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PATTERNS AND TRENDS OF OIL TRADE IN NIGERIA

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Abstract

This study was an attempt to investigate the Patterns and Trends of Oil Trade in Nigeria. Crude oil has played a major role as an indicator of economic growth since the 19th century till date, due to its immeasurable viability in supply of energy demand to many countries like, India, US, China, Netherlands and Belgium. Over five decades mow, Nigeria has been a consistence crude oil exporter, her primary product being unrefined crude oil. 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. 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 the above, it became imperative to investigate how the Nigerian economy which is heavily dependent on the export of its primary product has been affected by such trends in the world. This study investigates the impact of oil price shocks on oil sector stock prices in Nigeria using a high frequency data between 1979 and 2011. The analysis employs structural VAR methodology. The findings reveals that there is no significant effect of oil price found on oil sector stock prices, but there are significant effects of such macroeconomic variables as interest rate, exchange rate and real gross domestic product on oil sector stock prices in Nigeria. Therefore the volatility in oil price does not necessarily influence the movement of oil sector stock prices in Nigeria. It was concluded that, the variation in oil price has an effect on the growth of the Nigerian economy; hence, policies to influence economic growth should be independently pursued of oil price changes. The Petroleum Products Pricing Regulatory Agency (PPPRA) should frequently sensitize the general consuming public about the state of petroleum products’ supply and distribution, petroleum products pump prices updates, products import permit allocation, import performance, implementation of the Sovereign Debt Instruments (SDI) and subsidy verification.

                                        TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgment

Abstract

Table of content

 CHAPTER ONE

INTRODUCTION

1.1        Background to the study

1.2        Problem Statement

1.3        Aims/Objectives of study

1.4       The Research questions

1.5       Statement of Research Hypothesis

1.6      Scope of the study 

1.7      Basic Assumptions

1.8      Limitation of the Study

1.9    Significance of the Study

1.10 Operational Definition of Terms

1.10.1 Organization of the Study

CHAPTER TWO

LITERATURE REVIEW

2.1    Introduction

2.2    Concept of Oil Trade Shock

2.2.1 Trade Balance

2.3    Monetary Policy and Oil Prices

2.4    Asymmetric Effect of Oil Price Changes

2.5    The Structure of Exports and Export Earnings

2.6     Stock Market and Economic Activity

2.7.    Oil Prices and Stock Market

2.8.    Empirical Review

2.9.    Theoretical Framework

2.9.1   Dependency Theory of Development

CHAPTER THREE

RESEARCH METHODOLOGY

3.1   Research Design

3.2    Sources of Data

3.3    Multiple Linear Regression

3.4    Vector Auto Regression (VAR)

3.4.1  Impulse Response Function

3.4.2  Variance Decomposition

CHAPTER FOUR     

DATA PRESENTATION AND ANALYSIS

4.1     Introduction

4.2     Data Presentation

4.3     Explanatory variables

4.4     Unit Root Test

4.5     Lag Length Selection Criteria:

4.6     Empirical Result

4.7     Correlation Matrix Test

4.8     Excerpt of Granger Causality Test

4.9     Impulse Response Graph

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Policy Implications of Research Findings

5.5 Recommendations

References

Appendix

CHAPTER ONE

INTRODUCTION

  1. Background to the Study

Since twentieth century onwards, unrefined petroleum has gotten one of the primary markers of monetary movement around the world, because of its remarkable significance in the supply of the world’s vitality demands. Nigeria as one of the significant providers of unrefined petroleum in the universal market has depended such a great amount in the trends and patterns of oil trade in making their yearly spending plans. Nigeria being Africa’s largest oil and gas producer is presently ranked as the sixth largest in the world hydrocarbon among other oil & gas producing countries in the world, Nigeria has a maximum crude oil production capacity of 2.5 million barrels per day (C.B.N, annual report: 2018).  It also holds an estimated 36.5 billion barrels of crude oil & condensates and 180.4 trillion standard cubic feet of gas reserves mostly domiciled in the Niger–Delta (Ngwu, 2014).

Today when Nigeria is mentioned with reference to socio-economic benefits, the first thing that cross one’s mind is the abundance of natural resources such as; oil and gas, gold, coal, lead and zinc. Iron ore, limestone, salt and tin and lots more. Rather than be a channel of blessing the Nigerian oil and gas has brought so much turmoil and natural disasters on the oil communities, especially in the South-south region. Oil and gas have left trail of woes in their path with so much damage to the ecosystem and problems to human life in the exploration region.

