CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Crude oil plays a crucial role on the global economic stage, exerting significant influence over the
prosperity of nations worldwide. It serves as a major source of energy and revenue for many
countries, especially developing economies like Nigeria. Its importance lies in the fact that its by-
products serve as primary energy sources for homes, industries, and various sectors, including
transportation. Over the years, fluctuations in crude oil price have become a major focus of concern
due to their extensive impact on the economy. These price movements are influenced by a
combination of the global supply-side and demand-side factors. However, recent studies have
increasingly highlighted demand-side factors as key drivers of crude oil price movements.

At the global level, crude oil price movements affect almost all sectors of the economy, including
transportation, manufacturing, agriculture, and financial markets. Strong economic growth and
industrial production tend to boost the demand for oil—as reflected in the increased demand from
fast-growing developing nations in recent years (According to the U.S. EIA). Oil consumption in
the Organization for Economic Cooperation and Development (OECD) countries declined between
2000 and 2010, while non-OECD oil consumption increased more than 40%. China, India, and Saudi
Arabia had the largest growth in oil consumption among the countries in the non-OECD during this
period. Other important factors that affect demand for oil include transportation (both commercial
and personal), population growth, and seasonal changes. For instance, oil use increases during busy
summer travel seasons and in the winter, when more heating fuel is consumed.

Demand-side factors such as economic growth is one of the biggest factors affecting petroleum
product—and therefore crude oil—demand. As economies grow, the need for energy rises, thereby
exerting upward pressure on crude oil prices. Growing economies mean a higher demand for energy,
in general, especially for transporting goods from producers to consumers. The world’s
transportation sector depends almost totally on petroleum products such as gasoline and diesel fuel.
Many countries also rely primarily on petroleum fuels for heating, cooking, or generating electricity.

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Petroleum products made from crude oil and other hydrocarbon liquids account for about one-third
of total world energy consumption. (EIA, 2023). Economic growth is a primary driver of increased
energy consumption and petroleum product demand, as it typically triggers higher industrial output,
expanded transportation needs, and increased energy use. Key Impacts of Economic Growth on
Energy Consumption are as follows: industrial production demand, petroleum product consumption,
energy-growth correlation, sector-specific demands and global trends. Economic growth (GDP)
often requires a corresponding increase in energy consumption

Source: stochastic trend

Figure 1.1: Graph showing the World Energy Use and GDP Growth (1991–2013)

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In Nigeria, crude oil is the backbone of the economy, contributing a significant source of income for
the government and earnings in foreign currencies. Positive and negative effects have resulted from
this reliance on the oil industry. The oil and gas industry contributes almost 10% to the gross
domestic product (GDP), and almost 86% of all export earnings come from the sale of petroleum
(OPEC, 2018). The oil industry is Nigeria’s most prominent economic driver; it produces the tenth
most oil in the world and is the third largest producer in Africa. The country’s foreign exchange
revenue is 95% derived from its oil reserves ranging from 24 to 31.5 billion dollars. They each year
manufacture 90,000,000 tons, furthermore with a centralized economy so firmly when just one, it is
virtually impossible for Nigeria’s political system and cultural traditions to remain unaffected
(Uwakonye et al., 2006; Oyewole et al., 2023).

Nigeria is located in West Africa along the Gulf of Guinea, Nigeria is the continent's largest oil
producer and a major global oil exporter, with significant reserves located in the Niger
Delta. Historically, crude oil was discovered first in Bayelsa state by Shell Darcy on Sunday, 15th
January 1956. The country’s oil production is concentrated mainly in the Niger Delta region, which
includes states such as Rivers, Delta, Bayelsa, and Akwa Ibom. Without a doubt, crude oil exports
have been a notable source of income for the economy over the years, and their influence on the
economic growth and development of oil-producing nations, particularly Nigeria, which is the
subject of this research effort, cannot be overstated.

