A COMPARATIVE ANALYSIS OF THE IMPACT OF FLUCTUATING OIL PRICES ON NIGERIA’S AGRICULTURAL AND INDUSTRIAL SECTORS

ABSTRACT

This study was the brain child of the earnest desire to unravel the impact of the incessant fluctuating oil prices on two crucial sectors of the Nigerian economy; the agricultural sector and the industrial sector which used manufacturing sector as proxy. The analysis employed the unrestricted Vector Autoregressive methodology as its empirical technique, with a quarterly time series data spanning from 1987 quarter one through 2014 quarter four which covered 112 observations. The result of the impulse response function showed that a one standard deviation shock in oil price volatility had no significant impact on agricultural and manufacturing sectors. These results were further validated by the variance decomposition analysis which further established that amidst the oil price volatility; there exist a complementary role between the sectors. These findings therefore, necessitated the study’s conclusions. Thus it is supposed that if the country’s excessive dependence on crude oil price benchmarks for fiscal policy strategies is not mitigated, the economy may be headed for a deeper crises and instability orchestrated by the utterly negligence of other crucial sectors of the economy.

CHAPTER ONE INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The trending argumentamong scholars on the impact of the fluctuating oil prices on economic conditions of nations is not on whether it exists,butrelatively on the possible varying degree of the positive or the negative effects it commands over the economy. Such effects when narrowed down to the economic hub of sectoral decompositions such as the agricultural and industrial sectors may assist in absorbing the unforeseen shocksassociated with such volatilities.These volatilities according to Wakeford (2006) are often than not orchestrated by the dynamics of demand and supply challenges existent in the crude oil world market. Thus, the historical  antecedent  of  crude  oil  price  fluctuations  accompanied  by  some statistical evidence may become a useful tool in properly positioning Nigeria’s agricultural and industrial (manufacturing) sectors.

Bacon and Kojima (2008) proposed that the fluctuations in oil prices largely affect a country’s budgeting systems, balance of payment structure, domestic output and the general household behaviour. Thus despite the crude oil price benchmark’s fundamental position in carrying out fiscal and monetary policies responsibilities in Nigeria (especially on budgetingstrategies as pointed by Bacon and Kojima,

2008), the trickledown effectsmaywell seem to be completely yetunderstood. As such our economic priorities might not have been uniquely articulated to stand the test of high level volatilities given the economy’s structural compositions. These viewpoints areprincipally in tandem with the works of Aliyu (2009) and Joseph (2013)whose   worksshowed   that   oil   prices   largely   have   an   effect   on

macroeconomic indicators, which could  as  well largely extend  to  some  other critical sectors.

However, it is pertinent to graphically elucidate the oil price fluctuations using Central Bank of Nigeria’s (CBN) monthly oil price data  from 2006 month 1 through 2015 month 8.

Figure 1: Crude Oil Price and the Volume of Export for Nigeria

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Crude Oil Price and the Volume of Export

for Nigeria

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CrudeOilExp                CrudeOilPrice

Source: Own Plotting using CBN monthly figures

From the above illustration, we have the crude oil price depicted by the red line plotted with Nigeria’s volume of export in blue line. The left hand side represents the crude oil prices measured in US dollars per barrel while the right hand side denotes the crude export volumes in millions of barrels per day.A critical consideration of the oil price shows that there has been a very large fluctuationwith maximum price of $141.86 per barrel in July 2007 and minimum of $44.36/barrel in December 2008. This illustration aligns with the findings of Bacon and Kojima

(2008) whose works  showed wide  oil price  fluctuations between January and November 2007. Another significant observation from the fluctuation is the persistent decline from July 2014 ($109.63/barrel) through January 2015 ($48.81). In addition, the price fluctuations tend to on the average override the exports volume. These fluctuations could trickledown to other sectors of the economy since the country heavily depends on crude prices for its policy decisions. Another notable observation is the fact that the volume of crude export as observed from the graph is not at maximum when the price was at its peak. Hence one threatening challenge could possibly stem from how greatly these fluctuations may impact on other sectors of the Nigerian economy.

