Oil Price Volatilityand International Trade in Nigeria

Abstract

Trade is a crucial engine of economic growth particularly in a fast growing economy like Nigeria. Considering the importance of oil as an internationally traded commodity, its volatility could result to external trade imbalances especially in oil exporting economies like Nigeria. As such, this study examines the effect of oil price shocks on international trade via Oil Trade Balance (OTB), Non-Oil Trade Balance (NOTB) and Terms of Trade (TOT). Crude Oil Price Volatility (COPVOL) was measured and extracted using ARCH/GARCH model with data spanning from 1990-2019. The paper conducted the stationarity and cointegration test to examine the time series characteristics of the variables, and applied the Structural Vector Auto Regressive (SVAR) Model as well as Impulse Response Function (IRF) and Forecast Variance Decomposition (FVD) to examine the influence of oil price shocks on Oil Trade Balance (OTB), Non-Oil Trade Balance (NOTB) and Terms of Trade (TOT). The result showed that upward swings in oil price have a positive and significant impact on Terms of Trade and Oil Trade Balance, however, for Non-Oil Trade Balance, Oil price Shocks is negative and insignificant. The paper, therefore, recommended that Government should exploitthe downstream sector of the oil industry to capture additional values from hydrocarbons resources, linking new petrochemical facilities with refineries to
capture operational synergies; and to strengthen entrepreneurship through access to finance to encourage innovation and technology towards transforming the economy. The paper further recommended improving quality and standard of exports to encourage demands towards improving Nigeria’s terms of trade.