CRUDE OIL PRICE, EXCHANGE RATE AND THEIR EFFECT ON NIGERIA’S ECONOMY (1985 – 2015)

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CRUDE OIL PRICE, EXCHANGE RATE AND THEIR EFFECT ON NIGERIA’S ECONOMY (1985 – 2015)

ABSTRACT

Nigeria is a mono-product economy in term of generating revenue from Crude oil price, which constituted its major export commodity, changes in oil prices have continued to have implications for the Nigerian economy and, in particular on the exchange rate movements. This study examined the effects of crude oil price and exchange rate on the Nigeria economy using quarterly data from the year 1985 to 2015.

Relevant descriptive and econometric analyses were employed. The econometric tests used which include the unit root tests, Johansen co-integration technique and the Vector Error Correction Model (VECM), the unit root tests was carried out using the ADF, Phillip perron and ADF-GLS; all the variables were stationary at first difference. The long run relationship among the variables was determined using the Johansen Co-integration technique and there were 3 co-integrating vectors in total, the vector error correction model was used to examine the speed of adjustment of the variables from the short run dynamics to the long run and the impulse response function was used to determine the causal impact of shocks of the independent variables to response of the dependent variables.

The result findings revealed that there is no significant relationship among Crude oil price, exchange rate and RGDP, no significant relationship among Crude oil price, exchange rate and external reserve and no significant relationship among Crude oil price, exchange rate and CPI.

The study concluded that there exist a strong empirical evidence of timing importance in the crude oil price and exchange rate relationship. And recommendations were that the country should diversify from crude oil dependency because as crude oil price increases, the CPI also increases largely. Second, government pursuit of managed float exchange rate is desirable to ensure a substantial increase in the external reserve without significant damage of the exchange rate of the country. Third, an effective management and stabilization of crude oil price by Organization of Petroleum Exporting Countries (OPEC) could reduce the effect of its shocks on economic performance of Nigeria.

Keywords: Crude Oil price, Exchange rate, Economic Growth (RGDP), CPI, External reserve.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The search for oil which began in 1907 when Nigeria Bitumen Corporation conducted exploratory work in the country; however the firm left the country at the onset of world war. Thereafter licenses were given to D’Arcy Exploration Company and Whitehall petroleum. However, neither company found oil of commercial value and they returned their licenses in 1923 (Frynas, 1999). A new license covering 357,000sq.miles was given to a new firm called shell D’Arcy petroleum Development Company of Nigeria. The new firm was a consortium of Shell and British petroleum (then known as Anglo-Iranian). The company began exploratory work in 1937. Oil was discovered in non-commercial quantity at Akata near Eket in 1953 (Frynas, 1999).Shell BP in the pursuit of commercially available petroleum found oil in Oloibiri, Niger Delta which is in present Bayelsa state in 1956. Since the discovery of oil in commercial quantity, Nigeria has been largely a mono-product economy. The value of Nigeria’s total export revenue in 2010 stood at US$70,579 million, while income from petroleum exports of the total export revenue was US$61,804 million representing about 87.6 percent (Ogundipe&ojeaga, 2014).The discovery of oil brought in the eastern and mid-eastern regions of Nigeria, this brought hope of a brighter future for Nigeria in terms of economic development as Nigeria became independent. In 1969 the Nigerian government enacted decree 51 to strengthen its hold on the oil industry. With this decree the country (Nigeria) took greater control over the granting of concession and more involvement in the refining, distributing, and price of crude oil (Genova and Falola, 2003). It is clear that Nigeria realized the importance of its oil industry as well as the need to control it.

Prior to the discovery of Oil, Nigeria (like many other African countries) strongly relied on agricultural exports to other countries to supply to their economies (Andrew, 2009). Agriculture was the dominant source of Nigeria’s revenue earning and hence the sustenance of the economy accounting for 64.1% of the GDP before the discovery of petroleum of commercial quantity in 1956 (Oluwasanmi, 1960).Palm oil became an export commodity in Nigeria as far back as 1558; and by 1830, the Niger Delta, which now produces crude oil, had become the major source of palm oil which dominated Nigeria’s export list for more than 50 years (Olukoju, 2009). Cotton joined the export list in 1856, while cocoa was introduced and became an export cropin 1895 (Olukoju, 2009). Together with rubber, groundnut, palm kernel and Bennie-seed in later years formed the major valuable crops. These cash crops formed the main source of revenue, export and foreign exchange for the government (Udo, 1967). The savannah grassland to the north supports the planting of cereal and leguminous crops such as sorghum, millet, ground nuts as well as animal rearing mostly for hide and skin (Ekundare, 1973). Agriculture was the mainstay of Nigeria’s economy from the earliest time up to 1950s. Nigerians had an enviable record of food sufficiency but the era did not last beyond the 1960s when its economy began a descent into an abysmal dependence on imports (Ake, 1985).Agriculture provided 95% of the food needed to feed Nigerians, contributed 64.1% Gross Domestic Product (GDP) and employed over 70% of Nigerian population before oil began to be exported (Oluwasanmi, 1960).

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