CRUDE OIL PRICE SHOCK AND ECONOMIC CRISIS: A CASE STUDY OF NIGERIA AND VENEZUELA
  CHAPTER ONE
INTRODUCTION
 1.1 BACKGROUD OF THE STUDY
Oil price shocks have in recent years resurfaced and burgeoned to become one of the greatest global economic challenges of the 21st Century facing many countries of the world with developing countries such as Nigeria and Venezuela becoming more increasingly vulnerable to its ugly effects. Thus, Monjazeb etal (2013) rightly noted that the world economy has experienced various positive and negative fluctuations in oil price which have affected the macroeconomic variables and seriously challenged the economic situations of many countries. Boheman and Josephine (2015) further amplified this point stating that crude oil is arguably one of the most important commodities in today’s industrialized economy as it represents a crucial energy source for many countries. Its price has been subject to various fluctuations throughout time, commencing in the 1970’s when the world experienced its first substantial movements in the oil price, and thereby triggering one the relationship between oil price and economic growth.
There is no doubt that oil has become the lifeblood of modern economies such as Nigeria and Venezuela (Basher and Sadorsky, 2006). The over-dependence on oil in both countries can be lucidly attested to by 95 percent of their revenue which comes from it (Lopez, 2016). Ever since oil was first pumped in 1958 in Nigeria and 1914 in Venezuela, it has permeated every aspect of both countries, nurturing the culture of easy wealth (Lopez, 2016). Thus, both countries depend on earning from its crude oil exports for survival. The disposition to oil in both countries gradually led to abandonment of other sectors such as agriculture that were formerly their sources of revenue. By the 1970s and mid 1930s respectively, Nigeria and Venezuela had successfully changed their economic orientation and oil became the principal product and export (Mendoza and Vera, 2010).
Indeed, Nigeria and Venezuela have distinguished themselves as key oil exporters in the world. Nigeria is recognized as the 6th largest oil exporter and 8th largest deposit of natural gas in the world (Agagun etal, 2015). At a time, Nigeria was exporting more than one million barrels of crude oil a day to the United States (representing nearly 50% of Nigeria’s daily crude oil production) and it was projected that by 2015, Nigeria will provide 25% of the United States oil supply (Siollun, 2009). Similarly, Venezuela is touted as one of the world's largest exporters of oil and has the world's largest proven oil reserves at an estimated 296.5 billion barrels (20% of global reserves) as of 2012 (Lopez, 2016).
However, despite their oil wealth, Nigeria and Venezuela have remained susceptible to the effects of oil price shocks at every point of its occurrence. Like in the past, oil price shocks have led to a systematic decline in economic activities and severe hardships in both countries, even to the peak of sliding into recession (Carlson, 2014). The effects of vulnerability to oil price shocks are particularly very damaging to both Nigeria and Venezuela as oil exporting countries.  Ayadi (2005) explains this when he said that oil price increase should be considered good news in oil exporting countries and bad news in oil importing countries, while the reverse should be expected when the oil price decreases. Again, Abdelaziz etal (2008) equally noted that increase in oil prices tends to increase private disposable income in oil-exporting countries. This increases corporate profitability, at the same time raises domestic demand and stock prices. In oil importing countries, the process works broadly in reverse: trade deficit are offset by weaker growth and, over time, stock prices decrease.
Besides, different analysts have accentuated various reasons as causes of the global oil price shock. A fair amount of some of the reasons surrounds issues relating to glut in the global oil market caused by rising U.S. shale oil production and a slowdown in economic growth in China and the European Union (EU) reducing the demand for oil. This was further exacerbated by OPEC’s decision not to cut production by at least 2 million barrels a day (mbd) to absorb the glut in the oil market (Salameh, 2015).   
Following the current global oil price shocks, Nigeria and Venezuela have slided into a well of severe economic hardships, a situation which demands urgent hedging policy measures that will help to secure against further deterioration of the already worsen economic crisis of the present and possible future occurrence. Thus, this study seeks to examine the impact of global oil price shocks on the economy of Nigeria and Venezuela with the aim of proffering possible hedging policy measures that will help them secure against present and future vulnerability to the effects of oil price shocks.
1.2 STATEMENT OF THE PROBLEM
For over two years now, the global oil price shock has been weighing heavily on countries such as Nigeria and Venezuela that thrive heavily on oil revenue. The two countries have been counting the losses that the global oil price shock is having on their economies. The decline in the price of oil has drastically reduced revenue for the two countries; they now have less money at their disposal, a condition which has affected their purchasing power. In the case of Nigeria, apart from the fact that the global oil price shock has reduced revenue for the government of Nigeria, it is beginning to erode the country’s foreign reserves (Abioye, 2014). This has forced the government to embark austerity measures as part of fiscal adjustments designed to mitigate the negative impact of lower global oil prices on the country’s economy. Thus, Nnodim (2015) observed that many infrastructural projects that the country desperately needs have been cancelled. Again, multi-national companies operating in Nigeria and other corporate organization are now cutting down capital investment and expenses.
On the other hand, Venezuela has been faced with problems of cash shortages orchestrated by the fall in the price of crude oil. At the moment, the government of Venezuela is finding it difficult to finance her economic activities and this has led to a decline in production in the country. In addition, the increase in indebtedness that the government of Venezuela has registered in recent years has moved it from a position of net creditor to that of net debtor (Grisanti, 2016). Cash shortages and inability to make payment have also led to shortage in everything from bread to toilet paper in Venezuela (Egan, 2016). As a result of the decline in oil revenues, Nigeria and Venezuela are now characterized by serious economic problems, high rate of poverty (hunger), unemployment, high rate of inflation, frequent protest from the countries’ citizens.
This study therefore seeks to examine global oil price shock with special focus on the impact it has on Nigeria and Venezuela and the measures both countries can adopt to overcome the adverse effects the global oil price crisis has on them.
1.3 OBJECTIVES OF THE STUDY
The objectives of this study are to:
1. Investigate the factors responsible for the global oil price shocks.
2. Investigate the role of OPEC in global oil price shocks.
3. Investigate the impact of global oil price shocks on Nigeria and Venezuela.
4. To proffer viable measures Nigeria and Venezuela could adopt to overcome the    
    adverse effect of the global oil price shocks.
1.4 RESEARCH QUESTIONS
This study is guided by the following research questions:
1. What are the factors responsible for the global oil price shocks?
2. What is the role of OPEC in the global oil price shocks?
3. Why are the global oil price shocks affecting Nigeria and Venezuela negatively despite their richness in mineral resources?
4. What viable measures can Nigeria and Venezuela adopt to overcome the adverse effect of the global oil price shocks?
1.5 SIGNIFICANCE OF THE STUDY
This study is significant because its findings will help offer better insight into Nigeria and Venezuela struggle with the global oil price shock some hedging measures they could adopt to reduce its present effect on their economies and secure them against future occurrence.
 The study is equally significant because it assesses the impact of Nigeria and Venezuela’s overdependence on oil revenue. Thus, study will help direct attention of the government of both countries and their oil sector on the need for diversification into other sources of revenue like agriculture for economic growth.
Besides, this study will contribute to the body of knowledge and stimulate further research work on how Nigeria and Venezuela can overcome the adverse effects of the global oil price shocks.
1.6 SCOPE OF THE STUDY
This study is a comparative study of Nigeria and Venezuela in relation to the effect of the global oil glut. The study is therefore restricted in scope to Nigeria and Venezuela. It will cover from early 2014 till April 2017 that is a period of three (3) years.