CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND STUDY
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 In the world over, the sustainability of any economic growth is to a large extent depends 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). In 2008-2009, the last global economic crisis occurred which also led to the crash of oil price of commodities. Oil prices crashed from over 140 dollars per barrel to a low of 40 dollars per barrel in a matter of days.
Luckily Olusegun Obasanjo, Ngozi Okonjo-Iweala and Chukwuma Soludo had accumulated foreign reserves in excess of 53 billion dollars and had plenty of money in excess crude account despite the resistance by the state Governors. Thus while revenue dropped significantly, Nigeria was able to go through the period without the economy going into spin. All kinds of measures were suggested and some were adopted to help Nigeria reduce this regular boom and burst cycle. When prices rebounded, the country again relaxed and went back to business as usual. Within the last three years upstream oil companies have faced over 70 percent dip in their revenues as barrel prices dipped from $100 to below $30 per barrel. And for the commodity producers that depend on import of raw materials seem to struggle with the exchange rate dilemma orchestrated by falling oil prices. For a country like Nigeria that depend heavily on crude oil, the negative impact of recent oil prices cannot be overemphasized in views of sustainable economic development and survival of domestic industries. The country has seen crude oil prices increase from $113 to $147 per barrel and then retreat to current levels under $70 per barrel. Government established the Petroleum Support Fund (PSF) to reduce the shock from the oil price decline in 2006. The main objective is to stabilize the domestic effect of movement of crude oil prices in international crude and products markets. But how well the PSF has performed this objective remains to be seen.
1.2 STATEMENT OF THE PROBLEM
The impact of declining global oil price has been so high on the growth of Nigeria’s economy because Nigeria as a mono-product economy only depends majorly on crude oil is a source of revenue. The recent shock in crude oil prices which started in July 2014 has adversely affected Nigeria, especially in the areas of foreign reserves, currencies crisis, declining government revenue, and ultimately, threat in terms of ability to meet financial obligations as at when due. It is an acceptable fact that decline in oil price in the international market affects different countries differently depending on whether the country in question is an exporter of crude oil or an importer. In the developed society, oil price deep has little or no significant impact on the diversified economy as adequate measures are already in place to cushion its effect on fiscal and monetary policies. Today, Nigeria has substantially lost income from oil and has to fund the 2016 budget mainly from borrowed funds and perhaps from recovered loot. It is also argued that Nigeria is faced with consistent devalued standards of living. The current living standard in Nigeria showed that about 60% of her citizen live below one dollar per day In all these obvious problems, it is however imperative to investigate the impact of declining global oil price on the economic growth of Nigeria.
