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THE IMPACT OF CRUDE OIL PRICING ON THE GROWTH OF THE NIGERIAN ECONOMY

 Format: Microsoft Word   Chapters: 1-5

 Pages: 70   Attributes: STANDARD RESEARCH

 Amount: 3,000

 Feb 19, 2020 |  11:01 pm |  1650

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

The fact that the demand for oil is a derived demand has made oil a major source of energy in the world in general today; its role in the economy implies that its demand is not an end in itself. Crude oil has metaphorically been referred to as the ‘black gold’ (Bamisaye and Obiyan, 2006). Nigeria’s resource endowment is not disputable; the country is ranked as the largest oil producer in Africa and occupies the thirteenth position in the world. It has a proven crude oil reserve of 37,062 million barrels, natural gas reserve of 5,284.3 billion (OPEC Annual Statistical Bulletin, 2016) Thus, its reserve base is ranked the tenth in the world and the second largest in Africa. Following the rebasing of the country’s GDP, it became the largest economy in Africa. The impact of crude oil on Nigerian economy has been double-edged. It has benefited the country in some ways, and has in many other ways turned out to be a curse (Ogwumike and Ogunleye, 2008).

Prior to the discovery of crude oil in commercial quantity in 1956 (Adedipe, 2004; Odularu, 2007), the Nigerian economy, though largely agrarian (Canagarajah and Thomas, 2001), was stable and steadily growing. The pleasant situation continued into the 1960s when agriculture played a dominant role in her economy in terms of contribution to GDP and foreign exchange earnings. The stability and gradual growth of the economy reversed in the era of oil-dominant economy. The reversed situation was synonymous with decline in the roles played by agriculture (Kwanashie, Ajilima and Garba, 1998).The sector shrank in GDP contribution from 66% in 1958/59 to 16% in 2004 (United State Agency for International Development, 2006). Oil price surged to a historic height in 2008 when it was sold at $140 per barrel; this was about the highest price recorded in the oil market in recent times (Sanya, 2015). Political and economic decisions in the oil industry are causes of oil price movements, while many writers focused on the economic factors, the day-to-day prices of oil may be determined by free market forces, but sharp shifts in price level are essentially motivated by political factors, (Hamilton, 2009) agrees with (Mabro, 1991) that supply disruptions are a significant factor of oil price volatility. Naturally, the bigger the oil-price increase and the longer higher prices are sustained, the bigger the macroeconomic impact (Majidi, 2006).  The oil sector has remained the engine of growth in the Nigerian economy for decades. Due to the fact that Nigeria is gifted with richness in human labor, land and mineral resources, the country still wrestles with multitudes of economic encounters that have continued to impede her journey on the path of economic growth. The economy of Nigeria gradually became dependent on crude oil as productivity declined in other sectors (Englama et al, 2010). Oil being a stabilizing rope of the Nigerian economy plays an important role in shaping both the political and economic fate of the nation. From an economic point of view, (Baumeister and Peerman, 2009) explains that oil price shocks results from low price elasticity of demand and supply. The result of this is that large price variation is required to clear the market, that is, to restore the market to equilibrium. Hence decisions made by the oil sector, which are mostly long term, has a physical impact on the welfare of the common people in the nation.

Crude oil pricing being the major focus of this study requires international market for it to be effective. A stable oil market is required for a healthy world economy but this stability can only be achieved through a united effort of leading producers and consumers.

It is this issue of volatility of crude oil prices in Nigeria that gave birth to Nigeria national petroleum corporation (NNPC), the petroleum product pricing regulatory agency (PPPRA) and an international market called organization of petroleum exporting countries [OPEC].

1.2       Statement of the Problem

Crude oil being a major sources of revenue in Nigeria and the world in general plays an important role in shaping and influencing the Economic and political fate of the country. In Nigeria, oil plays a critical role in the conduct of fiscal and monetary policies because it accounts  for an average of 80 percent of government revenue, 90-95 percent of foreign exchange earnings and 12 percent of the real gross domestic product (Anyanwu, 1997). ). Irrespective of Nigeria’s huge oil wealth, the country has remained one of the poorest in the world. And its effect on growth of the Nigeria economy as regards return and productivity is still questionable. Higher oil prices may reduce economic growth, generate stock exchange panics and produce inflation which eventually leads to monetary and financial instability in the country which will also lead to high interest rates and even a plunge into recession. The volatility in the prices of crude oil have resulted in unfavorable balance of payments, or unequal flow of money, which led to reduction in money supply which in turn increases the exchange rate to currencies in other countries causing issues of inflation due to the fact that oil price has a direct effect on the prices of goods produced using petroleum products as an intermediate input. Thus this leads to increase in the cost of production. As such in order to offset the increase in the cost of production, the producers in turn pass the production costs to the consumers by increasing the price of the goods. Thus, consumption will decrease as a result of the increase in price, which will further leads to reduction in investment as a result of the fall in consumption, hence, output also reduces, and production. More so, fall in the standard of living whereas salaries do not increase with rising oil prices, It also argued that Nigeria is faced with consistent devalued standard of living. The current living standard in Nigeria showed that about 60% of her citizens live below one dollar. Moreover, the sector contributes to provision of employment in the country, but the contribution has however not been relatively significant because jobs are being lost on daily basis; public sector struggle to pay salaries whereas salaries do not increase with rising oil prices, as a result, wage growth has increasingly delayed GDP growth, and government consistently face challenge of foreign exchange volatility and budget deficit.