Nevertheless,one more raging argument among scholars is on the best ever routes in the course ofachieving national inclined butcontinual economic prosperity and advancement amidst the fluctuations in oil prices. Ogbu (2012) proposed viatechnical innovation, organizational development and expanse industrializedcompetence as opposed to Englama, Duke and Ogunleye (2010)who proposed the economy’s level of bequeathed material wealth and human resource. In furtherance of these arguments, the Nigerian scenario is worthy of discuss.This is because despite the country’s enormouscrude oil endowment, the World Development Indicators (2014) using 2013 data reported that 70% of the populace are living below the poverty line of $1.5 a day. Though this stands as proven statistical reference point for researchers and policy prescribers, but the assertion upon critical evaluation may appear degrading, especially, given the unexploited potential of our agricultural and industrial sectors.Thus the supporting argument associated with the issues of poverty in Nigeria could be evident on the country’s ardent mono-economic tradition practiced over the years.This is in addition tothe poorly utilized endowed material resources at her disposal, mainly, with respect to

the industrial sector of the economy which possess several unexploited development opportunities in generating employment as well as economic growth.

Furthermore, Englama et al (2010) noted that the breakthrough recorded as regards the unearthing of crude oil in the 1950s deemphasised Nigeria’s industrial production which prior to that time drove the economy and afterwards enormously emphasised crude oil production. But this is not without consequences as it has tremendously hampered economic performances and in addition caused an upsetto the country’s macroeconomic objective of reducing the intensity of unemployment, among other crucial economic challenges. All theseare attributable to the zealous mono-economic oriented system as obviously observed in the oil industry; not forgetting the high level of negligence suffered by other crucial sectors of the economy such as the agricultural and the industrial sectors.

Conversely, Amakom (2012) argued that a nation’s industrial sector, including the agricultural sector immensely decides its economic competence and as such wilds greater solid background upon which outstanding growth could be guaranteed over time.  Given  this  complementary  role  between  the  industrial  and  agricultural sectors, Nigeria is not an exception to this proven strategy of ensuring enhanced cum buoyant development requisite in both sectors.To a very large extent, it would perhapsentrench  development  in  any  emerging  economy.  Thus  Ogbu  (2012) further supported this argument by asserting that growth in industrial and agricultural sectors are very paramount while developing an economy.Thereby implying that deemphasizing the unnecessary emphasis on the crude oil sector and consolidating these vital sectors (agricultural and industrial sectors)may savage the Nigerian economy from a possible extinction, just like the cases of Japan, United States, India, Hong Kong, Singapore and South Korea.

The foregoing discuss invariably connotes that Nigerian manufacturing sector and its agricultural counterpart are verypertinent development channels through which the economy’s full potential could be attained, even amidst the fluctuations in oil prices. Therefore, the primary challenge and focus could be on ascertaining the degree of impact (either positive or negative) the fluctuating oil prices exert on Nigeria’s agricultural and industrial sectors which may help in restoring the Nigerian economy to the very echelon of world competitive status. This may also bring to an end the historical underpinning that Nigeria being the largest producer of oil in Africa is not among the top 10 African countries with the highest human development index evident from the United Nations Human Development index (2014).

1.2 STATEMENT OF THE PROBLEM

It is generally known that when one swims in the ocean of abundance, getting his priorities right becomes a daunting task and this may consequently give rise to avoidable life of struggle. Thus the fluctuations in oil prices unlike the proposition by Bacon and Kojima (2008) should perhaps not necessarily transcend to a huge dilemma for the Nigerian economy given the enormity of the untapped potentials in  the  agricultural  and  industrial  sectors.  From  a  historical  perspective,  the Nigerian industrial and agricultural sectors are clear illustrations of the high level of negligence experienced by other fundamental sectors of the economy (other than the oil sector) perhaps due to inconsistencies in policy objectives and implementations. We could corroborate this claim via the critical consideration of the  5  top  richest  countries  in  the  world  –  Qatar,  Luxembourg,  United  Arab Emirates, Norway and Singapore, which according to World Atlas (2014) revealed that  their  industrial  sectors  are  exceptionally  vibrant  and  progressive.  The backbone of these strong economies is fundamentally in tandem with their active

financial sectors, vibrantmanufacturing sectors and wise economic policies. Hence, the  challenge  that  abounds  in  the  Nigerian agricultural and  industrial sectors becomes a daunting one, given the fluctuating world oil price which inter alia is her major source of foreign earnings.

