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Shockwatch bulletin: The oil price shock of 2014: drivers, impacts and policy implications

Working papers

Written by Zhenbo Hou, Jodie Keane, Jane Kennan, Dirk Willem te Velde

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The price of oil halved from June 2014 to March 2015, owing mainly to increased oil supply in the US and elsewhere and to reductions in global demand.

An oil price drop has both direct effects through trade and indirect effects through growth and investment and changes in inflation. For example, a 30% drop in oil prices (IMF and WB forecast this as the approximate drop between 2014 and 2015) is expected to directly reduce the value of oil exports in sub-Saharan Africa by $63 billion (major losers include Nigeria, Angola, Equatorial Guinea, Congo, Gabon, Sudan), and reduce imports by an estimated $15 billion (major gainers include in South Africa, Tanzania, Kenya, Ethiopia). The trade effects feed through to economies including through current accounts, fiscal positons, stock markets, investment and inflation. African countries are expected to gain indirectly from higher global growth, estimated to increase African growth by between 0.1 and 0.5%.

We review actual impacts. The value of African oil exports to the major developed countries (EU, US, Japan) and China fell by $25 billion or 13% in 2014. Exports to the US fell by 44%, to the EU by 10%, but increased by 4% to China. The drop in the value of sub-Saharan African oil exports to these countries was particularly noticeable, as there was a 17% drop in the year to the last quarter of 2014. The value of Nigeria’s oil exports fell by 14% in the half year to the last quarter of 2014. On the other hand, the value of Tanzania’s oil imports dropped by 20% over the year to January 2015. Furthermore, between June 2014 and February 2015, inflation dropped by 2 percentage points in Tanzania, South Africa and Kenya. If inflation is 1-2 percentage points lower, real disposable incomes will be 1-2% higher, increasing consumption by around $10 billion in sub-Saharan Africa.

In terms of policy implications, countries can (1) enhance the positive effects of oil prices in reducing inflation by speeding up price pass through; (2)  put in place instruments to smooth the effects of price changes; (3) reduce oil price subsidies or increase taxes – which is good in economic and environmental terms: (4) reduce fiscal deficits: (5) introduce less monetary tightening than would have been the case without the oil price decline; (6) reduce energy intensity or diversify trade and production to reduce the economy’s dependence on volatile oil prices; and (7) foster cooperation amongst gainers and losers of oil price.

Zhenbo Hou, Jodie Keane, Jane Kennan and Dirk Willem te Velde