Examination of the Relationship between Oil Price Shock and Macroeconomic Variables in Nigeria

Abstract

The price of oil is one of the important macroeconomic indicators because of the extreme importance of supplying oil to different countries of the world to meet their energy needs. As Nigeria's economy depends on oil prices, the country remains vulnerable to fluctuations in world oil prices. During periods of rising oil prices caused by macroeconomic and political conditions in the international market, the state usually has a positive trade balance, there is an increase in foreign exchange reserves and the revaluation of the national currency. The purpose of the article is to evaluate the relationship between oil price change and Nigeria's economic growth rate using regression analysis. The source of statistical information is data from the National Bureau of Statistics, the Nigerian National Petroleum Corporation and the Nigerian Energy Commission. By checking the time series for steady-state using the advanced Dickie-Fuller test, a regression equation is constructed where the dependent variable is represented as the price of oil and the independent variables are key macroeconomic indicators. The econometric model constructed is adequate because the determination coefficient and the adjusted determination coefficient are 0.97 and 0.96 respectively. The Darbin-Watson statistic in the model is 1.98, meaning the model is reliable. Oil price fluctuations have been found to be related to investment, economic growth and exchange rates, as well as to inflation. The paper argues that the use of the shock of oil prices should be supported, as it promotes economic growth and is not inflationary. Therefore, the authors believe that the government, which is the main beneficiary of cash, should also implement strategies that counterbalance the propensity for economic downturn. Based on the analysis, a set of priority measures was proposed: enhancing financial liberalization, combating corruption, transparency of government activities, creating an open currency market, and developing non-inflationary monetary and fiscal strategies.