A trend is the general direction of a price over a period of time while a pattern is a set of data that follows a recognizable form, which analysts then attempt to find in the current data. To best understand the patterns and trends of oil trade in Nigeria, it is imperative that we understand the history of oil discovery in Nigeria and its impacts in this region till date. Crude oil was first discovered in Nigeria in 1956 by Shell D’Arcy Petroleum (which later in that same year changed its name to Shell-BP Petroleum Development Company of Nigeria Limited) at Oloibiri in the Niger Delta after half a century of exploration. Shell-BP, became the first sole concessionaire at that time. Nigeria later became an oil producer in 1958 when its first oil field (Oloibiri) came on stream producing 5,100 barrels per day (BPD). Nigeria formally joined the Organization of Petroleum Exporting Countries (OPEC) in 1971. The first Participation Agreement by the Federal Government acquires 35% shares in the Oil Companies in 1973; Second Participation Agreement, Federal Government increases equity to 55%.; between 1979 to 1993 other Participation Agreements (through NNPC) were signed. In 2017, the Nigerian National Petroleum Corporation (NNOC later NNPC) was established by Decree 33 of 2017 (Chika Onuegbu, 2016). Today, its more than five decades since oil was discovered and exploited in Nigeria, the country’s economic policy formulations have entirely been embedded in this single resource of nature, thereby making Nigeria depend solely and vulnerable to international oil price booms and bursts. The impact of the oil discovery has been tremendous has the country’s economy rely entirely on oil trade till date, while the negative sides evolves from oil spillage, corruption, militancy and pipe-line vandalism/bunkering. Oil spillage is a global issue that has been occurring since the discovery of crude oil, which was part of the industrial revolution. It has had disastrous impacts on the environment in the region and has adversely affected people inhabiting that region. The point remains that oil has significantly impacted the Nigerian political terrain and has since affected its relationship with other nations of the world including India (Ehinomen and Adeleke 2012:233)

According to Onigbinde (2014), in the 1970s, Nigeria was able to generate tremendous wealth as a result of the increase in the world oil price. As indicated by Odusami (2016:1), fluctuations in the cost of unrefined petroleum have noteworthy ramifications for a Varity of financial exercises. Mork (2009:20) analyzed the proof of awry reaction of yield to trends and patterns of oil trade and discovered proof of negative connection among trends and patterns of oil trade. Lee and Ratti (2017:53) examined the impact of genuine oil trade costs on yield and demonstrated that in significant stretches of monetary dependability, oil trade varieties influences yield in U.S., India, Japan, Germany, Canada, France, UK and Norway.

It could be seen that the general population has been especially worried about trends and patterns of oil trade fluctuations. In this way, the overarching view among business analysts is that there is a solid connection between the development pace of a nation and trends and patterns of oil trade.

Vaitheeswaran (2017:16) is of the opinion that the cause of the constant rise in oil price is that oil markets experience an unusual blend of tight supply and surging demand which offered ascend to changes in the trade patterns. One may likewise consider the unsteady political circumstance in the Middle East and the exercises of activist gatherings in the Niger Delta an up-and-comer cause for the ascent in trends and patterns of oil costs.

There exist a couple of research works that looks at trends and patterns of oil trade and significantly less investigations inspect trends and patterns of oil trade in Nigeria. Hence, this study examines patterns and trends of oil trade.

1.2    Problem Statement

Oil and gas exploration activities have led to the loss of farms aquatic life streams and rivers which used to be a source of livelihood to the occupant of this oil producing communities. However, behind this glossy facade of financial benefits, UNEP (2017) asserts that activities related to oil exploration and productions (such as seismic survey, drilling, production and transport) have a range of environmental and social effects on Ogoni community. Pictures of some of the degraded environment are depicted in the Figures below:

An image of illegal crude oil refinery site in the creeks of an Ogoni community in Nigeria’s Niger Delta, on July 7, 2010 (Reuters/Akintunde Akinleye)

The major causes of oil spills in the Nigeria include blowout, pipeline corrosion, equipment failure and sabotage. Other minor causes include accidental spills, overflow of tanks, valve failure, over pressure, sand cut through erosion, and engineering error. This study was inspired by the fact that Nigeria’s economy in the course of the most recent two decades has depended greatly on oil as a source of revenue and the constant fluctuations have been detrimental to the growth of the Nigerian economy. It has likewise been distinguished that the volatilities of these trends and patterns have critical ramifications for financial exercises. This view has been very much clarified by different authors including those of Rasche and Tatom (2011), Hamilton (2016, 2015, 2014, 2013), Burbidge and Harrison (2014), santini (2015), Gisserand Goodwin (2017), Loungani (2017), Tatom (2012), Mork (2009), Hamilton and Herrera (2014) and numerous others.

Despite over 30 years of research since the first major post­war oil crisis in 1973, non of  such work has been carried out in a developing country like Nigeria and not much has been done on an oil exporting economy, which Nigeria also belong. This research therefore, is to ascertain the effect of trends and patterns of oil prices on the Nigerian stock market.

1.3     Aims/Objectives of the Research

The primary aim of this research is to assess the patterns and trends of oil trade in Nigeria. Based   on   the   identified   research   problem,   the following sub objectives were set for the research:

  1. To examine the relationship between oil price and value of share traded.
  2. To determine how trade shock transmits to the Nigerian stock market.
  3. To determine how the Nigerian stock market could efficiently handle the trade shock effect in order not to slow stock returns.
  4. To ascertain the impact of oil export trade on Nigeria Economy.

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