Empirical studies on crude oil prices have focused on various determinants, including Organisation
of Petroleum Exporting Countries (OPEC), supply, production, exchange value of the Dollar,
speculators and brokers, economic factors, natural factors, refinery capacity, and
demand/consumption (Gyagri et al., 2017). However, recent empirical evidence suggests that
demand-side factors such as economic growth, fuel consumption, and transportation demand play a
crucial role in determining oil price movements. Recent research has established direct and positive
relationship between the three variables (GDP growth, fuel consumption and transportation) tend to
increase energy demand, expanding transportation and also influences crude oil consumption
patterns. Despite these findings, empirical results remain mixed, and there is still no compromise on
the scale and direction of these relationships within the Nigerian setting.

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The theory of price states that goods and services prices are decided anytime by the interplay of
supply and demand. The concept of price provides a framework for understanding how oil prices are
determined in a market economy and how these oil prices influence economic behavior and resource
allocation. This economic theory states that the price of an oil depends on its supply and demand.
Prices should rise if demand exceeds supply and fall if supply exceeds demand. Market equilibrium
occurs when supply matches consumer demand. In addition, this study braces Keynesian Economic
Growth Theory that the primary driver of a nation's economic activity and growth is aggregate
demand (AD). As a country GDP increases, consumption and investment increases, leading to higher
demand for energy products such as crude oil.

1.2 Statement of the Problem

The volatility of crude oil prices remains a major challenge for Nigeria’s economy. Nigeria despite
being one of the largest oil-producing countries in Africa, Nigeria continues to experience unstable
oil revenues due to fluctuations in crude oil prices. Nigeria’s federal and state governments remain
heavily dependent on oil revenues, relying on it to deliver public goods and the use of oil dollars to
service debt and bolster the national currency. The oil sector, however, has not significantly
improved the well-being of Nigerians. Non-oil sectors lead to vastly more employment opportunities
than the oil sector and their economic activities contributed approximately 93% of GDP in 2020.
These fluctuations are influenced by multiple factors, yet demand-side determinants have not been
adequately studied in the Nigerian context.

Nigeria’s dependence on oil almost crippled the economy, leading to a negative GDP growth of 1.8
percent in 2020. The pandemic highlighted the potential losses to the Federation of the Federal
government’s more than 50% revenue dependence on oil, as the shutdown of global economic
activities, onslaught of the pandemic and sharp declines in oil demand in 2020 left the government
unable to meet its 2020 revenue projections. The federal government had to slash its budget by a
more realistic 20 percent, reducing its benchmark price and production projections from $57 per
barrel to $30, and anticipated production volumes from 2.2 million barrels per day (mbpd) to 1.7
mbpd consecutively to accommodate new realities. Nigeria’s debt stock in 2020 stood at 31 percent
of GDP and continues to grow as it tries to bridge the shortfalls in oil revenues.

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Several interventions have been introduced to stabilize the economy, including fuel subsidy
adjustments, diversification policies, and economic reforms. In addition, efforts to improve oil
production efficiency, curb oil theft, and reduce pipeline vandalism in the Niger Delta have been
implemented to boost output. However, despite these efforts, crude oil price instability continues to
persist. This indicates that existing measures have not fully addressed the underlying demand-side
factors influencing oil price movements.

However, despite these interventions, oil price instability still persists, particularly in Nigeria, where
economic growth remains inconsistent, fuel consumption continues to rise, and transportation
demand is expanding rapidly. Several gaps remain in existing literature and policy analysis such like:
existing policies focus more on supply-side control rather than demand-side regulation; assorted and
inconclusive results on the relationship between GDP, fuel consumption, transportation demand, and
oil prices; few studies cover recent economic periods such as 2013–2023, which include recession
and recovery phases; some researchers rely on outdated data or single-variable models.

In light of these gaps, this study intends to provide a comprehensive analysis of the demand-side
determinants of crude oil prices in Nigeria by examining the roles of economic growth, fuel
consumption, and transportation demand within the specified period. This will provide a more
updated and Nigeria-specific understanding of demand-side dynamics in oil price determination.

