Investigating the Causality Between Oil Consumption and Economic Growth in Nigeria

Abstract

In Nigeria, the demand for oil is significant due to its essential role in the manufacturing and transportation industries. This study investigates the causality relationship between oil consumption and economic growth in Nigeria over the period from 1980 to 2022. The research utilizes Johansen’s maximum likelihood cointegration technique and the Granger causality test to explore this relationship comprehensively. The cointegration test results indicate that there is no long-term equilibrium relationship between oil consumption and economic growth. However, the Granger causality test reveals a unidirectional causality from oil consumption to economic growth.  The findings underscore the critical role of oil consumption in driving Nigeria's economic growth. Any attempts to conserve oil could negatively impact economic growth, highlighting the importance of oil consumption for the nation's economic stability. This study’s results contribute to the broader understanding of the interplay between energy consumption and economic development, particularly in oil-dependent economies like Nigeria. By examining data over an extensive period, this study provides robust evidence on the nature of the relationship between oil consumption and economic growth in Nigeria. The absence of a long-term equilibrium relationship, as indicated by the cointegration test, suggests that fluctuations in oil consumption do not have a sustained impact on economic growth over the long term. Instead, the Granger causality test's findings of unidirectional causality suggest that changes in oil consumption can predict changes in economic growth in the short term. This research has significant policy implications. Policymakers must recognize the importance of oil consumption in driving economic growth. Efforts to reduce oil consumption without alternative energy sources or strategies in place may hinder economic growth. Thus, a balanced approach is necessary, where energy conservation measures are implemented alongside initiatives to diversify energy sources and enhance energy efficiency. Moreover, this study highlights the necessity for further research to explore alternative energy sources that could support economic growth while reducing dependency on oil. This is particularly important in the context of global efforts to combat climate change and reduce carbon emissions. Nigeria’s economic policies should thus aim to balance between sustaining economic growth and transitioning towards more sustainable energy consumption patterns.