Increases in oil price or oil exports: Which one is more positive on trade balance for African OPEC Member Countries?

• Published date: 01 March 2023
• Author: Umar Bala,Lee Chin
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/opec.12236

OPEC Energy Rev. 2023;47:19–33.

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INTRODUCTION

The African OPEC Member Countries, being heavily oil- dependent countries, are heavily affected by movements in the

world oil market. Every dollar movement in the world oil price will have an impact to these countries’ oil exports, oil

revenue and trade balance. Oil prices have declined sharply since June 2014 and the responses of OPEC are series of

production cut quotas to boost falling oil prices (OPEC, 2018). An increase in oil prices and oil exports has always been

considered to be in favour of oil producers, while a drop in oil prices is said to improve the current account balance of oil

importers (Baffes etal., 2015; World Bank, 2015). However, this may not be true for African OPEC Member Countries that

rely heavily on oil exports. These countries are highly dependent on oil, where about 90% of their foreign earnings and

more than 80% of the total exports in their economy come from oil (see Table1). The net effect of currency devaluation

will be ambiguous because it will not influence the prices of oil exports, which are determined by OPEC, and therefore,

it cannot make the exports more attractive. In addition, the quantity of oil that is exported is fixed according to the quota

DOI: 10.1111/opec.12236

ORIGINAL ARTICLE

Increases in oil price or oil exports: Which one is more

positive on trade balance for African OPEC Member

Countries?

UmarBala1

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LeeChin2

© 2022 Organization of the Petroleum Exporting Countries.

1Department of Economics, Faculty

of Management and Social Sciences,

Bauchi State University, Gadau, Nigeria

2Department of Economics, Faculty

of Economics and Management,

Universiti Putra Malaysia, Serdang,

Selangor Darul Ehsan 43400 UPM,

Malaysia

Correspondence

Lee Chin, Department of

Economics, Faculty of Economics

and Management, Universiti Putra

Malaysia, Serdang, Selangor Darul

Ehsan 43400 UPM, Malaysia.

Email: leechin@upm.edu.my

Abstract

This study examines whether an increase in oil prices or oil exports will improve

the trade balance in African OPEC Member Countries. The annual panel data

of four African OPEC Member Countries, namely Algeria, Angola, Libya and

Nigeria were used in the study. The aim of the study is to determine whether

African OPEC Member Countries will benefit more from an increase in oil prices

or an increase in oil exports coupled with a depreciation in the exchange rate.

Two panel estimators were used, namely a fully modified OLS and a dynamic

OLS. The results indicate that both an increase in oil prices and in oil exports will

improve the trade balance of African OPEC Member Countries; but the greater

benefit will be from an increase in crude oil exports. Furthermore, depreciation

in the exchange rate will discourage imports, while it will be insignificant in en-

couraging exports. Policymakers should know that it will be more beneficial to

increase oil exports rather than oil prices in order to improve the trade balance of

their country. The oil producing countries are supplying the crude oil based on

the equilibrium in the world market demand increase in economic activities is

favourable to trade balance. In addition, the central bank has to realise that de-

valuing the exchange rate is not an effective way to improve exports since it will

not lower the price of domestic crude oil.