However, there has been some level of inconsistent fluctuations with respect to the percentage contributions of the manufacturing and agricultural sectors to Nigeria’s GDP. This  aligns with Adeola (2005) who was of the  view that Nigeria has neglected her manufacturing and agricultural sectors which invariably culminate to their negligible and fluctuating contributions to her GDP. We can illustrate these graphically using CBN data sets as shown below;

Figure 2: Percentage Contribution of Agricultural and Manufacturing Sectors to Nigeria’s GDP

% Contribution of Agric. and Manuf. Sectors to

Nigeria’s GDP

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Agriculture              Manufacturing

Source: Own plotting using CBN data from 1981_Q1 through 2014_Q4

From the above graphical analysis, it is clear that the percentage contribution of the manufacturing sector (shown in red) to Nigeria’s GDP is trending downwards unlike that of agricultural sector (shown in blue) that  is  fluctuating around a relatively stable trend. It is also obvious that since the first quarter of 2003 through the fourth quarter of 2014, the percentage contribution of the manufacturing sector to Nigeria’s GDP has not gone beyond 10%. Some of the figures fluctuated around zero, such that the first quarters of 2004, 2005, 2006, 2007 and 2008 are on the average 0.8%. This illustration is indeed problematic and worrisome when compared toother countries’ manufacturing sectors’ contributions to their national outputs. Thus Ogbu (2012) reported Brazil’s manufacturing sectors contribution to GDP as 20%, China 34%, Malaysia 30%, Thailand 35% and Indonesia 28%. None of Nigeria’s figures from the first quarter of 1995 (2.5%) to the period of 2014 quarter   four   (9.1%)as   graphicallyillustrated   is   close   to   that   ofany   of aforementioned countries’. This isa lucid sign that the country’s industrial sector (using  manufacturing sector  as  proxy) as  a  matter of  urgency requires  to  be massivelytransformed, especially amidst the fluctuating oil prices.

Consequently, the above analysis and countries’ case studies leaves more to be desired as the Nigerian economy requires lots of economic and policy catch ups that  will  bring  to  the  fore  the  untapped  potentials  of  our  manufacturing and agricultural sectors; instead of the excessive importance placed on the oil sector and its associated blind politics which had done the country more harm than good. Thus the  researchexperience of Ogbu (2012) opined thatNigeria’s oil  industry possesses inadequate advantages, minimally contributes to other sectors of the economy andhad never been a basic strategy of solving the country’s macroeconomic objective of employment generation. As such, there is indeed the need to align properly with the views of Bacon and Kojima (2008) for more policy

strategies  particularlyregarding the  fluctuating  oil  priceswhich  is  necessary  in restoring the economic hopes of other sectors(agricultural and industrial sectors) of the Nigerian economy.

Prior to the oil boom of the 1970s, the Nigerian agricultural sector largely dominated  the  industrial production and  was  a  major  driver  of  the  country’s economy  as  it  was  a  fundamental  source  of  foreign  earnings  and  ensured continuous inflow of foreign currency via export oriented activities with its bequeathed raw materials. The whole scenario changed given the emergence of crude oil discovery in large quantities, with the economic fortunes of the country tilting towards crude production which led to the reckless abandon encountered in other pertinent sectors of the economy, particularly agricultural and manufacturing sectors. This bloated interest in the oil sector was not without economic consequence as there emerged substantial mass exodus of village inhabitants to cities that produced crude oil, leading to huge unemployment indices cum very negligible living standards. Hence following the proposition by Bacon and Kojima (2008) that oil price fluctuations affects general household behaviour, it becomes necessary to exemplify that besides the industrialized Lagos State, Rivers State and other oil producing states  may have become too  congested.This is  a  possible consequence of our collective negligence of the manufacturing and the agricultural sectors which are better practiced in the rural setting other than cities with urbanization in mind.

While oil prices fluctuate, there are periods of high oil prices which guarantees Nigeria high Oil Revenue. It is only expected that with high Oil revenue, the agricultural and industrial sectors of Nigeria should flourish with particular reference to consumption of more agricultural and industrial goods, importation of capital goods for development of the industrial sector as well as the promulgation,

financing and implementation of sector specific developmental programmes with recourse to the agricultural and industrial sectors in particular.

