TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Research Questions
1.5 Hypotheses
1.6 Scope of the Study
1.7 Justification for the study
1.8 Significance of the Study
Content
1.9 Operational Definition of terms
CHAPTER TWO: REVIEW OF LITERATURE
2.1 Conceptual Model
2.1.1 Concept of Crude oil Price
2.1.2 Concept of Exchange Rate
2.1.3 Oil price and Exchange Rate
2.1.3.1 Post independence Era
2.1.3.2 Oil Boom Era
2.1.3.3 Post Sap Era
2.1.4 Concept of Fixed Exchange Rate 12
2.1.5 Concept of Floating Exchange Rate
2.1.6 Concept of Exchange rate Volatility
2.1.6.1 Measuring Exchange Rate Volatility
2.1.7 Foreign Exchange Market in Nigeria
2.1.8 Structure of Nigeria’s Foreign Exchange Market
2.1.8.1 Second tier Foreign Exchange Market
2.1.8.2 Autonomous and interbank foreign exchange market
2.1.8.3 Dutch Auction System
2.1.9 Exchange Rate Stability
Content
2.1.10 Concept of Foreign Reserve
2.1.11 Concept of Inflation
2.1.12 Conceptual Model
2.2. Theoretical Framework
2.2.1 Theories on Exchange rate
2.2.1.1 Asset approach theory
2.2.1.2 Purchasing power parity theory
2.2.1.3 Traditional theory
2.2.1.4 Monetarist theory
2.2.1.5 International Effect Theory
2.2.1.6 Balance of Payment Theory
2.2.1.7 Sterilization Theory
2.2.2 Theories on Oil Prices
2.2.2.1 Hotelling Theory on Price
2.2.2.2 Oligopoly Pricing Theory
2.2.2.3 Commodity Price Speculative Theory
2.2.2.4 Economic growth theory
2.2.2.5 Inclusive Growth Theory
2.3 Empirical Review
Content
2.4 Gaps in Literature
CHAPTER THREE: METHODOLOGY
3.0 Introduction
3.1 Research Design
3.2 Population
3.3 Types and sources of data
3.4 Model specification
3.5 Method of Data Analysis
3.6 Model estimation procedure
3.6.1 Unit root test
3.6.2 Dickey Fuller
3.6.4 Johansen co-integration
3.6.5 Impulse response function
3.6.6 Variance decomposition
3.7 A priori Expectation
3.8 Ethical Consideration
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND
DISCUSSION OF FINDINGS
4.0 Introduction
4.1 Descriptive Analysis and Trend
4.2 Econometrics Analysis
4.7 Theoretical findings
4.8 Empirical Findings
CHAPTER FIVE: SUMMARY, CONCLUSION
AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The search for oil which began in 1907 when Nigeria Bitumen Corporation conducted exploratory work in the country; however the firm left the country at the onset of world war. Thereafter licenses were given to D’Arcy Exploration Company and Whitehall petroleum. However, neither company found oil of commercial value and they returned their licenses in 1923 (Frynas, 1999). A new license covering 357,000sq.miles was given to a new firm called shell D’Arcy petroleum Development Company of Nigeria. The new firm was a consortium of Shell and British petroleum (then known as Anglo-Iranian). The company began exploratory work in 1937. Oil was discovered in non-commercial quantity at Akata near Eket in 1953 (Frynas, 1999).Shell BP in the pursuit of commercially available petroleum found oil in Oloibiri, Niger Delta which is in present Bayelsa state in 1956. Since the discovery of oil in commercial quantity, Nigeria has been largely a mono-product economy. The value of Nigeria’s total export revenue in 2010 stood at US$70,579 million, while income from petroleum exports of the total export revenue was US$61,804 million representing about 87.6 percent (Ogundipe &ojeaga, 2014).The discovery of oil brought in the eastern and mid-eastern regions of Nigeria, this brought hope of a brighter future for Nigeria in terms of economic development as Nigeria became independent. In 1969 the Nigerian government enacted decree 51 to strengthen its hold on the oil industry. With this decree the country (Nigeria) took greater control over the granting of concession and more involvement in the refining, distributing, and price of crude oil (Genova and Falola, 2003). It is clear that Nigeria realized the importance of its oil industry as well as the need to control it.
