IMPACT OF OIL PRICES ON THE NIGERIAN ECONOMY

(Banking and Finance)
IMPACT OF OIL PRICES ON THE NIGERIAN ECONOMY
ABSTRACT

This study examined the impact of oil prices on the Nigerian economy. In light of the empirical review and other discussions, a number of questions arose as to whether there is relationship between oil prices, the Nigerian economy proxied by Gross Domestic Product (GDP), exchange rate, fixed gross capital formation, inflation rate as well as lending rate. Using the Ordinary Least Square (OLS) regression technique with the aid of E-view 7.0 software, the empirical findings reveal among other things that there is a positive relationship between oil prices and the Nigerian economy. The study recommends that the government should maximize the revenue from increases in crude oil prices in Nigeria and that increases in crude oil prices should be channeled to investments in infrastructural development in Nigeria.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study                    
Statement of the Research Problem                    
Research Objectives                             
Hypotheses of the study                        
Relevance of the study                        
Scope of the Study                         
Limitation of the Study                        
CHAPTER TWO: LITERATURE REVIEW
Introduction                             
History of crude oil in Nigeria                         
Overview of Nigerian Economy                    
The Impact of Oil Production on the Nigerian Economy    
Theoretical Framework                        
Theories of Economic Growth                                                                                                                                                                                                
Empirical Literature                            
CHAPTER THREE: METHODOLOGY OF THE STUDY
Introduction                                
Model Specification                             
Sources of Data                            
Estimation Technique                             
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
Data Presentation and Analysis                        
CHAPTER FIVE:    SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings                            
Recommendations                            
Conclusion                                     
Bibliography                                
Appendix                                         
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
The price of crude oil which has contributed about 80% of the country’s GDP rose from $13 per barrel to a high of $125 per barrel between 2000-2010. This also resulted in significant increase in revenue generated. The annual budget expenditure between the period increased from 470 billion (naira) to 2.676 trillion (naira) (Ogbonna, and Appah, 2012). Budgeted Capital expenditure stood at 36.2% of total budget in 2000 which amounted to 300 billion naira and 20.6% in 2009 amounting to 1.524 trillion naira. Total recurrent expenditure increased between this period as a result of increase in salaries and expansion of government ministries and agencies (Nigeria budget office, 2009). In addition to the low capital budget ratio, government ministries have been unable to deploy capital funds effectively. One of the reasons being that some of these ministries still operate an ineffective manual system which has given rise to inconsistency, lack of transparency and accountability problems. Increased unemployment, poor health facilities and lack of adequate power supply are some of the economic problems that have resulted. Available evidence in shows that the country has proven oil reserves of 36 billion barrels, condensate of 4 billion barrels, proven gas reserves of 187 trillion cubic feet and the present average daily production of oil is 2.6 million bbl/b (Agbogun, 2004, Egbogah, 2010).
Previous studies on the Nigeria economy in the last decade show that the petroleum industry has been playing a dominant role and occupies a strategic position in the economic development of Nigeria (Azaiki and Shagari (2007). This is evidenced by the total oil revenue generated into the Federation Account from 2000 to 2010 which amounted to N34.2 trillion while non-oil was N7.3 trillion, representing 82.36% and 17.64% respectively. The mean value of oil revenue for the 10 year period is N3.42 trillion compared to non-oil revenue at N732.2 billion (CBN Statistical Bulletin, 2009). Further evidence was ten year’s average crude oil and condensates production of 832,866,752.1 barrels from 2000 to 2009.
The importance of crude oil to the economic development of Nigeria cannot be over emphasized, and the evidence presented in Binda and Van Wijnbergen (2008) which states that Nigeria gained an extra $390 billion in oil-related fiscal revenue between 1971 and 2005, or 4.5 times 2005 gross domestic product (GDP).
According to Odularu (2008), outside of the energy sector, Nigeria’s economy is highly inefficient. Moreover, human capital is underdeveloped. Nigeria ranked 151 out of 177 countries in the United Nations Development Index in 2004 and non-energy-related infrastructure is inadequate. Nigeria’s economy is struggling to leverage the country’s vast wealth in fossil fuels in order to displace the devastating lack that affects about 57 percent of its population. In 2009, persistent inflation and environmental degradation led to deprivation of means of livelihood and other socio-economic factors to the people of Niger Delta which is the major oil producing state in Nigeria. Despite the fact that crude oil has been the source of Nigerian economy, the economy is faced with high rate of unemployment, wide spread oil spillage, increasing poor standard of living as a result of decreasing gross domestic product, per capita income and high rate of inflation which has led to the effect of the economic development (Nwezeaku, 2010).