Negligence of these sectors even with improved oil prices over the years until most recently is evidenced all over the economy today, thus warranting the need to justify  if  indeed,  fluctuations  in  oil  prices  has  anything to  do  with Nigeria’s agricultural and industrial sectors bearing in mind the need also to proffer solutions and make recommendations where applicable, such that, no country of the world will grow or even develop with little or minimal attention to the complementary role of agricultural and industrial sectors of their economy. Thus we are faced with these challenging but pertinent research questions which should be addressed with some degree of carefulness given the fluctuating oil prices.

1.3 RESEARCH QUESTIONS

More specifically, the following research questions will be addressed in this study:

1.  How  do  fluctuations  in  crude  oil  prices  affect  the  output  of  Nigeria’s agricultural sector?

2.  How do fluctuations in crude oil prices affect the output of Nigeria’s industrial sector?

3.  What comparative relationship exists between the impact of the fluctuation in oil prices on agricultural and industrial sectors?

1.4 OBJECTIVES OF THE STUDY

The broad objective is to empirically evaluate the comparative analysis of the impact of fluctuating oil prices on Nigeria’sagricultural and industrial sectors while the specific objectives are:

1.  To  ascertain  how  fluctuations  in  crude  oil  prices  affect  the  output  of

Nigeria’s agricultural sector.

2.  To find out how fluctuations in crude oil prices affect the output of Nigeria’s industrial sector.

3.  To make a comparative analysis of the impact of the fluctuation in oil prices on the agricultural and the industrial sectors.

1.5 RESEARCH HYPOTHESES

The following crucial research hypotheses will be tested in the course of this study

H01:   Fluctuations in crude oil prices has no significanteffect on the output of

Nigeria’s agricultural sector.

H02: Fluctuations in crude oil priceshas no significant effect on the output of

Nigeria’s industrial sector.

H03: There is no significantdifference in the impact of fluctuationsin oil prices on the agricultural and the industrial sectors.

1.6 POLICY RELEVANCE OF THE STUDY

This research work will be of immense benefit to Nigeria’s policy makers as a whole and  not  just exploring the  policy alternatives available to  the Nigerian government amidst the fluctuating oil prices. Fundamentally, it will bring to fore the crucial and appalling difficulty of negligence faced by the Nigerian agricultural and industrial sectors, including the potential dangers of over dependence cum mono economic system as could be observed in the oil sector. In addition, by resuscitating the degree of  vibrancy required in the agricultural and industrial

sectors, the government would have prepared to avert the possible looming crises hovering around Nigerian economy given the continued fluctuating oil prices.

More specifically, the study will uncover the task of agricultural and industrial sectorsperformances in resolving the critical macroeconomic issue of unemployment. This will be achieved by suggesting and encouraging policies that would be relevant to enhancing agricultural and industrial activities which will boost productivity, hence, the anticipated trickledown effect. Finally, de- emphasizing the excessive attention in the oil sector would help Nigeria with the requisite attitude towards the agricultural and industrial sectors which may invariably bring about the new world of opportunities that abound in the face of fluctuating oil prices.

1.7 SCOPE AND DELIMITATION OF THE STUDY

Fundamentally,  it  is  a  country specific  study  purposive towards  the  Nigerian situation and a quarterly time series data (from CBN bulletin and US Energy Information Administration) spanning from 1987Q1 through 2014Q4 will be employed.The choice  of  these  time  interval  for  the  data  set  was  particularly informed by the availability of data. Note that the decision to employ data set from the  US  Energy  Information  Administration stems  from  the  obvious  fact  that Nigeria is not an oil price determinant but an oil price taker since it is internationally determined.

However, given the vast nature of the Nigerian industrial sector, this research work will keenly pay specific attention to the manufacturing sector and the agricultural sector will also be examined. The variables of interest in this study will be: the oil price volatility (OILPV), manufacturing output (MANOP) and agricultural output (AGROP).However, while we hope to bring this research work to the very echelon

of world standard, the Vector Autoregressive (VAR) model in a three dimension equation will be employed to resolve the objectives of this study.

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