IMPACT OF OIL PRICE VOLATILITY AND TRADE OPENNESS ON A GROWING ECONOMY

This study investigates the interplay between oil price volatility, economic growth, and openness using data spanning from 1980 to 2020. Bound cointegration and regression methods were employed to analyze both short and long-term effects. The results indicate that in the short run, oil price volatility negatively impacts economic growth. However, as the economy becomes more resilient over time, oil price volatility begins to have a positive effect on economic growth in the long run. Additionally, trade openness is found to have a positive and significant impact on economic growth in the short term. Nevertheless, the influence of trade openness and exchange rates on long-term economic growth is statistically weaker. This suggests that the adverse impact of oil price volatility is more pronounced in the short run and diminishes over the long term. Consequently, policymakers should focus on managing exchange rates and leveraging comparative trade advantages to promote economic growth.


Introduction
The global oil market has exhibited increasing volatility in recent times, primarily due to a combination of factors.This includes a surge in demand from developing nations and an uptick in oil production from advanced countries, notably the United States.The situation was further exacerbated by a significant reduction in oil demand in China during the COVID-19 pandemic, leading to a 20% decline.
Projections indicate that major oil-producing nations like Iraq, Nigeria, and Angola may witness a substantial drop in their net income, ranging from 50% to 85% compared to 2019 levels.This would mark the lowest income generated from the oil sector in these countries over the past two decades, with the possibility of further revenue decline depending on future market conditions.DOI: https://doi.org/10. 57233/gujeds.v4i1.7     Gusau Journal of Economics and Development Studies (GUJEDS), Vol 4 (1), December, 2023ISSN: 3027-1126  Additionally, the research in this area appears to be divided into two main categories.One group investigates the connection between oil prices and economic growth, while the other delves into the relationship between trade openness and economic growth.It's worth noting that many of these studies have not taken into account the impact of exchange rates in their analyses.
Several studies have reported a positive influence of oil price volatility on economic growth, as evidenced by research conducted by Oyeyemi (2013), Foudeh (2017), and Bediako (2018).Despite differences in how economic growth is measured, the time frames considered, the countries studied, and the levels of statistical significance (ranging from the conventional 5% to 1%), all of these studies have consistently demonstrated a statistically significant connection between oil price volatility and economic growth.In contrast, another set of studies has presented evidence indicating a negative impact of oil price volatility on economic growth, as observed in the work of Elmi and Jahadi (2011), Nwonu (2017), and Nwoba et al. (2017).
There are also studies that have found a neutral or insignificant relationship between oil price volatility and economic growth, In contrast, Rigobon and Rodrik (2005) found a negative and substantial relationship between trade and economic growth, while Fenira (2015) discovered a relatively weak connection between trade openness and economic growth.Similarly, Sarkar (2007) reported an insignificant relationship Furthermore, the results, as indicated by the coefficient of the error-correction term, reveal a persistent tendency to converge to equilibrium following an initial oil price shock.This observation corroborates the findings of previous empirical studies (Elmi and Jahadi, 2011;Nwonu, 2017;Nwoba et al., 2017).However, in the short run, trade openness is found to be statistically significant and positively associated with economic growth, while the impact of the exchange rate is observed to be neutral.The implication of these findings is that if the government continues to heavily rely on oil as its primary source of income, short-term shocks may lead to fiscal deficits that take an extended period for the economy to recover from.(Foudeh, 2017;Bediako, 2018;Folajimi et al., 2019).
However, the study did not find evidence of exchange rate and trade openness influencing economic growth in the long run.The policy implication of these findings is that an economy like Nigeria, heavily reliant on oil as its primary revenue source, will continue to face short-term oil price volatility shocks until it achieves full economic diversification in the long run.This diversification will help shield the economy from negative growth episodes, such as those experienced during the second and third quarters of 2020.

