CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND STUDY
Crude oil as an energy source since its discovery in the 1800‟s has been vitally important to the world economy. According to Hathaway (2009), the importance of oil has risen to the extent that in a world suddenly without oil, all the major distribution systems that allow economic transactions on a more than local basis would fail and the world economy would collapse. Crude oil is a major source of foreign exchange earnings and the dominant source of revenue for the Nigerian government. According to Yuan , Liu and Huang ( 2014 ), oil price shocks have had an attendant multiplier effect on crude oil and economic activity. The Nigerian economy has been completely reliant on oil and the basis upon which government budgeting, revenue distribution and capital allocations are determined. Volatility is an upward and downward movement of oil prices globally. This assertion thus translates that these oil prices are exogenous because it’s determined by external influences that somewhat stagnate the Naira and Nigeria cannot moderate the causes of these oil price slides. Nigeria’s exports of oil at a time of peak prices –have enabled the country to post merchandise trade and current account surpluses in recent years.
Reportedly, 80% of Nigeria’s energy revenues flow to the government; 16% cover operational costs, and the remaining 4% go to investors (Atukeren 2003). However, the World Bank has estimated that as a result of corruption 80% of energy revenues benefit only 1% of the population In the world over, the sustainability of any economic growth is to a large extent depends on the diversification of such economy. In the developed society fallen oil prices is not a threat as several measures are in place to upturn such occurrences. Ayoola (2013) argues that Nigeria as a mono-product economy, remains susceptible to the movements in international crude oil prices. Yusuf (2015) also contends that oil plays a critical role in Nigeria in the conduct of fiscal and monetary policies because it accounts for average of 80% of government revenue, 90-95% of the foreign exchange earnings and 12% of the real gross domestic product. Despite such windfall, Nigeria has an increasing proportion of impoverished population and experienced continued stagnation of the economy (Okonjo-Iweala and Osafo-Kwaako, 2007). In 2008-2009, the last global economic crisis occurred which also led to the crash of oil price of commodities. Oil prices crashed from over 140 dollars per barrel to a low of 40 dollars per barrel in a matter of days. Luckily Olusegun Obasanjo, Ngozi Okonjo-Iweala and Chukwuma Soludo had accumulated foreign reserves in excess of 53 billion dollars and had plenty of money in excess crude account despite the resistance by the state Governors.
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