Oil Price Volatility and the Nigerian Economy: ARDL and Granger Causality Approaches
For the past four decades, crude oil has been a major source of revenue, energy and foreign exchange for the Nigerian economy. Nigeria depends heavily on revenue from crude oil but volatility in price of the product has always put the country in precarious economic situation. Against this background, this paper analyzed the relationship between crude oil price volatility and the Nigerian economic performance from 1970 to 2018. It applied Granger causality test and autoregressive distributed lag (ARDL) model as estimation techniques. It could be inferred from the findings that the influence of oil price volatility, gasoline domestic pump price and exchange rate are both short-run and long-run phenomena while that of inflation and monetary policy rate are only long term phenomenon. It was found that crude oil price volatility, domestic pump price of gasoline, exchange rate, inflation rate and monetary policy rate have significant positive impact on economic growth on the long-run periods, which means that increase in earnings from crude oil and appreciation of Naira increases the economic growth of the country and decrease in crude oil earnings and depreciation of Naira decreases the economic growth of the country. Therefore, government should diversify its earnings by developing agriculture, industrialization and investment in order to reduce the heavy reliance on crude oil and income fluctuation resulting from the fluctuation in crude oil prices in order to protect the country’s economy. In addition, government should reduce gasoline pump price by deregulating the downstream sector and at the same time encouraging private sector’s participation in crude oil refining in order to encourage competition thereby bringing down the price of fuel. Considering the importance of exchange rate variable, these findings eventually suggest that a systematic exchange rate via monetary policy should be properly developed to promote the stability and sustainability of economic growth in Nigeria.
Keywords: Crude Oil Prices, Economic Growth.