Bawa and Mohammed (2007) assert that “Nigeria with all its oil wealth has performed poorly, with GDP, per capita today not higher than at independence in 1960”. This means that an average Nigerian was better off before independence in 1960. Bawa and Mohammed acknowledged poor performance of Nigeria’s economy but did not provide any empirical evidence or percentage figures by way of hypotheses testing and thereby confirming the fact that some of their works must have been based on assumptions that cannot be statistically verified and generalized (Baridam, 2008, and Eromosele, 1997).
Oil revenue which is supposed to be a source of finance for economic development has turned out to be a bone of contention between many interest groups, precisely the government and oil and gas companies.
STATEMENT OF THE RESEARCH PROBLEM
Unfortunately, the economy has been bedeviled by sustained underdevelopment evidenced by poor human developmental and economic indices including poor income distribution, militancy and oil violence in the Niger Delta, endemic corruption, unemployment, relative poverty (Nwezeaku, 2010). Irrespective of Nigeria’s huge oil wealth, the country has remained one of the poorest in the world. In particular, the Niger Delta which produces the oil wealth that accounts for the bulk of Nigeria’s earnings has also emerged as one of the most environmentally degraded regions in the world evidenced from the World Wildlife Fund report released in 2006 (Ekaette, 2009).
The problems with Nigerian economy have been traced to failure of successive governments to use oil revenue and excess crude oil income effectively in the development of other sectors of the economy (Yakub, 2008). Over all, there has been poor performance of national institutions such as power, energy, road, transportation, politics, financial systems, and investment environment have been deteriorating and inefficient (Nafziger, 2008).
In the light of the above, the relevant research questions are:
What is the relationship between oil price and the Nigerian economy, proxied by (Gross Domestic Product GDP)?
What is the relationship between oil price and exchange rate?
What is the relationship between oil price and gross fixed capital formation?
Is there any relationship between oil price and inflation rate?
What is the impact of oil price on lending rate in Nigeria?
RESEARCH OBJECTIVE
The objective of this research work includes the following:
To examine the relationship between oil price and Gross Domestic Product (GDP).
To ascertain if there is relationship between oil price and exchange rate.
To find out if the relationship between oil prices and gross fixed capital formation.
To examine the relationship between oil prices and inflation rate.
To examine the relationship between oil prices and lending rate in Nigeria.
HYPOTHESES OF THE STUDY
This aspect of the research work is concerned with the acceptance or rejection of decision.
The research hypotheses relevant to the above stated questions and objective are:
There is no positive relationship between oil price and Gross Domestic Product (GDP).
There is no positive relationship between oil price and exchange rate.
There is no positive relationship between oil price and exchange rate.
RELEVANCE OF THE STUDY
It is expected that this study would consolidate existing literature on the issues surrounding the oil price and Nigerian economy. The study would also facilitate the examination of the effects of oil price on Nigerian economy and thus boosting the empirical evidence from Nigeria. Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in economic modeling and policy simulation with respect to the selected variables examined in the study.
The result of the study would be of benefits to investment analysts, investors and corporations.  
It will also be useful in stimulating public discourse given the dearth of empirical researches in this area from emerging economies like Nigeria. Finally, it would also add to the available literature on the area of study while also providing a platform for other researchers who may want to further this study.   
SCOPE OF THE STUDY
It is a Nigerian specific-study which focuses on the impact of oil prices on the growth of the Nigerian economy. It covers a period of 26 years (1985 to 2010). Relevant data are sourced from the Nigeria Stock Exchange and the Central Bank of Nigeria Statistical bulletin (2011, 2012).
LIMITATION OF STUDY
The conduct of research in Nigeria and indeed all developing countries is imbued with a lot of limitation. However, in this particular research, the following limitations were encountered.
The time limit within which the study must be completed.
Inadequate of financial resource required to promptly complete the study.
In addition, research work is not an easy task, especially when one is researching into an area that is new of which people have not worked on.
There are bound to be some impeachments that would crop up from one place or the other.   

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