Impact of falling and volatile oil prices on oil exporting countries

The purpose of this study is to examine the macroeconomic effects of falling oil prices on the economies of four major oil exporting countries for the period of 1980- 2015. Of particular interest are the negative effects of falling and volatile oil prices on the economies of Russia, Saudi Arabia, Nigeria, and Venezuela.  Although falling crude oil prices have been a welcome event for oil-importing countries, its impact on oil exporters, particularly those dependent on oil revenue as a major source of income for the government, has been economically painful. Using annual data, we apply a structural vector autoregressive (SVAR) model to study the dynamic interaction among key macroeconomic variables (Oil prices, real output growth, employment, and investment) and a fiscal indicator (government spending) for each country. With oil revenues as a major source of income for government spending, economic activity in each country has been unduly dependent on crude oil prices.  Using oil price changes as an exogenous shock in each case, the SVAR model, using impulse, traces the reaction of government spending, real GDP growth, employment, and investment in each country to unexpected variations on crude oil prices.  Our findings show that the negative impact of falling oil prices on various measures of economic activity critically depend on the degree of diversification of each country’s economy. Our empirical results also show that in addition to falling oil prices, the increased volatility of oil prices has exacerbated the negative impact of falling oil prices on these countries over the period of study.

Key words: Oil price shocks, business cycles, economic stability