogwumike and Ogunleye, 2008). The contribution of crude oil to GDP increased from 1.6 percent in 1960 to 11 percent in 2001. (Adenikinju, 2006). This contribution is made up of proceeds from oil exports, local crude oil sales for domestic refining, and local natural gas sales. However, due to the significant involvement of foreign investors in the oil sector and the resultant repatriation of profits and dividends, the contribution has been limited (Odularu, 2007). Crude oil also accounts for over 90% of Nigeria’s foreign exchange profits (Adedipe, 2004; Adenikinju, 2006). According to Ogwumike and Ogunleye (2008), the sector outperforms other sectors in terms of contributing to export revenues. For example, in 2005, it accounted for approximately 98 percent of the country’s total exports. Furthermore, the sector contributes to the creation of jobs in the country (Odularu, 2007). However, because of its limited interconnections with the rest of the economy, the contribution has not been particularly important (Ibrahim, 2007). As a result, the industry barely employs 1.3 percent of Nigeria’s entire contemporary sector workforce (Odularu, 2007). Despite the positive effects of oil on the Nigerian economy, the country has not progressed considerably (Odularu, 2007). Due to setbacks induced by oil-related activities, this is the case. As previously stated, the introduction of oil has transformed the economy’s structure. Other industries have shrunk in size and contribution to the economy, while the oil industry has grown. For example, the US Agency for International Development (2006) draws a link between Nigeria’s strong increase in oil production in 2003 and a drop in agriculture as a percentage of GDP from 29 percent in 2003 to 16 percent in 2004. In a similar vein, the manufacturing sector’s contribution to GDP has been declining, despite expansion in the oil industry (Adedipe, 2004). Have Nigeria’s economic woes been caused mainly and directly by oil production? According to Ibrahim (2007), there is little empirical support for the negative influence of natural resources on economic growth and development, citing Perrings and Asuategi (2000). As a result, it is possible that the bad performance of the Nigerian economy is related to factors other than oil operations, such as policy management of the country’s oil resources.

 STATEMENT OF THE PROBLEM

The lack of studies on the impact of energy shocks on economic growth in oil-exporting countries like Nigeria, compared to studies on oil-importing countries, spurred this research (Olomola and Adejumo, 2006). Furthermore, the research looks into the overall conclusions of several previous studies that oil price swings and market disequilibrium have no effect on the Nigerian economy (see Ikla et al, 2012; Chuku, Effiong and Sam, 2010; Olomola and Adejumo, 2006, for a survey). Furthermore, the study argues with these studies on explaining the impact of oil prices on the economy using monetary factors such as monetary supply and interest rates, citing Bernanke et al. as a source of inspiration (1997), a study that concentrates on an oil-importing country, the United States, rather than an oil-exporting country, Nigeria. This research aims to push the boundaries of knowledge by estimating the impact of oil price shocks on Nigerian economic growth using an aggregate demand framework that theoretically connects analytical variables, rather than simply explaining output behavior by oil price and a slew of arbitrarily suggested variables, as previous studies have done.

OBJECTIVES  OF THE STUDY

1. To investigate the impact of the oil price shock on Nigeria’s economy. 2. To examine the impact of oil price shocks in Nigeria between 1970 and 2014.

RESEARCH QUESTION

1. Has the recent increase in oil prices had a substantial influence on the Nigerian economy?

 RESEARCH HYPOTHESIS

The oil price shock has had no meaningful impact on the Nigerian economy, according to Ho. Hi: The impact of the oil price shock on the Nigerian economy is enormous.

 SIGNIFICANCE OF THE STUDY

The global economic impact of the oil price shock has been greater (Hamilton, 2003). The price of oil has been variable for the past three decades, and given its importance in the Nigerian economy, oil price shocks have had major and destabilizing repercussions. Nigeria has been the continent’s leading oil producer, but attacks on oil refineries and the kidnapping of foreign engineers by the movement for Niger Delta independence in the Niger Delta region were cited as one of the reasons for a spike in oil prices from 2006 to 2007. Despite this, Nigeria’s production is generally thought to be insufficient to effect international oil prices, therefore this assumption is correct (CBN, 2008).

 SCOPE OF THE STUDY

The oil price shock in Nigeria is the subject of this research. The study spans the years 1970 to 2014, during which many events disrupted the oil market’s equilibrium.

 LIMITATIONS OF THE STUDY

Financial constraints – A lack of funds impedes the researcher’s efficiency in locating relevant materials, literature, or information, as well as in the data gathering procedure (internet, questionnaire and interview). 2. Time constraint- The researcher will be working on this topic while also doing other academic tasks. As a result, the amount of time spent on research will be reduced.

DEFINITION OF TERMS

The spot price of a barrel of benchmark crude oil is referred to as oil price. Fluctuation: It refers to the variations along the road from one point to another, and it is an irregular rising and dropping in number or amount.

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