Energy Consumption and Industrial Output in Nigeria: A Co-Integration and Causality Analysis

Abstract

This paper examines the causal relationship between energy consumption and industrial output in Nigeria using annual time-series data covering the period 1980–2023. Co-integration analysis and causality tests within a multivariate Vector Error Correction Model (VECM) framework were employed to assess the long-run equilibrium relationship and short-run causal dynamics between energy use and industrial output. Control variables — gross fixed capital formation, labour force, trade openness, and inflation — were included to mitigate omitted variable bias. Two model specifications were estimated: Model 1 uses total primary energy consumption as the energy variable, while Model 2 uses electricity consumption as an alternative proxy. The results provide evidence of a statistically significant long-run equilibrium relationship between energy consumption and industrial output, with a positive and significant long-run elasticity. The error-correction term is negative and statistically significant, indicating moderate adjustment to long-run equilibrium. Granger causality tests reveal unidirectional causality from energy consumption to industrial output in the short run (supporting the growth hypothesis) and bidirectional causality in the long run (supporting the feedback hypothesis). The study concludes that reliable, affordable, and sustainable energy supply is a precondition for industrial development in Nigeria. Policy recommendations are derived directly from the empirical findings.