Asymmetric Impacts of Oil Price on Inflation: an Empirical Study
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energies Article Asymmetric Impacts of Oil Price on Inflation: An Empirical Study of African OPEC Member Countries Umar Bala 1,2 and Lee Chin 2,* 1 Department of Economics, Faculty of Management and Social Sciences, Bauchi State University, P.M.B. 65 Gadau, Nigeria; [email protected] 2 Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor Darul Ehsan, Malaysia * Correspondence: [email protected]; Tel.: +60-603-8946-7769 Received: 14 August 2018; Accepted: 26 October 2018; Published: 2 November 2018 Abstract: This study investigates the asymmetric impacts of oil price changes on inflation in Algeria, Angola, Libya, and Nigeria. Three different kinds of oil price data were applied in this study: the actual spot oil price of individual countries, the OPEC reference basket oil price, and an average of the Brent, WTI, and Dubai oil price. Autoregressive distributed lag (ARDL) dynamic panels were used to estimate the short- and long-term impacts. Also, we partitioned the oil price into positive and negative changes to capture asymmetric impacts and found that both the positive and negative oil price changes positively influenced inflation. However, the impact was found to be more significant when the oil prices dropped. We also found that the money supply, the exchange rate, and the gross domestic product (GDP) are positively related to inflation, while food production is negatively related to inflation. Accordingly, policy-makers should be cautious when formulating policies between the positive and negative changes in oil prices, as it was shown that inflation increased when the oil price dropped. Additionally, the use of a contractionary monetary policy would help to reduce the inflation rate. Lastly, we suggest that the government should encourage domestic food production, both in quantity and quality, to reduce inflation. Keywords: oil price; food production; inflation; asymmetric; Algeria; Angola; Libya; Nigeria 1. Introduction During the 1970s, economies around the world experienced increasing inflation rates that were followed by a rapid rise in international crude oil prices. In contrast, the significant decrease in inflation that was experienced during the 1980s and 1990s was associated with falling oil prices in global markets [1]. However, despite the higher price for crude oil during the 2000s, this observation, in this case, suggests that inflation was lower in many countries when compared with the rising oil prices and inflation that were experienced during the 1970s [2]. That notwithstanding, the rise and decline in crude oil prices during the periods of inflation in 1970 and 1980 were quickly adjusted. However, more recently, there has been little evidence to suggest that changes in crude oil price influence inflation [3]. Falling oil prices also weakened the overall foreign earnings of the African oil-producing countries, resulting in rising inflation rates given the demand for foreign offshore products; specifically, demand did not fall for food items. Interestingly, African countries are classified as food-insecure countries [4]. In this instance, the price of goods and services continued to rise as oil prices fell, whereas during periods of high oil prices, the price of goods and services did not fall, indicating that oil price changes have a nonlinear effect on domestic prices. In 2016, the inflation rate in Angola, Libya, and Nigeria Energies 2018, 11, 3017; doi:10.3390/en11113017 www.mdpi.com/journal/energies Energies 2018, 11, 3017 2 of 21 hit double digits. Notably, the inflation rate is usually volatile as there are various reasons for why it canEnergies change. 2018, 11, x FOR PEER REVIEW 2 of 19 The oil boom during the mid-1970s was a case where the inflation rate was positively affected. Also, thereThe isoil evidence boom during to suggest the mid-1970s that positive was anda case negative where changesthe inflation in oil rate prices was in positively the same affected. proportion willAlso, impact there inflation is evidence differently. to suggest For example, that positive in 2008, and when negative oil prices changes increased, in oil theprices inflation in the showed same a moreproportion substantial will response impact inflation compared differently. to when theFor oil example, price decreased in 2008, inwhen 2006, oil while, prices during increased, the middle the inflation showed a more substantial response compared to when the oil price decreased in 2006, of 2014, the oil price fell from US$115 per barrel to $52 per barrel and inflation rose. Interestingly, this while, during the middle of 2014, the oil price fell from US$115 per barrel to $52 per barrel and did not follow the oil price hike pattern from the period between 2006 and 2008. The impact of oil inflation rose. Interestingly, this did not follow the oil price hike pattern from the period between price changes on