Effect of oil price shock and some selected macro-economic variables in some selected net oil exporting and net oil importing countries

Abstract

This topic was on effect of oil price shock and some selected macro-economic variables in some selected net oil exporting and net oil importing countries. Nigeria is a mono-product economy, where the main export commodity is crude oil, changes in oil prices has implications for the Nigerian economy and, in particular, exchange rate movements. The latter is mostly important due to the double dilemma of being an oil exporting and oil importing country, a situation that emerged in the last decade. The objectives of the study are; To examine the effect of oil price shocks on some macroeconomic variables like inflation and exchange rate, to investigate the effect of oil price shock on the real sector of Nigeria economy, to identify the channels through which the impact of oil price shocks transmits in the Nigerian economy The study examined the effects of oil price shock on macroeconomic performance in Nigeria using yearly data from the year 1979 to 2014. The theoretical framework of this study is based on unrestricted Vector Auto Regression model by Sims (1980). The models are used to estimate the relationship between oil price changes, inflation rate, Gross Domestic Product and real exchange rate. Unit root tests, Johansen co-integration technique, variance decomposition test, granger casualty test and Vector Auto Regression Mechanism was used to examine the speed of adjustment of the variables from the short run dynamics to the long run.

Chapter one

Introduction

1.1Background of the study

Oil price (OP) shocks have been a leading source of concern globally; however, the oil-importing countries are the most anxious owing to their high dependency on imported oil. OP fluctuations threaten macroeconomic stability of developing countries such as Nigeria through various channels.

Since the oil price shocks in 1973 and following the stagnation especially in the developed countries, studies on the relationship between oil price shocks and economic activities have increased (Kose & Baimaganbetov, 2015). These studies employed different econometric techniques, consequently coming up with different results (Hamilton, 1983; Akpan, 2009). A critical evaluation of these studies reveals a bias in focus on developed oil importing countries, leaving out the developing countries. A further review of these studies shows that while some of the scholars believe that oil price shocks is a blessing, others are of the opinion that it is a curse. In another observation, Hooker (1996) asserts that, there was no relationship between oil prices shocks and macroeconomic variables. However, the question of whether oil price shocks play any significant role in explaining variations in economic performance in the Africa environment remains contentious. While this debate remains, the oil price shocks transmission channels process is still not equivocally established in the oil exporting developing economies (Akpan, 2009; Olomola, 2010), more importantly that (Hamilton, 1983) claims that a rise in oil prices has been acknowledged as one of the primary causes of economic recession. Therefore, this problem leaves us with the following objectives: to determine whether oil price shocks play any significant role on the economy of Africa’s oil exporting countries and to also identify the transmission channel of oil price into the economy? Consequently, a few studies that have attempted to look at issues surrounding oil price and economic activities in Africa with specific focus on the significance of oil price shocks on the economic performance remains inconclusive and more importantly when a group of countries is considered for study. More so that limited studies on the Africa’s oil exporting countries have not adequately addressed economic performance in relation to oil price shocks, leaves the doubt as to whether oil price shocks really play any significant role on economic performance or not. However, the impact of oil price shocks on economic performance is expected to vary from the oil exporting countries and oil importing countries. For instance, positive (negative) oil price shocks should be considered a good (bad) news for the oil exporting (importing) countries.

The price of oil has witnessed profound fluctuations and this has implication for the performances of macroeconomic variables, posing great challenges for policy making both fiscal and monetary. According to Awe (2002), crude oil price has increased on averages from US $25 per barrel in 2002 to US $55 per barrel in 2004, an increase in petroleum price tend to have a contractionary impact on world demand and growth in the short term. This steep upward trend in the price of crude oil in recent years reaching a record nominal high of US $147 in mid-2005 and a sharp drop to$87 in 2012, and $46 a barrel since 2014 to $41.95 2016. Nigeria is highly vulnerable to fluctuations in the international oil market despite being the 6th largest producer of oil in the world. This is so, given the fragile nature of the Nigeria macro economy and the heavy dependence on crude oil proceeds. Based on this the researcher wants to investigate the effect of oil price shock and some selected macro economic variables in some selected net oil exporting and net oil importing countries

 

Statement of the problem

The study is motivated by the fact that Nigeria relies heavily on crude oil export revenues, that has several implications for the Nigerian economy, given the amount of wide swings in oil prices in the international oil market. It is, therefore, vital to analyze the effect of these fluctuations on the Nigeria macro economy and possibly the channels of transmission of an oil price shock to the Nigeria economy. It’s understandable that some investors believed the conflict in Iraq will send oil prices skyrocketing. But, so far, oil prices haven’t risen as much as is expected. The reason is simple, because the United States, while strategically interested in Iraq’s future, is the beneficiary of a massive oil boom at home. This lessens the need for Iraqi oil, which has only begun to enter the market in earnest over the past couple of years. Plus, Iraq only produces about 3.2 million barrels per day. That’s just not enough to affect global oil supplies in the longer term. Indeed, with U.S. oil production slated to grow and Saudi capacity still available, supplies haven’t really been affected. Indeed, we don’t expect this to change much, either. History has shown that oil price spikes are usually short lived and any bump the resource receives because of the situation in Iraq will be no different. Supply is adequate, and that’s always what dictates the price of oil in the end.

Objective of the study

The objectives of the study are;

1. To examine the effect of oil price shocks on some macroeconomic variables like inflation and exchange rate
2. To investigate the effect of oil price shock on the real sector of Nigeria economy
3. To identify the channels through which the impact of oil price shocks transmits in the Nigerian economy

Research question

1. Is there an effect of oil price shocks on some macroeconomic variables like inflation and exchange rate?
2. Is there an effect of oil price shock on the real sector of Nigeria economy?
3. Are there the channels through which the impact of oil price shocks transmits in the Nigerian economy?

Research hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀: there is no significant effect of oil price shocks on some macroeconomic variables like inflation and exchange rate

H₁: there is significant effect of oil price shocks on some macroeconomic variables like inflation and exchange rate

 H₀²: there are no significant effect of oil price shock on the real sector of Nigeria economy

 H₂: there significant effect of oil price shock on the real sector of Nigeria economy

H₀³: there are no channels through which the impact of oil price shocks transmits in the Nigerian economy

 H₃: there are channels through which the impact of oil price shocks transmits in the Nigerian economy

Significance of the study

The study will be very significant to students, Nigeria government and the policy makers. The study will give a clear insight on the effect of oil price shock and some selected macro-economic variables in some selected net oil exporting and net oil importing countries. Nigeria really depends on oil, when the price drop it affect economy. The study will give insight on the solution. The study will also serve as a reference to other researcher that will embark on the related topic

Scope of the study

The scope of the study covers effect of oil price shock and some selected macro-economic variables in some selected net oil exporting and net oil importing countries

Limitation of the study

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study

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