OIL PRICE INSTABILITY AND INDUSTRIAL SECTOR OUTPUT IN NIGERIA

OIL PRICE INSTABILITY AND INDUSTRIAL SECTOR OUTPUT IN NIGERIA

ABSTRACT

This study set out to examine the oil price fluctuations and industrial sector output in Nigeria. The study covers the period of 1981-2020 which was the genesis and the peak period of increased oil price and growth in Nigeria. The study made used of secondary data from various statistical bulleting of Central Bank of Nigeria and World Bank Data Base. The study employed the use of econometric tools Of Descriptive statistics, ADF unit root test, Ordinary Least Square Method and Granger causality test to explore and identify the relationship between oil price instability and industrial sector output in Nigeria. The unit root test shows that all variables were stationary at 5% difference except the dependent variable which is stationary at level i.e. I (0). The ordinary least square method result shows that there is a direct and positive relationship between oil price and industrial output in Nigeria during the study period. The result of the granger causality test indicates the existence of causal relationship between oil price and industrial output. Based on these findings, this study recommends that the income that government is generating from crude oil should be properly channeled into productive projects that can boost the industrial growth of this country. In addition, the proceeds deriving from this crude oil should be effectively managed by the government as well as making industrialization a priority in their budgetary allocation.

CHAPTER ONE

Introduction 1.1 Background of the Study

The need to promote a virile industrial sector has continued to be a major concern of development economies. The reason for this awakened decision in industrialization can be traced to the fact that a significant work to be the level of industrialization offers the place in a growing economy.

Also, industrial output significantly increase the prospect of growing availability of manufactured products, increase employment, greater efficiency, improved balance of payments and higher technological innovation ‘‘CBN 2002’’.

However, a lot of efforts were made by the past administration in Nigeria at promoting industrial development and trade, and its impact of macroeconomic variables on the industrial sector shows that efforts were not make by policy makers to effectively satisfy the desired industrial development which should increase national income per capita income, secure full employment and expand the market for local low materials, prove foreign exchange earnings. Industrial sector performance in Nigeria has been rather poor since independent, prior to 1970, during that period there was a total reliance to agricultural production while the past 1970 period shower an extensive shift to reliance on petroleum.

In addition to the monoculture structure of the production bases, there was the problem of oil price instability, which has affected industrial sector productivity in Nigeria in a large extent since 1973, and the substantial fluctuations in the international price of crude oil have had for reusing implication for the country’s macroeconomic policies ‘‘Olapoenia, ‘‘1986’’ Okigbo, 1973, Iwayemi 1995.

 

Due to uncertainties created by the Grab – Israel War, in 1973 the price of crude petroleum rose from the first time from $3 to $11.6 per barriers. And this rise in the price of crude petroleum generated a total of N9.2 billion in revenue for Nigeria in 1994 as the country exported 108 million tons of crude oil that year ‘‘Mandal’’ 1977. And also as a result of resultant increase of revenue, upsurge in crude oil and price, there was opportunity for industrial development and modernization of the Nigerian Economy.

Although the oil price increase in 1943 was short lived, between 1979 and 1980, the price of oil rose in the international market between 135 and A$40 a barrel from et $14 level recorded in the early part of 1978. The rise in crude oil price again was mainly to the Iranian Revolution. In response Nigeria produced 84.2.5 million barrel in 1979 and realized N9305.6 million in the prices ‘‘The African Guardian, 1986, First Bank Business Report, 1990’’ with the increased revenue derivable from oil sector, the Nigerian economy became monoculture as emphasis moved from the agricultural sector to oil sector.

Consequent upon the freezing, there was a structural adjustment programed which the country passed in 1988, it was accompanied by austerity measure of enormous proportion. By

1990, Nigeria earning from crude oil export reached N106.62 million as against the targeted N38.62 million as the price was not welcomed in the international market and it is as a result of the guif war between Iraq and kawat.

 

1.2 Statement of the Problem

Nigeria like many several developing countries has witness decades of dictatorship and political instability, the country in addition to continuous oil price instability is still challenged with a political tension between different ethnic group’s especially current ethnic crises in the Nigeria Delta which is threatening the down oil sector. As the 7^th largest producer, Nigeria external liquidity position has been strengthened by the high oil price.

