Oil Price Volatility and Economic Growth in Nigeria: a Vector Auto-Regression (VAR) Approach

The study examined oil price volatility and economic growth in Nigeria linking oil price volatility, crude oil prices, oil revenue and Gross Domestic Product. Using quarterly data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin and World Bank Indicators (various issues) spanning 1980-2010, a non-linear model of oil price volatility and economic growth was estimated using the VAR technique. The study revealed that oil price volatility has significantly influenced the level of economic growth in Nigeria although; the result additionally indicated a negative relationship between the oil price volatility and the level of economic growth. Furthermore, the result also showed that the Nigerian economy survived on crude oil, to such extent that the country‘s budget is tied to particular price of crude oil. This is not a good sign for a developing economy, more so that the country relies almost entirely on revenue of the oil sector as a source of foreign exchange earnings. This therefore portends some dangers for the economic survival of Nigeria. It was recommended amongst others that there should be a strong need for policy makers to focus on policy that will strengthen/stabilize the economy with specific focus on alternative sources of government revenue. Finally, there should be reduction in monetization of crude oil receipts (fiscal discipline), aggressive saving of proceeds from oil booms in future in order to withstand vicissitudes of oil price volatility in future.