Impacts Of Oil Price Volatility On Economy
(Case Study Of Nigeria Economy)
Oil price volatility, characterized by unpredictable fluctuations in the price of oil, exerts significant impacts on the economy across various sectors. Fluctuations in oil prices influence consumer behavior, corporate investment decisions, and government policies, impacting economic stability. In times of rising oil prices, consumers experience increased fuel and energy costs, leading to reduced discretionary spending and higher inflationary pressures. This, in turn, can dampen consumer confidence and weaken overall economic growth. Additionally, industries heavily reliant on oil, such as transportation and manufacturing, face elevated production costs, potentially leading to reduced profitability and job losses. Conversely, during periods of declining oil prices, consumers may benefit from lower fuel costs, stimulating spending and economic activity. However, oil-producing nations may face reduced revenue, impacting government budgets and investment initiatives. Moreover, heightened oil price volatility can disrupt financial markets, causing uncertainty and affecting investor sentiment. To mitigate the adverse effects of oil price fluctuations, governments often implement policies aimed at diversifying energy sources, promoting renewable energy technologies, and building strategic reserves. Additionally, businesses may adopt risk management strategies, such as hedging, to mitigate the impact of oil price volatility on their operations. Overall, the dynamic nature of oil prices underscores the interconnectedness between energy markets and the broader economy, highlighting the need for proactive measures to manage volatility and promote economic resilience.
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the study
1.2 Statement of problem
1.3 Objective of the study
1.4 Research Hypotheses
1.5 Significance of the study
1.6 Scope and limitation of the study
1.7 Definition of terms
1.8 Organization of the study
CHAPETR TWO
2.0 LITERATURE REVIEW
CHAPETR THREE
3.0 Research methodology
3.1 sources of data collection
3.3 Population of the study
3.4 Sampling and sampling distribution
3.5 Validation of research instrument
3.6 Method of data analysis
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS AND INTERPRETATION
4.1 Introductions
4.2 Data analysis
CHAPTER FIVE
5.1 Introduction
5.2 Summary
5.3 Conclusion
5.4 Recommendation
Appendix
INTRODUCTION
1.1 Background to the Study
Economic growth plays a key role in industrial innovation (Malatyali, 2016). The first fluctuations in crude oil prices that occurred in 1973s have made economists to view sudden movements in the oil price as a fundamental source of economic fluctuations, for example, Hamilton (2005) suggests that in the last few decades, nine of the ten recessions in the USA were preceded by large positive increases in crude oil price. Moreover, the very recent highs registered in the crude oil market are causing concern about slowing in the economies of many developed countries including Nigeria. The price of a barrel of Brent crude oil in European countries fell from than $100 p/b in Sept 2014 to less than $46 p/b in January 2015. Besides, the decline was the third largest over the past 30 years, has particularly interesting parallels with the episode in 1985-86, therefore, renewed interest in the impacts of fluctuating oil prices on the economy. Therefore, this relation has captured increasing attention of academic researchers such as: (Hamilton, 2009; Kilian and Vigfusson, 2011; Edirneligil and Mucuk, 2014; Ftiti et al., 2016) the most influential articles in the field, and others. The impacts of fluctuations in oil prices on economic growth and their mechanism in oil-exporting countries differ from those in the oil-importing countries (Moshiri and Banihashem, 2012).
Over the years, concerned economists have examined the possible factors that lead to oil price fluctuations. For instance, shocks to the supply arising from political events such as wars and revolutions in OPEC member countries, improvements in the technology of extracting crude oil price, and the discovery of new fields. Also important steps in this regard, for example, in Taiwan “renewable energy development plan” of the installed capacity of solar power generation capacity planned between the years 2002-2020 in accordance with the aimed to reach 10 percent (Kizgin and Benli, 2013). In addition, a shock to the oil demand for crude oil price associated with unexpected movements in the global business cycle. As well, demand shock for above ground oil inventories, reflects shifts in expectations about future shortfalls of supply relative to demand in the oil markets (Hamilton (2008)). The period includes a lot of fluctuation and two severe accidents. One crash, in recent months of 2008, the so-called worst financial crisis since the great depression. Due to the expansion of financial derivative instruments, which have often been held accountable for giving rise to the financial crisis in 2008 (Ulusoy, 2011).
