The Effect of Oil Revenue Volatility on State Government Expenditure in Nigeria

Nigeria's federal allocation system makes state governments heavily dependent on oil revenue shared through the Federation Account, creating a direct channel through which oil price volatility transmits to subnational fiscal performance. This study examines how oil revenue volatility affects government expenditure patterns across a sample of twelve Nigerian states drawn from all six geopolitical zones for the period 2015 to 2023. Secondary data are obtained from the Federation Account Allocation Committee releases, the Budget Office of the Federation, and the National Bureau of Statistics. The study employs a panel vector autoregression model to trace the dynamic responses of capital and recurrent expenditure to shocks in oil revenue allocations. The analysis distinguishes between states with higher internally generated revenue capacity and those more dependent on federal transfers to identify whether fiscal diversification buffers the expenditure impact of oil revenue shocks. The theoretical framework draws on the resource curse hypothesis, the permanent income hypothesis applied to government spending, and subnational fiscal federalism literature. Recent budget analyses of state governments confirm significant procyclical expenditure patterns that amplify the economic effects of oil price cycles. The study provides empirical granularity on how revenue volatility reshapes the composition of state spending, with potential negative effects on long-term infrastructure and human capital investment. Findings are intended for state Ministries of Finance, the Revenue Mobilisation Allocation and Fiscal Commission, and the Office of the Accountant General of the Federation. Keywords: oil revenue, state government expenditure, fiscal federalism, volatility, Nigeria