Oil Price Volatility and Economic Growth in Nigeria: a Vector Auto-Regression (VAR) Approach

Abstract

The study examined oil price volatility and economic growth in Nigeria linking oil price
\nvolatility, crude oil prices, oil revenue and Gross Domestic Product. Using quarterly data sourced
\nfrom the Central Bank of Nigeria (CBN) Statistical Bulletin and World Bank Indicators (various
\nissues) spanning 1980-2010, a non‐linear model of oil price volatility and economic growth was
\nestimated using the VAR technique. The study revealed that oil price volatility has significantly
\ninfluenced the level of economic growth in Nigeria although; the result additionally indicated a
\nnegative relationship between the oil price volatility and the level of economic growth. Furthermore,
\nthe result also showed that the Nigerian economy survived on crude oil, to such extent that the
\ncountry‘s budget is tied to particular price of crude oil. This is not a good sign for a developing
\neconomy, more so that the country relies almost entirely on revenue of the oil sector as a source of
\nforeign exchange earnings. This therefore portends some dangers for the economic survival of
\nNigeria. It was recommended amongst others that there should be a strong need for policy makers to
\nfocus on policy that will strengthen/stabilize the economy with specific focus on alternative sources
\nof government revenue. Finally, there should be reduction in monetization of crude oil receipts (fiscal
\ndiscipline), aggressive saving of proceeds from oil booms in future in order to withstand vicissitudes
\nof oil price volatility in future.