Conclusion and policy implications
This study examines the relationship between oil price volatility, economic growth, and (Online); 2786-9695 (Online) ©Authors 99 Nigeria, a prominent global crude oil producer and a significant player within OPEC, has experienced a substantial economic downturn primarily attributable to oil price fluctuations.Notably, the sharp decline in crude oil prices during the COVID-19 pandemic, dropping below $25 per barrel, resulted in a fiscal deficit for the Nigerian government's budget.Consequently, the country's economic growth rate experienced negative values of -6.1% and -3.2% during the second and third quarters of 2020, according to the National Bureau of Statistics (NBS) in 2020.These adverse growth rates have pushed the Nigerian economy into a state of fiscal hardship.Moreover, Nigeria heavily relies on the exportation of crude oil as a primary revenue source for the government, hindering efforts to achieve a diversified and balanced economic growth.This reliance on oil exports has led to uneven growth in various sectors of the economy, making it challenging for the government to successfully diversify its economic base, as discussed by Kawai in 2016.This paper makes several notable contributions to the existing body of research.Firstly, it integrates up-to-date data on oil price fluctuations, economic growth, and trade openness.Secondly, it adds value to the ongoing debate concerning the complex relationship between oil prices, economic growth, and trade openness, particularly in the context of a pandemic.Thirdly, the study holds significant relevance for policymakers by shedding light on the consequences of excessive dependence on crude oil for economic growth.In essence, this research investigates the connection between oil price volatility, economic growth, and trade openness in Nigeria.Literature review A growing body of research has explored the intricate relationship between oil price volatility, economic growth, and trade openness.The findings from this literature are diverse, encompassing variations across countries and research methodologies.
such as those conducted byJawad (2013) andOkoye and Ndifreke (2018).Although some of these studies have introduced additional variables like agriculture and construction into their analyses, they have not included the control of exchange rates through cointegrating regression analysis.Taken together, these additional findings underscore the ongoing debate surrounding the nexus between oil prices and economic growth.Therefore, there is ample room to contribute empirically to this debate.Moreover, existing literature has extensively explored the influence of trade openness on economic growth, yielding varied conclusions.Some studies have reported a positive correlation between trade openness and economic growth.Conversely, others have identified a negative association, and some have even suggested a neutral impact of trade openness on economic growth.Noteworthy studies supporting the positive impact of trade openness on economic growth include works by Freund and Bolaky (2008), Das and Paul (2011), Marelli and Signorelli (2011), Nowbutsing (2014), Zarra-Nezhad et al. (2014), and Keho (2017).
Additionally, the long-run results, as depicted in the middle section of Table3, reveal a positive and substantial impact of oil price volatility on economic growth.While this outcome differs from the short-run findings, it aligns with practical expectations.Economies heavily reliant on crude oil often develop resilience to oil price shocks over the Gusau Journal of Economics and Development Studies (GUJEDS), Vol 4 (1), December, 2023 ISSN: 3027-1126 (Online); 2786-9695 (Online) ©Authors 105 long term by diversifying their revenue sources away from oil dependency.In the case of Nigeria, the oil price shocks during the COVID-19 period prompted the government to implement an Economic Sustainability Plan, aiming to rejuvenate the economy through various stimulus packages directed at various sectors, including agriculture, manufacturing, construction, ICT, energy, and more.This result is consistent with recent empirical research trade openness in Nigeria, employing bound tests and regression analysis on data spanning from 1980 to 2020.The results indicate that in the short run, oil price volatility exerts a negative and significant impact on economic growth.However, as the Nigerian economy diversifies and becomes more resilient over the long term, oil price volatility begins to positively affect economic growth.Additionally, trade openness is found to have a positive and significant impact on economic growth in the short term, although the effects of exchange rate and trade openness on long-term economic growth are observed to be neutral.These findings imply that in the short run, Nigeria, heavily dependent on oil for foreign earnings, will continue to be influenced by oil economy will become less susceptible to short-term oil price shocks.Given that the negative impact of oil price volatility is more pronounced in the short run and diminishes over time, the study recommends that policymakers fully implement the government's economic recovery and growth plan.Additionally, policymakers should address the persistent issue of exchange rate instability in the country to capitalize on the benefits associated with trade.

Table 3 :
Results of oil price volatility and trade on growing economy