A VECTOR AUTOREGRESSIVE ANALYSIS OF OIL PRICE VOLATILITY AND ECONOMIC GROWTH IN NIGERIA (1997-2017)

Abstract

In Nigeria, oil prices have frequently fluctuated but at the moment there is a decline and not an increase. The effect of this condition on economic growth is not clear in literature as studies reveal contradicting results. This study sought to investigate the effect of oil price volatility on economic growth in Nigeria. An explanatory research design was employed. Time series data spanning 20 years was used. The study used VAR and Granger causality to analyze the data using STATA statistical software version 13. The study led to the conclusion that the first lag of GDP growth positively affects the current GDP growth significantly and has a negative significant effect on the current oil price volatility. The study also concludes that the second lag of GDP growth on oil price volatility is negative and significant. Another conclusion is that the first and second lags of oil price volatility have a negative and significant effect on the current GDP growth rate but the current oil price volatility was not related to its lags. The study also concludes that in Nigeria, both GDP Growth and Oil Price volatility, can affect each other. The findings imply that oil price volatility leads to a decline in household welfare and increase in poverty and that with the increase in elasticity of substitution of demand for imports to domestically produced crude oil, welfare loss for household groups goes on increasing. The study recommends a need for Nigerian government to have an energy regulatory commission to regulate the price of gasoline and disease since its fluctuations have a negative impact on the economy. The Nigerian government can control oil and energy prices typically in the form of price freezes or ceilings for increasing prices rather than price floors; given that price decreases are typically politically popular to consumers. Another government tactic for controlling price increases and volatility is the introduction of price subsidies and tax reductions. Nigerian government may also target specific industries with subsidies and tax reductions to reduce costs. These industries can be those that rely heavily on petroleum products such as gasoline and diesel and may include agriculture, public and goods transport, and fisheries, to avoid consumers receiving substantial price shocks to essential purchases. The Nigerian governments can also buildup its strategic oil reserves to make it possible for it to supply the market in the case of sharp price spikes that typically result from physical disruptions to supply, such as hurricanes and other natural disasters.

Key Words: Oil Price Volatility, Economic Growth, Nigeria