Effect of Oil Price Shock and Some Selected Macro-economic Variables in Some Selected Net Oil Exporting and Net Oil Importing Countries
Chapter One
Objective of the study
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.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
Many studies have investigated the effect of oil price shocks on macroeconomic variables around the world. Perhaps most outstanding is the effect of oil prices on economic growth, inflation, exchange rate and industrial output. The other studies on this subject matter may include the effect of oil activities on a country’s sovereign risks and perhaps investors’ sentiments and uncertainties. On the relationship with economic growth, there are three categories of outcomes in the studies. The first set of studies argues that oil price shocks have positively impacted on economic growth. For instance, Omojolaibi (2013) examined the effect of crude oil price changes on economic activity in Nigeria between 1985 and 2014. He concluded that oil price changes positively affected economic growth. In the same year, Igberaese (2013) studied the Nigerian economy and drew a similar conclusion. Ani et al. (2014) examined the causal relationship between four macroeconomic variables: real GDP, exchange rate, inflation rate and interest rate in Nigeria. They found that a positive but insignificant relationship existed between oil price and GDP. In the same vein, Yukata (2015) in the study of more advanced countries like US, EU and Japan, argues that oil price increase benefits the more advanced economies. In a related study, Ifeanyi & Ayenajeh (2016) utilizing secondary data from 1980 to 2014, concluded that crude oil price volatility positively and significantly related to economic growth in Nigeria. The second set of studies on this subject matter argues that oil price shocks have negatively impacted on economic growth. Bekhet and Yusop (2009), in their study of oil prices and macroeconomic variables in Malaysia, concluded that oil prices negatively affected GDP growth and energy consumption. Tang et al. (2010), in their study of China from 1998 to 2008, found that an increase in oil-price negatively affected investment and output. Iwayemi & Fowowe (2011), in their study of Nigeria 1985 to 2007, concluded that positive oil shocks did not cause GDP but negative oil shocks significantly caused output and the real exchange rate. Similarly, Alley et al. (2014) utilized GMM model to investigate the effect of oil price shocks on economic activities in Nigeria and concluded that oil price uncertainty reduces the level of economic activity in a small open oil-producing economy like Nigeria. Also, Nazir & Hameed (2015), investigated oil prices and GDP in Pakistan using data covering from 1972 to 2011 and concluded that oil prices affected real GDP negatively in the long run. Kiliçarslan & Dumrul (2017) conducted a similar study in Turkey and deployed SVAR analysis for the period from 2005Q1 to 2017Q2. The evidence confirmed that a rise in the price of crude oil elicited a decline in economic growth and increased crude oil prices, inflation and real exchange rate. The final set of studies on the relationship between oil price shocks and economic growth posit that the variables have no effect on each other. This is the position of Muhammad & Ghulam (2017) in their study of Pakistan. Another set of studies investigate the effect of oil price changes on the consumer price index or inflation. Oil price changes will likely affect consumer prices since crude oil products constitute a direct input for many consumer goods (Sek et al., 2015). One of the earliest studies in this relationship was conducted in India by Bhattacharya & Bhattacharya (2001) using monthly data running from April 1994 to December 2000. Utilizing VAR models and impulse response function, they found that 20 percentage point shock in oil prices lead to a 1.3 percentage point increase in inflation in other commodities. Similarly, Dawson (2007) studied the OECD countries and found that a 1% increase in the oil price elicited a 2.9% depreciation in the real exchange rate. Also, Bermingham (2008) in a study of Ireland from 1996 to 2008 deployed Engle-Granger and ARDL approaches and found that the rising price of oil significantly affected inflation. Castillo et al. (2010) examined the case of United States of America. They isolated the average levels of the oil price and inflation to form three sub-samples, covering the periods 1970-1983, 1984-2002 and 2002- 2008. They observed that an increase in oil price volatility triggers a higher level of inflation level. Ogundipe et al. (2014) used annual data spanning 1970 to 2011 to investigate the effects of oil price, exchange rate volatility, external reserves and interest rate in Nigeria. Using Johansen Co-integration and VECM techniques, they found that a proportionate change in oil price elicited a more than proportionate response from exchange rate volatility. Jiranyakul (2016) investigated Thailand data from 1993 to 2015 using the Johansen cointegration test and Granger causality tests. The study concluded that an oil price shock causes inflation index to rise while oil price uncertainty has no effect on the increase in inflation. Bala & Chin (2018) investigated the asymmetric effect of oil price shocks on inflation in small oil exporting economies like Nigeria, Libya, Algeria and Angola. Utilising the NARDL dynamic panels, they observed that both the positive and negative oil price changes affected the level of inflation. While examining the relationship between inflation, oil prices and exchange rate, Mukhtarov et al. (2019) studied Azerbaijan and utilized VECM technique on data covering the period 1995 to 2017. They found that a 1% increase in oil prices and exchange rate causes inflation to increase by 0.58% and 1.81%, respectively.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This section discusses the method and procedures employed in carrying out the research. It contains the procedures of collecting and analyzing data. Generally, specification of economic model is based on economic theory and on the available data relating to the study. Thus, the two-gap model was employed as a theoretical framework in this study to analyze effect of oil price shock and some selected macro-economic variables in some selected net oil exporting and net oil importing countries.