The country has a production of 2 million barrel of oil pending and high oil price has seen the change in the current account from a deficit of 9% GDP in 1998 to a surplus currently.

Export growth has seen excellent, but Nigeria remains too dependent on oil, its position can weaken quite significant and quite rapidly if the oil price drops too far below 20$ per barrel.

In 1970, there was a massive industrialization as a result of highest oil price in the Nigeria economy. However, hoping that Nigeria will achieve the momentum of strong economic growth in the 70s which was attested by extreme expansion in oil production as a result of increase in oil price and the massive public sector investment in the infrastructure. And the constraints arising from the growth and the performance of industrial sector in Nigeria within the period ranging from the 1970s through the year under review include shortage of infrastructure, regional disparities as industries are mostly located in the cities with attendant export and balance of payments deficits and lack of adequate institutional capacities in terms human capital development that hindered a prospect in industrial sector of the country.

1.3 Research Question

         

The study will provide answer for the following research questions:

1. What is the impact of oil price instability on industrial sector output in Nigeria?
2. What is the causal relationship between oil price fluctuations and industrial sector output in Nigeria

 

 

 

 

 

      1.4 Objectives of the Study

 

The general objective of this study is to empirically investigate the impact of oil price instability on industrial sector output in Nigeria. However, the study has the following the following specific objectives:

1. To examine the relationship between oil price instability and industrial sector output in Nigeria.
2. To investigate the causal relationship between oil price fluctuations and industrial sector output in Nigeria.

 

 

        1.5 Research Hypothesis

 

To realize the aim of this study; we analyze and formulate the following hypothesis.

1. Ho: That oil price has no relationship with industrial output in Nigeria
2. H1: That there is a causal relationship between oil price shocks and industrial sector output in Nigeria.

1.6 Significance of the Study

         

The significance of the study however on its contributions to literature as well as methodology, and the economic importance of oil price fluctuations to growth for oil exporting countries like Nigeria.

The study assess the relationship between changes in oil price instability and industrial output will be specifically significant to all economic agents in the country being it an policy making country, economic analysts and oil dependent economy. The case study of investigating the oil price instability and industrial sector output will give the best insight for a country like Nigeria because of its crude oil earnings.

 

 

1.7 Scope and Limitations of the Study

The major limitations of this research work are the limited time frame that is required to complete the research work. Also, secondary data was utilized in this research; it does not employ primary data. This means that it relied on existing or ready-made data in the analysis. The study doesn’t cover period before and after

1981-2020 and it doesn’t cover data outside Nigeria. This is in line with the scope of the study. Also, the research will focus on oil price instability and industrial sector output in Nigeria. The period is identified specifically to capture extensively the relationship between oil price and industrial sector output in Nigeria.

 

 

 

1.8 Organization of Chapters

 

The study will be divided into five chapters. Chapter one contains general introduction which include background of the study, statement of the problem, research question, objectives of study, research hypothesis, scope and limitations of the study as well as this section. Chapter two discusses the theoretical framework and review of related literature, it includes discussions of the conceptual issues, theoretical framework, review of theoretical issues surrounding oil price instability and industrial sector output in Nigeria. While chapter three explained the model specification, technique and methods of data collection.

 

 

1.9 Definition of Key Terms

 

1. Industrial Output: Industrial output can be described as the entire output of all facilities that produces goods in a country, it comprises all the outcome of all industries and factories across the whole country.
2. Government Capital Expenditure: Capital expenditure can be seen as the money spent by the Government in other to improve and develop the facilities, building, health, education, machinery.

• Nigerian Economy: The Nigerian economy has been identified as the 27^th largest economy in the whole world in terms of nominal GDP, it is an mixed economy with emerging markets and expanding technology, communications, services, entertainment sectors, financial, manufacturing and technological sector.

1. Ordinary Least Squares (OLS) Regression: This is a method of analysis which is mostly statistical analysis that represents the relationships between variables, one or more variables (independent) and dependent variables. OLS regression is the

best method of estimating variables, it is flexible and it is mostly used for testing basic data analysis.

Keywords: Oil Price, Industrial Output, Exchange Rate, Government Capital Expenditure.

OIL PRICE INSTABILITY AND INDUSTRIAL SECTOR OUTPUT IN NIGERIA

Sharing is caring!