The second crash experienced in the oil price has declined sharply over $100 per barrel since June 2014 to around $30 pb recently. The decline in oil price poses considerable challenges for fiscal, monetary and structural policy. However, the shocks in oil price create uncertainty and undermine effective fiscal management of oil revenues. According to costs (Erdoğan, 2011) businesses seeking capital, uncertainty affecting the cost of capital is beneficial because it eliminates and reduces compliance costs. Changing oil prices have an effect on the global economic performance and the economy level of any country. The effects of this is positively or negatively dependent on the nature of the relation between oil-exporting economy and oil-importing economy (Le and Chang, 2015) that higher oil revenues play an oil price increase contributes to a transfer of wealth from oil importing to oil-exporting countries (Balcilar and Ozdemir, 2013). Studying the relationship of between crude oil price shocks and economic performance is significant for investors to take necessary investment decisions and for policy makers to regulate financial markets more effectively. Marketable securities, which can be considered as an indicator of accounting standards increase refers to temporary investments that are bought or sold for companies, the evaluation of the fair value method of marketable securities is another important issue (Erdoğan et al., 2016). Hierarchical structure may be useful in the detection of the theoretical description of financial markets and in the search of economic factors affecting special groups of stocks (Ulusoy et al., 2012). This study will examine the impacts of oil price volatility on Nigeria economy 2000-2016.
1.2 Statement of the Problem
It is no more news that the recent fall in crude oil prices that began in July 2014 is seriously affecting the economic activities of Nigeria and also in the areas like foreign reserves, currencies crisis, declining government revenue, and majorly possesses a threat to meet financial obligations as at the right. The implication of this is that it brings a large out pour of policies among policy makers and contributions from the academia. These policies have brought about the need to diversify our economy towards once thriving sectors in the economy, removal of subsidy, the war on corruption and reduction of government activities and government related cost. This study identified two basic research problems. First is the need to determine when agents believe that the effects of shocks will be permanent, shocks feed into their expectations, and the persistence of shock is thus large. In the same vein, when agents believe that the effects of shocks are only temporary, prices quickly return to their initial position. Secondly, the research problem is the need to understand the effect of oil price volatility on four fundamental economic variables (total government revenue, capital importation, exchange rate and foreign exchange reserves) in Nigeria. It is against this background that the researcher seeks to examine the impacts of oil price volatility on Nigeria economy from the year 2000-2016.
1.3 Research Objectives
In order to achieve the broad objective of the study, the following specific objectives were investigated. The broad objective of the study is the impacts of oil price volatility on Nigeria. To achieve this objective, the study strived to;
1. Determine whether there are attendant positive significant relationship exist between crude oil price and economic growth.
2. Examine the effects of crude oil price volatility on government revenue, foreign exchange rate, capital importation and foreign external reserves.
1.4 Research Hypotheses
Hypothesis Two
There is no positive and significant relationship between oil price and economic Growth.
Hypothesis Two
There is no positive effect of crude oil volatility on government revenue, foreign exchange rate, capital importation and foreign external reserves Economic (foreign exchange rate, foreign external reserves, government revenue and capital importation) impact of Crude oil price volatility is positively significant.
1.5 Significance of the Study
The recent crashing of global oil prices is attracting heated debate among policy makers and academics because of the effect on global output, inflation and economic stability. Nigeria represents a good case study for exploring the effect of exogenous oil price shock on oil exporting countries because of her dependence on crude oil earnings, and the challenges currently confronting the government. The significance of the study therefore is its contribution to literature as well as methodology and the economic importance of oil price uncertainty to growth for oil exporting countries like Nigeria. Thus, the findings of this study are beneficial to the government, policy makers, the private sector and academia.
