Oil is a majorsource of energy in Nigeria and the world in general. Oil being the mainstay ofthe Nigerian economy plays a vital role in shaping the economic and politicaldestiny of the country. Although Nigeria’s oil industry was founded at the beginningof the century, it was not until the end of the Nigeria civil war (1967 – 1970)that the oil industry began to play a prominent role in the economic andsocio-political life of the country. Nigeria can be categorized as a countrythat is primarily rural, which depends on primary product exports (especiallyoil products).
Since the attainment of independence in 1960 it has experiencedethnic, regional and religious tensions, magnified by the significantdisparities in economic, educational and environmental development in the southand the north. These could be partly attributed to the major discovery of oilin the country which affects and is affected by economic and social components.Crude oildiscovery has had certain impacts on the Nigeria economy both positively andadversely. On the negative side, this can be considered with respect to the surroundingcommunities within which the oil wells are exploited. Some of these communitiesstill suffer environmental degradation, which leads to deprivation of means oflivelihood and other economic and social factors. Although large proceeds are obtainedfrom the domestic sales and export of petroleum products, its effect on the growthof the Nigerian economy and general social development, as regards returns andproductivity is still questionable, hence, the need to evaluate the relativeimpacts of crude oil on the nation. In the light of the study, the mainobjective is to assess the impact of crude oil on the Nigerian economy, as wellas its socio-political implications.
In Nigeria, though crude oil has contributedlargely to the economy, the revenue has not been properly used. Considering thefact that there are other sectors in the economy, the excess revenue made fromthe oil sector can be invested in them to diversify and also increase the totalGDP of the nation. The changing internationaloil market has posed great concerns for Nigeria. The global financial crisishas led to slow growth across the world’s economies, resulting in lower demandfor commodities, especially oil. This impact has been transmitted throughseveral sources to the Nigerian economy, especially through oil price fluctuationsand stock market dynamics due to the reappraisal for planned investments orcomplete stoppage of previously committed programmes of investment. However,the speculative behaviour and investment activities have helped to buy up crudeoil prices internationally, the reality of the global recession is beginning tobe fully appreciated across the globe. The adverse impact of the crisis is moreevident and direct on international prices of oil and the world capital market.
The recent movements of oilprices are apparent in their unprecedented decline from record of about US$147/barrelin July 2008 to about $50/barrel in January 2009 while the daily basket pricehas hovered between $38and $44. The impact of falling oil prices differs fromcountry to country depending on whether the country is an oil-exporter or oil-importer.In an oil-exporting country, a rise in world oil prices improves the tradebalance, leading to a higher current account surplus and an improving netforeign asset position. At the same time, increase in oil prices tends toincrease private disposable income in oil-exporting countries. This increasescorporate profitability, at the same time raises domestic demand and stockprices. In oil-importing countries, the process works broadly in reverse: tradedeficit are offset by weaker growth and, over time, stock prices decrease(Abdelaziz et. al., 2008).
This development in theglobal economy, which has posed great challenge to policy makers acrosscountries, is as a result of the increasing spate of fluctuations in the priceof oil. The price of crude oil, which had stayed between $2.50 and $3 since1948, rose from $3 per bbl in 1972 to $12 per bbl by the end of 1974, and from$14 per bbl in 1978 to $35 per bbl in 1981. The price of oil, went below $10per bbl in 1986, but surged again to between US $18 and $23 in 1990’s. itcrossed the US$40 mark in 2004; and rose to about US$60 from 2005 during thesummer of 2007, the price of one barrel of crude oil jumped above US $70 andeven crossed the US$145 mark in July 2008. The price staggered to US$80.
50 inOctober 2009 and remained at an average of US$75 till August 2010.An oil price change(increase), all things being equal, should be considered good news in oilexporting countries and bad news in oil importing countries, while the reverseshould be expected when the oil price decreases (Ayadi, 2005). The challenge,however, of the combined effect of hikes in oil prices on economic growth andsocio-political development for oil producing nations like Nigeria is reallyenormous. Huge inflow of oil revenues in Nigeria is more often associated withexpansion in the level of government spending while periods of dwindling oilrevenues are usually accompanied by budget deficits.
