Oil Crises Term in West Africa Essay

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In the contemporary, the world is experiencing an oil crisis. For almost three years now, the oil price has declined by more than 40 percent since 2014. At that point in time, the price of a barrel stood at $115, considerably deteriorating as it presently stands at $50. The oil price is comparatively determined by actual supply and demand and relatively by expectation. In particular, demand for oil is closely associated to economic activity whereas supply can be influenced by different aspects such as geo-political issues and also regional weather. Notably, if oil producers have the perception that price is remaining high, they make an investment, subsequent to which a lag increases supply. In the same manner, low prices give rise to a scarcity in investment. Moreover, the decisions by the Organization of the Petroleum Exporting Countries (OPEC) fashion expectations. This is in the sense that if the organization limits supply suddenly, it can lead to a spike in prices. Moreover, in the present day, America has come to be the biggest oil producer in the world. Despite the fact that U.S does not conduct the exportation of crude oil, it presently imports considerably less oil, generating a great deal of spare supply. Such oil crises have an impact on the West African region. West Africa encompasses nations such as Nigeria and Niger, which are oil producing companies. The purpose of this paper is to analyze the implications of Macroeconomic policies during periods of oil crisis in West Africa.

Causes of Oil Crises

Ensuing years of comparative price stability at roughly $100 - $115 per gallon, oil prices sharply declined from June 2014. The deterioration in oil prices was substantial in comparison to preceding periods of oil price decreases in the course of the past 30 years, but not unparalleled. The causes linked to the oil crises are both short-term and long-term. These comprise of numerous years of major rising surprises in oil supply, descending surprises in the demand for oil, winding down of geopolitical risks that had endangered production, alteration in OPEC policy aims, and an appreciation of the U.S. dollar. Specifically, alterations in supply situations seem to have played a key role, with the strategy undertaken by OPEC purposed at supporting its market share substantially worsening the decline in prices that was already on-going (Baffes et al., 2015).

The current international market production share for OPEC stands at 30 percent, declining from approximately 50 percent from almost 5 decades ago, significantly owing to the growth of non-OPEC major oil producers such as Russia, United States, as well as Norway. Imperatively, for these sorts of circumstance, OPEC would usually come in to ensure that there is stability in prices by cutting production. Nonetheless, it has not done so in the present period of oil crisis. In accordance to Essandoh-Yeddu and Yalamova (2017), taking into consideration that the price of Brent crude is at its lowermost level since 2010, the budgets of a number of Africa’s top oil producers, are being weakened substantially taking into account that more than 70% of their revenues emanate from oil production and most would not have adequate fiscal safeguards to deal with the fall in oil prices. The weakening in oil prices has substantial macroeconomic, monetary and policy implications. If continued, it will facilitate growth and diminish inflationary, external, and fiscal strains in several oil importing nations. On the other hand, abruptly lower oil prices will deteriorate fiscal and external situations and decrease economic activity in a number of oil-exporting countries.

Protracted low oil prices have a likelihood of having major implications for economy growth and inflation. Oil prices that are weak will also give rise to major shifts in real income from exporting nations to importing nations, impact fiscal and prevailing account dynamics, and result in lower prices for non-oil goods. These different elements may limit macroeconomic policies in different ways while at the same time paving way for prospects to address long-term reform necessities in different economic areas. Oil exporting nations in the region are bound to experience a negative effect because lower oil prices give rise to substantial losses in export and fiscal revenues. On the other hand, oil importing nations in the region, such deterioration in oil prices should support economic growth that is stronger, decrease inflation, and enhance external and fiscal balances, all of which ought to decrease macroeconomic susceptibilities (Baffes et al., 2015).

Macroeconomic Policy Implications

Macroeconomic policies deal with the functioning of the economy in its entirety.
The main objective of macroeconomic policies is to offer a steady economic setting that is favourable to nurturing strong and sustainable economic growth. They fundamental elements of macroeconomic policy include monetary policy, fiscal policy, and exchange rate policy. Oil market shocks, in addition to domestic and foreign throughput, generate macroeconomic fluctuations in the economy (Crosby, 2012). Macroeconomic policies play a significant role in economies during periods of oil crisis. These policies are all the more imperative for West Africa as the volatility of oil prices in the past few years has instigated these key challenges into greater emphasis. Over a period of simply a few years, oil prices have fallen from $115 per barrel to $70 and further down to $50. These fluctuations can result in substantial changes in fiscal revenue generated by the West African oil producing nations. Moreover, it is key to note that oil is a resource that can be exhausted and is therefore a key concern for the domestic economies. Nations in West Africa produce the greatest amount of oil in the content, which can substantially profit them, and their governments have a key role to play in these resources (Davis, Fedelino, and Ossowski, 2003).