Methodological Theory
The macroeconomic responses to oil price shock in Nigeria can be explained using both supply and demand channels. According to economic theory, crude oil price change influence economic activity through both supply and demand channels. Supply side effects could be explained based on the fact that oil is an important input in production. Therefore, crude oil price increases reduce the demand for crude oil, decreasing the productivity of other input factors which induce firm to lower output. For a neoclassical economist, the most natural way to think of crude oil is an input to the economy’s production function. When an input gets more expensive, the profit-maximizing level of output declines. The standard way to present this argument (Hamilton 2005) is a simple Cobb-Douglas model of a representative form with the following production function:
CHAPTER FOUR
DATA PRESENTATION, MODEL ESTIMATION AND INTERPRETATION OF RESULTS
Interpretation of Results
Unit Root Test Result
The result clearly shows that inflation rate is stationary at level. Meanwhile, crude oil price and real exchange rate were not stationary at first difference but integrated of the same order and they are all stationary.
CHAPTER FIVE
Conclusion
This study is carried out to investigate whether or not a dynamic relationship exists between crude oil price shocks and some macroeconomic variables and to examine the various oil price shocks with the implications on the Nigerian economy. All the variables in the literature survey provided some useful insights into the shock in oil price and macroeconomic performance in Nigeria. Based on the findings, it was established that the crude oil price shocks in Nigeria have a significant impact on dynamic variables such as inflation rate, real exchange rate, and gross domestic product. Crude oil price volatility is one of the major macroeconomic problems that confront the Nigerianeconomy today. It was observed that one phenomenon that has infected the price of crude oil in the global oil market which is also persistent but may die out quickly as we venture into the future is volatility or shocks.
The study further reveals that a little shock in the price of crude oil in the global oil market in the current period will produce a long-term effect on macroeconomic activities in Nigeria. In other words, oil price shock affects monetary and fiscal policies in Nigeria and have a significant impact on government expenditure pattern and the growth of the gross domestic over the years in Nigeria. Finally, the paper observed that oil price shocks have a substantial influence on output and inflation rate in Nigeria contrary to the research of Olomola (2006) who believed that oil price shock may not necessarily be inflationary.
Based on the findings made in this study, the study recommends as follows:
The energy policy makers in Nigeria should have a better understanding of how the world’s oil markets are likely to evolve in the future and how the total world demand for crude oil is likely to change in response to the changes in oil prices initiated by OPEC, and in response to future changes in price resulting from changing supplies in non-cartel countries.
A fall in the price of oil would decrease the level of GDP and worsen the economy, so it is essential to encourage diversification. As a means of cushioning the effect of oil price fluctuations in the economy. Nigeria should return to agriculture by providing technical input and financial support to the farmer.
Due to the failure of the Nigeria economy, after the period of the oil boom, it has been noticed that a fall in oil price brings about a fall in macroeconomic policies, mainly in terms of government expenditure and interest rate due to deflation. hence, it is, therefore, advisable for the government to establish strong macroeconomic policy.
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