Macroeconomic effects of oil price shocks on the major oil-exporting countries

Crude oil remains the primary source of energy, accounting for almost a third of global energy production. The international crude oil prices are highly volatile and varies far more frequently than any other energy commodity, this carries serious risks for the oil exporting economies. Positive oil price shock implies an increase in wealth transfers from oil importing economies to the oil exporting economy. The falling oil prices triggers a trade imbalance, balance of payments as the foreign reserves starts to shrink and it widens the fiscal deficit for energy exporting economies. Most of the oil producing companies are state owned in oil exporting economies. The national government is the main beneficiary from the oil export, its direct revenues, royalty, value added tax and windfall taxes associated with oil production. There are many macroeconomic indicators that are highly affected by the crude price uncertainty. The paper studied the findings from the previous research literatures on the oil price shocks and its consequences to the economy. Historical oil price shocks from the time of modern-day oil-trading, the reasons of the price shocks and the price determination criteria is discussed in this paper. The study examined the impact of oil price fluctuation twenty-nine (29) major oil exporting economies, using the structural auto-vector regression model (SVAR) for a period of three decades from 1991 –2020. Countries that are net oil-exporting economies are chosen, with more than $2 billion annual crude oil exports. Countries are divided in to three main groups depending upon the development phase of the economy such as developed, transitional and developing economies. While, developing countries are further sub-divided into five groups regionally. After the selection empirical analysis is performed on annual data for the exports (EXP), foreign exchange reserves (RES), nominal effective exchange rate (EXC), fiscal balance (FisBal), and GDP growth (GDPg). Some preliminary analysis is done with the data to find the unit root, optimal lag for each individual country. Then, an impulse response shock to international oil price is induced to measure the behavior of each macroeconomic variable in response to the oil price shock. The results of it varies for each country, but within the group it is found that many countries follow the same path to normality that are in same region. Based on outcomes of variance decomposition, the findings show serious vulnerability of transitional and developing economies to the macroeconomic indicator variance as a result of oil price shock. Exports, reserves and fiscal balance for Africa, Middle East and Latin American economies are the hardest hit by crude price uncertainty. Exchange rate for Africa, North Africa and Latin America is the most affected by price fluctuations. Economic growth in the transitional economies is contributed by the oil sector revenues. In fact, the growth in the Middle East and transitional economies are severely impacted during the crude price fluctuation from the findings. The fiscal structure of the government is built around tax revenues from the oil-economy in developing energy exporting countries. The price slump after COVID-19, when the world fuel demand was standstill, could have been reduced by some alter policies and decision making of the OPEC and governments. Thus, energy exporters should attempt the diversification of their fiscal revenue structure, expand the taxation, privatize the state-institute, encourage alternate non-oil exports and each energy exporter should strictly follow the OPEC cartel quota for individual member in order to cushion the economy when the falling oil demand leads to reduce sales and export revenues.