West Africa, which is a nation that is renowned for oil production is experiencing oil crisis, akin to the rest of the world. Subsequent to four years of comparative stability at approximately $105/barrel, the prices of oil have decreased sharply since mid-year 2014. It is imperative to note that this is not the very first gradual swing in oil prices as there have been just about five other periods of deteriorations in oil price surpassing 30 percent and numerous more periods of oil price increases. In the course of the past 50 years, these fluctuations have stimulated an importance on the macroeconomic implications of oil price fluctuations (Huidrom and Zhao, 2015).

Declining oil prices more often than not have an impact on economic activity and inflation by shifting aggregate supply and demand and instigating macroeconomic policy responses. With respect to a supply side perspective, decreased oil prices result in a decrease in production cost. In delineation, supply side economic policies are the group of government policies which purpose to alter the fundamental structure of the economy and to augment the economic performance of markets and industries. Imperatively, the lower the production cost across an entire variety of energy-centred commodities might be delivered to customers and therefore, in an indirect manner, decrease inflation. In addition, the decreased production cost can additionally lead to increased investment. On the other hand, from a demand side perspective, through the reduction of energy bills, a decrease in oil prices leads to an increase in the real income of consumers and thereby resulting in a surge in consumption (Huidrom and Zhao, 2015).

Fiscal Policy

Fiscal policy functions by means of change in the level and structure of government spending, the magnitude and kinds of taxes that are levied and the extent and kind of government borrowing. Imperatively, the government can have a direct impact on economic activity by means of incessant and capital expenditure, and have an indirect impact through the influences taxes, spending, investment, transfers on private consumption, as well as net exports. As a tool for ensuring fluctuations in economic activity have stabilized, fiscal policy can mirror discretionary activities undertaken by government (Dolamore, 2018). Governments utilize fiscal stimulus packages to in order to support aggregate demand by increasing the level of public spending or by decreasing the taxes levied.

In accordance to Adam (2010), price volatility in oil which is a key commodity in the market usually has an impact on development. In particular, oil prices have been substantially volatile over the years specially in the past number of years. This circumstance has subjected the economies of oil producing nations in West Africa together with their budgets to severe economic shocks which at times instigate economic adjustments. In the contemporary, oil imports continue to have a significant impact on the balance of trade and the national budget. More specifically, the last number of years saw the lodging by the national budget of higher crude oil prices, circumstances which gave rise to suspension of rises in the prices of petroleum products and at the same time as petroleum subsidies which characterised the period reached 2.4% of GDP in 2008 (Adam, 2010).

Dissimilar fiscal rules may be necessitated….....

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Adam, M. A. (2010). Fiscal policy options for managing an oil economy. Friedrich-Ebert-Stiftung (Parliamentary Briefing Paper).
Baffes, J., Kose, M. A., Ohnsorge, F., & Stocker, M. (2015). The great plunge in oil prices: Causes, consequences, and policy responses. World Bank. Retrieved from: http://www.worldbank.org/en/research/brief/policy-research-note-01

Crosby, M. (2012). Macroeconomic Policy: Demystifying Monetary and Fiscal Policy. Economic Record, 88(281), 295-296.
Davis, M. J. M., Fedelino, M. A., & Ossowski, M. R. (2003). Fiscal policy formulation and implementation in oil-producing countries. International Monetary Fund.

Dolamore, R. (2018). The tools of macroeconomic policy—a short primer. Parliament of Australia. Retrieved from: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/MacroeconomicPolicy

Essandoh-Yeddu, J., Yalamova, R. (2017). Current Drop in Oil Prices: Impact on Africa. International Association for Energy Economics.

Huidrom , R., Zhao, T. (2015). Macroeconomic implications of the recent oil price decline. The World Bank. Retrieved from: http://blogs.worldbank.org/prospects/macroeconomic-implications-recent-oil-price-decline

Mudida, R. (2003). Modern Economics. Nairobi: Focus Books.

Usman, Z. (2015). Africa's oil shock. Al-Jazeera. Retrieved from: http://www.aljazeera.com/indepth/opinion/2015/01/africa-oil-shock-economy-20151653236689289.html

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