Macroeconomic Effects of Crude Oil Price Movements: The Case of Nigeria

Since the beginning of the 20th century till date, crude oil has played a major role as an indicator of economic growth, due to its immeasurable importance in supply of energy demand of the entire world. Over more than four decades, Nigeria has been an important crude oil exporter, her primary product. Crude oil production and export since 1957 has brought a tremendous change to the economy of Nigeria, contributing a large share to the gross domestic product of the country. As reported in Hamilton (2008), high and fluctuating oil prices have become an inevitable result of recent world developments such as strong growth in demand, contribution of scarcity rent and OPEC monopoly pricing. In the light of these, it is of interest to investigate how the Nigerian economy which is heavily dependent on the export of its primary product will be affected by such trends in the world. For the purpose, the study seeks to analyze various economic impacts caused by international fluctuations in crude oil prices on the Nigerian economy between1994Q.1 -2013Q.4 using quarterly data. Output growth and inflation variables have been used to reflect the state of the economy while money supply will capture the monetary policy response to real crude oil price movements. The analysis employs structural VAR methodology. The empirical results suggest a negative relationship between inflation and oil price shock and its volatility over the sample period while response of monetary policy is insignificant. However, both unexpected price shock and volatility imposes a positive impact on the Nigerian output which later may destabilize the economy. Keywords: SVAR, inflation, money supply and crude oil price.