Oil Revenue Volatility and Fiscal Federalism in Nigeria: An Analytical Framework for Revenue Sharing Reform

This study develops an analytical framework for reforming Nigeria's petroleum revenue sharing arrangements under the fiscal federalism structure, responding to evidence that oil revenue volatility disproportionately destabilises subnational government finances. Nigeria's heavy dependence on petroleum revenues for intergovernmental transfers creates acute fiscal vulnerability during periods of low oil prices, as experienced during 2015 to 2016 and 2020. Using a mixed quantitative-analytical methodology, the study models the volatility of FAAC petroleum distributions to the 36 states from 2010 to 2024 using variance decomposition and correlation analysis, drawing on CBN and FAAC archival data. Findings quantify the extent to which state fiscal deficits are driven by petroleum revenue shocks rather than by domestic tax performance, and reveal that derivation formula adjustments have not mitigated volatility for oil-producing states. The analytical framework developed proposes a countercyclical petroleum revenue smoothing mechanism and a minimum state fiscal floor funded from the NSIA Stabilisation Fund. The study fills a gap at the intersection of petroleum law and public finance and offers practical reform pathways for the Revenue Mobilisation Allocation and Fiscal Commission. Keywords: fiscal federalism, petroleum revenue, oil volatility, Nigeria, revenue sharing.