There is no gain saying thatNigeria relies so much on revenue from oil exports but it equally massivelyimports refined petroleum and other related products. Evidence, for instance,shows that government spending, which before1999 remained well below N0.5trillion, hit N1.02 trillion mark in 2001 and N1.5 trillion in 2004. Thefigures for 2006 and 2007 stood at N2.
04 and N2.5 trillion respectively. Sincediscovery of oil in a commercial quantity in Nigeria, oil has dominated the economyespecially in Nigeria hence oil accounts for more than 90- percent of Nigeria’sexports, 25 percent of its Gross Domestic Product (GDP), and 80 percent of itsgovernment total revenues. Thus, a small oil price changes can have a large impacton the nation.
For instance, a US $1 increase in the oil price in the early1990s increased Nigeria’s foreign exchange earnings by about US$650 million (2percent of GDP) and its public revenues by US$320 million a year.Nigeria’s reliance on oilproduction for income generation clearly has serious implications for itsdevelopmental outlook. Secondly, oil is an important commodity in the economy ofany country in the world because it is a major source of energy for domesticand industrial commodity. Changes in the prices of either the crude oil or anyof the end products are expected to have impact on users and the nation atlarge. Oil prices traditionally have been ore volatile than many othercommodity or asset prices.However, it has been observedthat the recent global economy melt down also contributed in the oil priceshocks which has more adverse effect on oil importing countries than exportingcountries. At the beginning of the crisis, oil price crashed below $40/b in theworld market, which had serious consequences on Nigeria fiscal budget that ledto the downward review of the budget oil benchmark price. Today oil price isoscillating between $60/b and $75/b.
Oil price shocks which arepredominantly defined with respect to price fluctuations resulting from changesin either the demand or supply side of the international oil market (Hamilton,1983; Wakeford, 2006). These changes have been traditionally traced to supplyside disruptions. Two issues are identified regarding the shocks; first is themagnitude of the price increase, which can be quantified, in absolute terms oras percentage changes. Each of the shocks had connections with some movementsin key macroeconomic variables in Nigeria. For instance, the 1973-74, 1979-80,and 2003-2006 periods were associated with price increases while the oil marketcollapse of 1986 is an episode of price decrease. During the first oil shock inNigeria (1973-74), the value of terms of trade rising from 18.9 in 1982 to 65.
3by 1974. Government revenue, whichstood at 8 percent of GDP in 1972 rose to about 20 percent in 1975. Thisresulted in increased government expenditure owing largely from the need tomonetize the crude oil receipts.
Investment was largely in favour of education,public health, transport, and import substituting industries (Nnanna and Masha,2003). During the oil price shock of 2003-2006, Nigeria recorded increases in theshare of oil in GDP from about 80 percent in 2003 to 82.6 percent in 2005. The shockwas gradual and persisted for a while. This could be regarded as a permanent shock.The result of the shock was a favourable investment climate, increased nationalincome within the period although a slight decline was observed in the growth rateof GDP.
The concerns regarding howrapidly the global financial crisis penetrated the Nigerian capital market,especially given that there is hardly any thriving domestic mortgage market inNigeria is to be considered as one among the factors that affects stockmarkets. The decline of indicators of activities on the NSE before theescalation of the crisis on the global scene became a source of concern formany. Emerging facts reveal that the crisis may have been made evident in thecapital market through various channels. Foreign portfolio investment withdrawalsand withholdings in order to service financial problems at the foreigninvestors’ home, as well as prospects of reduced FDI, are bound to affectinvestor confidence in the economic health of Nigeria. Evidence on the foreignportfolio withdrawals shows that the total financial inflows to Nigeria between2007 and 2008 increased by 21%, while that between 2008 and 2009 was predictedto reduce by 38.6%. In a globalised world, transactions are carried out indifferent countries in integrated markets. The world has over the past twodecades towards liberalization, although not well integrated into the worldmarket, have been facing serious destabilizing effects in the past yearsespecially since the emergence of the global financial crisis in July 2008.
Thecapital market has been shrinking; major international hedge funds have been withdrawn;and the international credit line has faded out of loadable funds for domestic industry.Market capitalization fell by 45.8% in 2008, a sharp reversal of growth from2007, when the market grew by 74.7% (Okereke-Onyiuke, 2009).