Oil Crises Term in West Africa

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.

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 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 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 to address the fiscal challenges the West African region is likely to experience as it generates oil revenues. According to Adam (2010), the most prevalent fiscal rule is the permanent income rule centred on the Permanent Income Hypothesis established and advanced by Milton Friedman. In particular, this rule necessitates that spending ought to be fixed at levels similar to the present discounted value of oil revenues in the future. The upside of this rule is that is makes certain that there is equity across generations and also makes an accommodation revenue volatility effects. This is a fiscal rule that is recommended for West African nations such as Ghana, Nigeria, and Gabon. However, it is imperative to note that this fiscal rule may generate tensions both economically and socially owing to the build-up of oil wealth for future generations when the economy is experiencing severe development challenges.

In addition, optimal policy regulations for central banks have a tendency to command a dynamic reaction to shocks influencing aggregate demand and level of relaxation within the economy. The stabilization of the output gap seems to be a fundamental goal for central banks, not just from a welfare standpoint, but also for the reason that it can add to lower volatility of price and wage inflation. The reaction of monetary policy could as a result be significantly dissimilar reliant on the source of the oil supply or demand and its effect on aggregate demand and labor market circumstances across nations. This makes it vital for police makers to attain a poise in the instantaneous effect oil price changes with more medium-term contemplations. All the more, in a growth environment that is weak in general and with policy interest rates limited by the zero lower bound in a number of economies, the implemented monetary policy may come to be susceptible to downward risks to price stability. With regard to nations in West Africa that import oil, the collective impact of decreasing prevailing account deficits and inflation returning with the policy targets is bound to make it possible for central banks to decrease interest rates (Baffes et al., 2015).

A number of nations in West Africa offer their citizens substantial subsidies. Nonetheless, more often than not, these subsidies have a tendency to have negative distributional impacts and alter consumption and production in the direction of energy-intensive activities. When West African nations such as Nigeria and Ghana offer subsidies, their economic advantages are concentrated on households that earn high income. This is owing to the reason that such households consume a greater amount of subsidized energy in comparison to underprivileged households. Moreover, regulating and scarcities more often than not go together with subsidized kinds of energy consumption. This means that richer families end up benefitting compared to poor ones (Baffes et al., 2015). Secondly, energy subsidies can lead to crowding out of important public spending and private investment, boost unwarranted energy consumption, decrease enticements for investment in renewable energy, and hasten the exhaustion of natural resources. In actual fact, the low-slung energy cost linked with subsidized or low oil prices may boost a shift in the direction of production which is more concentrated in fossil fuels or energy more usually. This goes in contradiction to wide-ranging environmental objectives in several nations. To counterbalance the medium-term inducements for augmented oil consumption, and in the similar period creating fiscal space, policymakers could adjust tax policies on the use of energy, particularly in nations where fuel taxes are low (Baffes et al., 2015).

Deteriorating oil prices decrease the need for fuel subsidies, and offer a prospect for subsidy reform with restricted impact on the prices that are paid by customers. This kind of subsidy reform ought to give rise to an extensive and permanent tilt towards more fuel pricing that is based on the market. The implication of this fiscal policy is that it will avert increasing fuel subsidies at the time when prices of oil begin to increase again. Baffes et al. (2015) outline that fiscal resources released by lesser fuel subsidies could on one hand become savings for rebuilding fiscal space lost or on the other hand reapportioned towards better targeted programs to help underprivileged families, and support important infrastructure and human capital investments (Baffes et al., 2015). From a fiscal policy perspective, it is key for West African nations to combine subsidy reforms with energy tax reforms. The decline in oil prices has been in a manner that, even after cuts in subsidies, the local fuel prices have decreased. One of the ways of resolving this aspect is by increasing energy taxation.

Monetary policies take into account public interventionist measures purposed to impact the level and design of economic activity in order to attain particular desired objectives. Monetary policy encompasses all the actions and measures taken by the central bank and the government, which have an impact on the cost, amount and accessibility of money and credit within the economy. In particular, monetary policy operates on two fundamental economic variables including the level of interest rates and the aggregate supply of money in circulation. Numerous developing nations in West Africa position a great deal of focus on monetary policy to expediate an arranged and methodical process on economic development (Mudida, 2003). Monetary policies have major implications on economies in West Africa during periods of oil crises.

It is imperative to note that most of the oil producing nations in West Africa lack a great deal of diversity and as a result have businesses that are significantly reliant on imports to supply inputs for manufacturing so as to satisfy consumer demand. Nonetheless, with the deterioration in oil revenues generated following in the deterioration in crude prices and declining production, nations in West Africa have financial sectors that lack the foreign exchange necessitated to offer industries and businesses with hard currency. With the importation of oil from the United States declining, foreign revenues are set to decrease during oil crises, giving rise to a gradual decline in investment domestically. From a monetary policy perspective, it is imperative for the governments to relax the capital controls which are forced in response to the decline in oil prices. In the course of oil crises, majority of the banks have restricted dollar spending from domestic accounts and at the same time the central banks have positioned stringent restrictions on foreign exchange. In order to properly deal with such periods of oil crises, the West African nations should ensure that the commercial banks increase the restriction on foreign spending and also facilitate central banks opening up the prevailing exchange rate regime to encompass a free-floating market for portfolio investors. Moreover, the easing of capital controls makes it possible to have free movement of capital both into and out of the West African region

The recent gradual decrease in oil prices will substantially reduce the West African region’s inflation, giving rise to an increase in the number of nations with minimal or even negative inflation. Monetary policy implications imply that central banks may respond with increase accommodative policies to the magnitude that lower oil prices diminish inflation over the policy-pertinent prospect. Monetary policy ought to in fact respond to all factors and shocks that could give rise to an aberration of projected inflation from medium-term policy goals. To begin with, bearing in mind that energy is a fundamental intermediate commodity, its price effect could be extensive across sectors and in the course of time, particularly in the presence of sticky price and wage creation (Baffes et al., 2015).

In the oil-exporting nations in the West African region such as Nigeria, it is imperative for the central banks to maintain a poise in the need to support growth against the need to sustain steady inflation and investor confidence with regard to substantial currency pressures. Methodical depreciations in exchange rate can facilitate oil exporters to make alterations to a negative terms of trade shock and restrain the impact on aggregate demand. However, jumbled movements can place major pressure on balance sheets and result in a challenging mixture of above target inflation and deteriorating activity. In particular, monetary policies that lead to the stabilization of the real exchange rate or the price of exports using the domestic currency are perceived as rendering greater welfare gains and stability amongst oil exporting nations compared to those targeting stringently consumer price inflation (Baffes et al., 2015).

For oil exporting nations in West Africa, the sharp decrease in oil prices is also a recap of the susceptibilities intrinsic in a largely concerted dependence on oil exports and a prospect to give a boost to their endeavours to diversify. These endeavours ought to lay emphasis on practical measures to move incentive away from activities in economic sectors that cannot be traded and employment in the public sector, encompassing reassuring high-value added activities, exports in non-resource concentrated sectors, and advancement of skills that are significant employment in the private sector (Baffes et al., 2015). The diversification practice of the minimal fruitful oil exporters gives the suggestion that diversification more often than not occurs amidst declining oil revenues and depends on both vertical variation in oil and gas sectors and horizontal variation past these sectors, with a focus on technological advancement and competitiveness. The enticement structure for workforces and companies, and a modification in social attitudes towards investment in human capital, free enterprise and employment in the private sector, must be nurtured in the non-oil tradable sector (Baffes et al., 2015).