1.3 Research Objectives

The broad objective of this study is to find out the effect of demand-side determinants (economic
growth, fuel consumption, and transportation demand) on crude oil prices in Nigeria. The specific
objectives are to:

i. To examine the effect of economic growth (GDP growth) on crude oil prices in Nigeria.
ii. To analyze the impact of fuel consumption on crude oil prices in Nigeria.
iii. To evaluate the influence of transportation demand on crude oil prices in Nigeria.

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1.4 Research Questions
i. To what extent does economic growth (GDP growth) impact crude oil prices in Nigeria?
ii. How much does fuel consumption influence crude oil prices in Nigeria?
iii. To what extent does transportation demand influence crude oil prices in Nigeria?

1.5 Research Hypotheses

The following null research hypothesis will be tested to aid the study:

Hypothesis 1

1. H₀₁: Economic growth (GDP growth) has no significant effect on crude oil prices in Nigeria.

Hypothesis 2

2. H₀₂: Fuel consumption has no significant effect on crude oil prices in Nigeria.

Hypothesis 3

3. H₀₃: Transportation demand has no significant influence on crude oil prices in Nigeria.

1.6 Scope of the Study

This study focuses on examining how demand-side factors influence crude oil prices in Nigeria. In
particular, it considers economic growth (GDP), fuel consumption, and transportation demand as
key variables that may drive changes in crude oil prices.

The time frame of the study covers the period 2013 to 2023. The justification for the use of the base
year in this study is because it was a year that record the reflects recent economic realities in Nigeria,
including periods of economic recession, recovery, and structural adjustments in the oil and gas
sector. It also allows the study to make use of up-to-date data, ensuring that the findings are relevant
to current economic conditions.

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The geographical scope of the study is limited to Nigeria. This is because Nigeria is highly dependent
on crude oil, and there is a need to better understand how internal demand factors contribute to oil
price movements within the country. In addition, there is limited research that focuses specifically
on demand-side determinants of crude oil prices in Nigeria.

The study is restricted to demand-side variables only, namely economic growth, fuel consumption,
and transportation demand. Other factors such as oil production levels and global supply conditions
are not included. An appropriate econometric method will be used to analyze the relationship among
the variables and ensure that the results are reliable.

1.7 Significance of the Study

This study will serve as an insight to the government and policy maker in understanding how
demand-side factors influence crude oil prices and to help them to support the development of more
effective energy and fiscal policies aimed at stabilizing the economy.

The subject of oil price is timeless and so the study will help members of society who are seeking to
gain knowledge about how the fluctuations in oil prices affect transportation costs, fuel prices, and
general cost of living in Nigeria.

It will also serve as a reference to students and other researchers from finance and other related fields
that might embark on similar enquires into the topic by providing an updated empirical evidence on
demand-side determinants of crude oil prices. It will also serve as a reference for future academic
research in energy economics and related fields.

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[Link]

Uwakonye, M.N., Osho, G.S., Anucha, H. (2006), Impact of oil and gas production on the Nigerian
economy: A rural sector econometric model. International Business and Economics
Research Journal, 5(2), 61-75.

OPEC Annual Statistical Bulletin. (2022). Available from: [Link]

OPEC (Organization of the Petroleum Exporting Countries). (2018), Annual Statistical Bulletin
2018. Organization of the Petroleum Exporting Countries. Available from:
[Link] web/static_files_project/media/downloads/publications/ASB%20
[Link]

International Journal of Petroleum and Petrochemical Engineering (IJPPE) Volume 3, Issue 3, 2017,
PP 7-15 ISSN 2454-7980 (Online) DOI: [Link]
[Link] ©ARC Page | 7 Determinants of Global Pricing of Crude Oil- A Theoretical
Review Gyagri M. 1 , Amarfio, E. M. 1 and Marfo. S A.1

[Link]

Oyewole, O., Adedayo, A., Adeyiga, J.A., Oyewole, A.A., Akingbade, T.J., Onayemi, O.O.,
Odekina, G. (2023), Calculating the sample size for ordinary least square estimation in presence of
multicollinearity. Advances and Applications in Statistics, 89(2), 243-261.