1.3 Research Questions

This study will be asking questions such as :

                   i.        Does crude oil pricing affect the growth of the Nigerian economy?

                 ii.        How do we profer solutions  to the negative impact of crude oil pricing?

1.4   Aims and Objective of the Study

The aim of this research is to ascertain the impacts of crude oil pricing on the nigerian economy.

This study has the following key objectives:

     i.        To examine the impact of crude oil pricing on the growth of the Nigerian economy.

   ii.        To profer solutions to the effects crude oil pricing has on the growth of the Nigerian economy.

1.5  Hypothesis:

In effort to realize the objectives of the study, the following hypothesis will be tested:

H1: There is a positive impact of crude oil pricing on the growth of the Nigerian economy.

H0: There is no positve impact of crude oil pricing on the growth of the Nigerian economy. 

1.6 Significance of the Study

The determination of OPECs crude oil pricing is highly essential this is because crude oil price volatility has remained a fact of life. Crude Oil being a major source of foreign exchange to most OPECs members needs suitable pricing policy. The total revenue accumulating to these countries is a function of their oil export and prices of this resource.                                 

A prudent point is that OPEC is an organization of developing countries and not of rich commercial interest, therefore the strife for OPEC is to ascertain fair revenues and effective control over their oil, which represents a major part of their foreign earnings.

It’s obvious from various studies that the effort to bring sanity on the cause of oil price volatility in Nigeria has failed because they were not stemmed from empirical research. Therefore this study will contribute to this regards by buttressing the issues related to the volatility of crude oil pricing, it will also serve as a guide to policy makers and the general masses on how to tackle the challenges faced from such volatilities.

1.7  Scope  of the Study

This study lays emphasy on the impact of crude oil pricing on the Nigerian economy. However, this study covers a period  of (1985-2015).

1.8  Organisation of the Study

This study  comprises of five chapters, each dealing with different aspects.

Chapter one highlights the subject matter  under consideration, it considers the role of OPEC the significance of the study, objective of the study, crude oil pricing and its impact on the Nigerian economy.

Chapter two of this project consists of Literature Review and Theoretical Framework that are likely to be used in the research.

Chapter  three  of this study outlines the research approach and methods, model specification , as well as establishing how the methods will be applicable to the research questions.

Chapter four outlines the analysis, presentation and the interpretation of results which has been derived in chapter three.

Chapter five is made up of summary of the research work and also recommendations for policy making,This will therefore be followed by References as signposted in the research.


REFERENCE

Adedipe, B. 2004.  The impact of oil on Nigeria’s economic policy formulation. [Online]. Available from: http://www.odi.org.uk/events/ 2004/06/16/32-background-paper-sunday-abiodun-adedipe-impact-oilnigerias-economic-policy-formulation.pd

Ademola A., 1998. Consequences of oil price shocks on the economic growth of the Nigerian economy: An econometric analysis. . Journal on social economics, 3(3):2-4, 6-7.

Adamu, A. (2015), ‘‘the Impact of Global Oil Prices on the Nigerian EconomicCrude Oil Production and its Revenue’’, Research paper presented at the   Middle East Conference on Global Business, Economics, Finance and Banking, Dubai – UEA. Downloaded from: www.globalbizresearch.org. 

Alley, Ibrahim  Oil Price Shocks And Nigerian Economic Growth (United State Agency for International Development, 2006).European Scientific Journal   July  2014  edition vol.10, No.19   ISSN: 1857 – 7881 (Print)  e - ISSN 1857- 7431 375

Bamisaye, O. A. and Obiyan, A. S. 2006. Policy analysis of oil sector in Nigeria. European Journal of Social Sciences. [Online]. Available from: http://eurojournals.com/ejss%203%201.pdf#page=43

Baumeister, C. and Peersman, G. 2009. Sources of the volatility puzzle in the crude oil market. [Online]. Available from: http://www.feb.ugent.be/ FinEco/christiane/documents/BP2_dec09.pdf

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