Prior to the discovery of Oil, Nigeria (like many other African countries) strongly relied on agricultural exports to other countries to supply to their economies (Andrew, 2009). Agriculture was the dominant source of Nigeria’s revenue earning and hence the sustenance of the economy accounting for 64.1% of the GDP before the discovery of petroleum of commercial quantity in 1956 (Oluwasanmi, 1960).Palm oil became an export commodity in Nigeria as far back as 1558; and by 1830, the Niger Delta, which now produces crude oil, had become the major source of palm oil which dominated Nigeria’s export list for more than 50 years (Olukoju, 2009). Cotton joined the export list in 1856, while cocoa was introduced and became an export cropin 1895 (Olukoju, 2009). Together with rubber, groundnut, palm kernel and Bennie-seed in later years formed the major valuable crops. These cash crops formed the main source of revenue, export and foreign exchange for the government (Udo, 1967). The savannah grassland to the north supports the planting of cereal and leguminous crops such as sorghum, millet, ground nuts as well as animal rearing mostly for hide and skin (Ekundare, 1973). Agriculture was the mainstay of Nigeria’s economy from the earliest time up to 1950s. Nigerians had an enviable record of food sufficiency but the era did not last beyond the 1960s when its economy began a descent into an abysmal dependence on imports (Ake, 1985).Agriculture provided 95% of the food needed to feed Nigerians, contributed 64.1% Gross Domestic Product (GDP) and employed over 70% of Nigerian population before oil began to be exported (Oluwasanmi, 1960).
The oil dependence and volatility of oil prices in international markets often lead to significant problems in areas of fiscal planning, quality of public spending, and other financial institutions when oil prices collapse. When oil prices fall, fiscal budgets sometimes go into deficit; countries badly affected start taking loans tied to their reserves, and incur more debt. The activities of cartel pricing policy and oil speculators have also affected the price of crude oil, growth of speculative activities which often influence exchange rate. Speculation causes short run fluctuation in exchange rate, and when there is speculation or expectation of a change in the rate of exchange or oil price, a state disequilibrium arises. The forex reserve is at the lowest level since October 2005 when Nigeria recorded $23.92 billion in external reserve. With this, the central bank has ignored calls to devalue the naira, maintaining an official exchange rate of N197 per dollar while the currency trades at N350 per dollar at the parallel market (Financial Nigeria, 2016).
According to Adedipe (2004), the rise in oil revenue was caused by the Middle East war of 1973. It created extraordinary wealth for Nigeria and the naira appreciated as foreign exchange influxes offset outflows and Nigeria foreign reserves assets increased. Between 1973 and March 1974, when OPEC announced an Oil embargo against a number of western countries for their support for Israel during the six days war, Oil prices reach $12 per barrel from $3 per barrel( premium times, 2014). By 1979 to 1980, the new Nigeria narrative was ‘austerity’ as oil prices fell for two decades thereafter. Until 2003, the Nigeria economy’s boom and burst cycle was predicted using the oil price outlook( Premium times, 2014) Oil prices fell sharply in the second half of 2014, bringing to an end a four-year period of stability of $105 per barrel. The decline, which is much larger than that of the non-oil commodity price indices compared to early-2011 peaks, may signal an end to a price “super cycle” (Pricewaterhousecoopers, 2015).The economy of Nigeria gradually became dependent on crude oil as productivity declined in other sectors (Englama, Duke, Ogunleye&Isma., 2010). Between June 30 2014 and Dec. 31 2014 oil prices declined from $112.78/barrel to 55.57/barrel, they recorded a decline of 15%, the naira depreciated by 8% and 13% at the official and interbank market in 2014 and by 5.6% at the interbank market as at Jan 23 2015(Godwin, 2015).The sources and implications of the sharp decline in oil prices led to intensive debate,the oil price falls to $50/bbl. in the second quarter of 2015, before recovering to an equilibrium level of $70/bbl. in 2016. At $55/bbl. in 2015, the average oil price falls short of Nigeria’s proposed federal budget benchmark, of $65bbl (PWC, 2015).Oil prices remained low in 2015 and rose only marginally in 2016.
Exchange rate is the price for which a country’s currency is exchanged for another’s country’s currency and is influenced by several factors among which are interest rates, inflation, or political condition of the country (Oliver &Okpe, 2015). The exchange rate is perhaps one of the most widely discussed topics in Nigeria today because of its macro-economic importance especially in a highly import dependent economy as Nigeria (Olisadebe, 1995). Although the Naira exchange rate witnessed some period of relative calm between July to November 1986 since the implementation of the structural adjustment programme (SAP) in July, 1986, its continued depreciation form December 1986, however, may have implications on the level of real sector activities in the country. The Naira which traded at N0.960 = US$1.00 in December 1985 depreciated to N3.18 to $1.00 by December 1986 and further to N8.71 against the US dollar in December 1990. To stem the trend, the policy of guided deregulation pegged the naira at N21.89 against the dollar in 1994.
Further deregulation of the foreign exchange market in 1999, however, pushed the exchange rate to N97.60 to US$1.00 by December (CBN statistical bulletin, 2015). With huge inflow of oil revenue due to hike in the oil price, the end-period rate stood at N118.21 in December, 2007. This remained stable until towards the end of 2008 when the global financial crisis took its toll on the oil sector thereby causing naira exchange rate to depreciatefrom 117.74, 2008 to N126.48 in December, 2008 and further to N149.68 in December 2009, (Aliyu, 2009).In December 2010, the exchange rate further depreciated to N150.48 and 157.32 by December 2013. In December, 2014 the exchange rate stood at N169.68 which later depreciated to N196.99 as at December, 2015 (CBN statistical bulletin, 2015).