OIL PRICE SHOCKS AND OIL SECTOR STOCK PRICES IN NIGERIA
1.1 BACKGROUND OF STUDY
The changing international oil market has posed great concerns for Nigeria’s fiscal outlook. The global financial crisis has led to slow growth across the world’s economies, resulting in lower demand for commodities, especially oil. This impact has been transmitted through several sources to the Nigerian economy, especially through oil price fluctuations and stock market dynamics due to the reappraisal for planned investments or complete stoppage of previously committed programmes of investment. However, the speculative behaviour and investment activities have helped to buy up crude oil prices internationally, the reality of the global recession is beginning to be fully appreciated across the globe. The adverse impact of the crisis is more evident and direct on international prices of oil and the world capital market. The recent movements of oil prices are apparent in their unprecedented decline from record of about US$147/barel in July 2008 to about $50/barrel in January 2009 while the daily basket price has hovered between $38and $44.
The impact of falling oil prices on stock market differs from country to country depending on whether the country is an oil-exporter or oil-importer. In an oil-exporting country, a rise in world oil prices improves the trade balance, leading to a higher current account surplus and an improving net foreign asset position. At the same time, increase in oil prices tends to increase private disposable income in oil-exporting countries. This increases corporate profitability, at the same time raises domestic demand and stock prices. In oil-importing countries, the process works broadly in reverse: trade deficit are offset by weaker growth and, over time, stock prices decrease (Abdelaziz et. al., 2008)
This development in the global economy, which has posed great challenge to policy makers across countries, is as a result of the increasing spate of fluctuations in the price of oil. The price of crude oil, which had stayed between $2.50 and $3 since 1948, rose from $3 per bbl in 1972 to $12 per bbl by the end of 1974, and from $14 per bbl in 1978 to $35 per bbl in 1981. The price of oil, went below $10 per bbl in 1986, but surged again to between US $18 and $23 in 1990’s. it crossed the US$40 mark in 2004; and rose to about US$60 from 2005 during the summer of 2007, the price of one barrel of crude oil jumped above US $70 and even crossed the US$145 mark in July 2008. The price staggered to US$80.50 in October 2009 and remained at an average of US$75 till August 2010.
An oil price change (increase), all things being equal, should be considered good news in oil exporting countries and bad news in oil importing countries, while the reverse should be expected when the oil price decreases (Ayadi, 2005). The challenge, however, of the combined effect of hikes in oil prices on economic growth for oil producing nations like Nigeria is really enormous. Huge inflow of oil revenues in Nigeria is more often associated with expansion in the level of government spending while periods of dwindling oil revenues are usually accompanied by budget deficits. There is no gain saying that Nigeria relies so much on revenue from oil exports but it equally massively imports refined petroleum and other related products. Evidence, for instance, shows that government spending, which before1999 remained well below N0.5 trillion, hit N1.02 trillion mark in 2001 and N1.5 trillion in 2004. The figures for 2006 and 2007 stood at N2.04 and N2.5 trillion respectively.