1.7 Scope of the Study
The focus of the study is Nigeria, and it estimates the impact of crude oil prices on Nigeria’s Economic Growth. The study covered the period of 2000 to 2016. The yearly figures on GDP, Per-capita Income and Crude oil prices and the monthly average prices of Brent, West Texas Intermediate (WTI) and OPEC basket were used as proxies for crude oil prices, while foreign exchange rate, foreign external reserves, government revenue and capital importation were used to proxy economic indicators.
1.9 DEFINITION OF TERMS
OIL PRICE VOLATILITY: It is a rate at which the price of oil increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. Volatility is a statistical measure of the dispersion of returns for oil.
1.8 ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows
Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.
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Impacts Of Oil Price Volatility On Economy;
Oil price volatility can have significant impacts on an economy, as oil is a critical commodity that is used extensively in various sectors. These impacts can be both positive and negative, and they affect different aspects of an economy. Here are some of the key impacts of oil price volatility on an economy:
- Inflation: Oil price fluctuations can lead to changes in inflation rates. When oil prices rise, it can lead to higher production costs for businesses, which may pass those costs on to consumers in the form of higher prices for goods and services. This can contribute to overall inflation in the economy, potentially eroding consumers’ purchasing power.
- Cost of Living: Higher oil prices often result in increased prices for gasoline, heating oil, and other energy-related products. This directly affects consumers’ cost of living, as they need to spend more on transportation and heating expenses, leaving less money for other discretionary spending.
- Trade Balance: Countries that are net importers of oil, meaning they import more oil than they export, can see their trade balances deteriorate during periods of high oil prices. This is because they spend more on oil imports, leading to a larger trade deficit, which can put pressure on their currency and overall economic stability.
- Energy-Dependent Industries: Industries that heavily rely on oil and its byproducts, such as the transportation and manufacturing sectors, are particularly sensitive to oil price fluctuations. High oil prices can lead to increased production costs, reduced profitability, and, in some cases, job losses. Conversely, low oil prices can benefit these industries by reducing their operational costs.
- Investment and Economic Uncertainty: Oil price volatility can create uncertainty in financial markets and investment decisions. This can affect businesses’ willingness to invest in capital projects and expansions, as they are unsure of future energy costs. Investors may also be more cautious in such conditions.
- Government Revenues: Oil-exporting countries often rely heavily on revenues from oil exports to fund their budgets. When oil prices are high, these countries can experience substantial revenue increases, which can lead to higher government spending. Conversely, low oil prices can result in budget deficits and reduced public services.
- Currency Exchange Rates: Oil price fluctuations can influence exchange rates. Countries that are major oil exporters typically see their currencies strengthen when oil prices rise, as they have more foreign exchange reserves. Conversely, oil-importing nations may experience currency depreciation, which can impact their international trade and debt obligations.
- Energy Efficiency and Alternative Energy: High and volatile oil prices can incentivize investments in energy-efficient technologies and alternative energy sources. These can reduce a country’s dependence on oil, enhance energy security, and stimulate growth in new industries.
- Consumer Behavior: Consumer spending patterns can change in response to oil price volatility. High oil prices may lead consumers to opt for more fuel-efficient vehicles, use public transportation, or reduce their overall travel, impacting related industries.
- Geopolitical Tensions: Oil is often a source of geopolitical tensions. Conflicts in oil-producing regions or supply disruptions can lead to sharp increases in oil prices, which can have cascading effects on the global economy.
It’s important to note that the impacts of oil price volatility vary depending on a country’s level of dependence on oil, its economic structure, and government policies in place. Governments and businesses often need to adapt to these fluctuations, either through strategic planning, hedging strategies, or policy adjustments, to mitigate the negative consequences and capitalize on the potential benefits of oil price movements.