inflation in oil-exporting countries is currently unclear, as increases in oil prices will 2006 and 2008. The impact of oil price changes on inflation in oil-exporting countries is currently increase the amount of revenue in the economy and create inflation. Interestingly, in those economies, unclear, as increases in oil prices will increase the amount of revenue in the economy and create oilinflation. price decreases Interestingly, still cause in those the economies, inflation rate oil pric to increase.e decreases Therefore, still cause this the studyinflation aims rate to to examine increase. the impactTherefore, of oil this price study changes aims onto examine inflation the in theimpact African of oil OPEC price changes member on countries inflation Algeria, in the African Angola, OPEC Libya, andmember Nigeria. countries Algeria, Angola, Libya, and Nigeria. FigureFigure1 displays1 displays the the global global crude crude oil oil priceprice fromfrom 19751975 to 2015. The The authors authors in in [5] [ 5associate] associate the the periodperiod from from 1973 1973 to to 1996 1996 with with assertive assertive behaviorbehavior by OPEC OPEC and, and, therefore, therefore, call call this this period period “The “The age age ofof OPEC” OPEC” ([ ([5]5] identifiesidentifies five five main main periods periods associated associated with with significant significant changes changes in the price in the of priceoil: 1859– of oil: 1859–1899,1899, 1900–1945, 1900–1945, 1946–1972, 1946–1972, 1973–1996, 1973–1996, and 1997–present) and 1997–present).. It can be It canseen be that, seen between that, between 1975 and 1975 1979, and 1979,the theprice price of crude of crude oil oilstayed stayed reasonably reasonably steady steady and and only only fluctuated fluctuated by byabout about US$12–14 US$12–14 perper barrel. barrel. Then,Then, during during the the Iran–Iraq Iran–Iraq war war andand thethe IranianIranian Revo Revolution,lution, from from 1979 1979 to to 1980, 1980, crude crude oil oil production production waswas cut cut by by 10%, 10%, which, which, in in turn, turn, had had the the effect effect of of increasing increasing the the price price of of crude crude oil oil from from US$14 US$14 to to $35 $35 per barrelper [barrel6]. Indeed, [6]. Indeed, increasing increasing oil prices oil haveprices led ha theve leadingled the leading firms and firms major and players major inplayers the industry in the to broadenindustry their to broaden search for their oil search and caused for oil non-OPECand caused membernon-OPEC countries member to countries increase to their increase oil production. their oil production.Although, from early 1982 to 1985, OPEC made an effort to stabilize the price of crude oil through productionAlthough, quotas, from the early slowdown 1982 to of 1985, the global OPEC economymade an andeffort the to illegal stabilize quotas the price that OPECof crude member oil through production quotas, the slowdown of the global economy and the illegal quotas that OPEC countries produced caused crude oil prices to drop to US$10 per barrel. The striking features in member countries produced caused crude oil prices to drop to US$10 per barrel. The striking features Figure1 are the 2008 and 2011–2013 oil price hikes. Oil prices increased gradually from 1998 to 2008 in Figure 1 are the 2008 and 2011–2013 oil price hikes. Oil prices increased gradually from 1998 to and reached the peak of US$94 per barrel in 2008. In June 2014, the oil price level reached a maximum 2008 and reached the peak of US$94 per barrel in 2008. In June 2014, the oil price level reached a price of US$115 per barrel, and, around January 2016, the price dropped to less than US$30 per barrel maximum price of US$115 per barrel, and, around January 2016, the price dropped to less than US$30 dueper to barrel the increasing due to the oil increasing supply from oil supply mostly from non-OPEC mostly countries.non-OPEC [countries.7]. It is worth [7]. It noting is worth that noting OPEC’s contributionthat OPEC’s to contribution the world’s to oil the supply world’s had oil decreased supply had from decreased 55% in from 1976 55% to 42% in 1976 in 2014, to 42% which in 2014, shows thatwhich OPEC shows has slightlythat OPEC lost has the slightly means lost to control the means global to control oil prices. global oil prices. 120 100 80 60 40 Crude Oil Price (USD Per Barrel) Per (USD Price Oil Crude 20 0 1975 1980 1985 1990 1995 2000 2005 2010 2015 Year FigureFigure 1. 1.Crude Crude oil oil price price movements. movements. Source:Source: This graph graph was was plotted plotted by by the the first first author author based based on onthe the datadata reported reported in in the the OPEC OPEC Annual Annual StatisticalStatistical Repo Reportrt [8] [8] using using the the software software Econometric Econometric Views Views version version 9 (Information9 (Information Handling Handling Services Services (IHS)(IHS) MarketMarket Ltd., London, United United Kingdom).