CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
In the world over, the sustainability of any economic growth is to a large extent depend on the diversification of such economy. In the developed society fallen oil prices is not a threat as several measures are in place to upturn such occurrences. Ayoola (2013) argues that Nigeria as a mono-product economy, remains susceptible to the movements in international crude oil prices. Yusuf (2015) also contends that oil plays a critical role in Nigeria in the conduct of fiscal and monetary policies because it accounts for average of 80% of government revenue, 90-95% of the foreign exchange earnings and 12% of the real gross domestic product. Despite such windfall, Nigeria has an increasing proportion of impoverished population and experienced continued stagnation of the economy (Okonjo-Iweala and Osafo-Kwaako, 2007).
“There are many evidences, particularly over the post-Breton woods era, pointing to the vital role of oil price fluctuations in the determination of the path of the exchange rate” (Adeniyi et al, 2004).
Crude oil as an energy source since its discovery in the 1800‟s has been vitally important to the world economy. According to Hathaway (2009) the importance of oil has risen to the extent that in a world suddenly without oil, all the major distribution systems that allow economic transactions on a more than local basis would fail and the world economy would collapse.
Crude oil is a major source of foreign exchange earnings and the dominant source of revenue for the Nigerian government. According to Yuan, Liu and Huang (2014) oil price shocks have had an attendant multiplier effect on crude oil and economic activity. The Nigerian economy has been completely reliant on oil and the basis upon which government budgeting, revenue distribution and capital allocations are determined. Volatility is an upward and downward movement of oil prices globally. This assertion thus translates that these oil prices are exogenous because it’s determined by external influences that somewhat stagnate the Naira and Nigeria cannot moderate the causes of these oil price slides. Nigeria’s exports of oil at a time of peak prices – have enabled the country to post merchandise trade and current account surpluses in recent years. Reportedly, 80% of Nigeria’s energy revenues flow to the government; 16% cover operational costs, and the remaining 4% go to investors (Atukeren 2003). However, the World Bank has estimated that as a result of corruption 80% of energy revenues benefit only 1% of the population.
According to Ujunwa (2015) the recent oil price shock (large fall in oil prices) has been attributed to factors such as higher than expected supply, weakness in global demand for oil, driven largely by improvements in production technology, particularly the shale technology in the United States, steady rise in production of countries not belonging to the Organization of Petroleum Exporting Countries (OPEC), the faster than expected recovery of production in some stressed OPEC producers (Iran for instance); OPEC’s November 2014 decision to maintain production level despite the sharp decline in prices, which clearly shows that the trend might not abate soon.
According to Ujunwa (2015) the recent oil price shock (large fall in oil prices) has been attributed to factors such as higher than expected supply, weakness in global demand for oil, driven largely by improvements in production technology, particularly the shale technology in the United States, steady rise in production of countries not belonging to the Organization of Petroleum Exporting Countries (OPEC), the faster than expected recovery of production in some stressed OPEC producers (Iran for instance); OPEC’s November 2014 decision to maintain production level despite the sharp decline in prices, which clearly shows that the trend might not abate soon. Oil price changes, volatility have been a very controversial topic among different scholars. External shocks can be defined as a large unanticipated change in world
