Oil Price Shock and Trade Balance in Nigeria

This study used the Brent crude oil price to examine whether the variability in the trade balance of Nigeria is linked to the fluctuation in oil price.To achieve this, the study used annual frequency data from 1981 to 2021 sourced from the United Nations Conference on Trade and Development (UNCTAD), the World Bank’s World Development Indicator (WDI), and the Central Bank of Nigeria (CBN) Statistical Bulletin. The bound test procedure to cointegration was adopted and the nexus between oil shock and trade balance was examined within the autoregressive distributed lag (ARDL) framework. Additionally, the augmented Dickey-Fuller approach to unit root was used in determining the degree of integration of the series. Certain findings were made from the analyses. First, the study confirmed that there is long-run relationship among the variables. Second, oil price hikes lead to a surplus trade balance in the long run, but only insignificantly. Contrariwise, the positive impact of oil price hikes on the trade balance in the short run was significant. Third, the study found that inflation had an insignificant positive effect on the trade balance. Fourth, the estimation revealed that an increase in real effective exchange rate and trade openness is insignificant and lead to a deficit trade balance in the long run. The study recommends that domestic oil shocks in the form of low oil production should be mitigated by addressing the security challenges in the country.