IMPACT OF PETROLEUM PRICE FLUCTUATIONS ON KEY CONVERGENCE CRITERIA IN ECOWAS MEMBER STATES
Over the period 1980-2008, the price of crude oil had fluctuated significantly, with a mean, minimum and maximum values of $ 32.31 (bbl), $ 12.72 (bbl) and $ 140 (bbl) respectively. The above statistics, in addition to a standard deviation of 17.08 over the sample period show that the prices of crude have always been characterised with severe instability. Monthly fluctuations have in fact been more severe than these annual trends, with the price of crude oil reaching $140 (bbl) in July 2008. Such instability in the prices of crude oil is bound to cause macroeconomic distortions, especially in net-oil importing countries, like some ECOWAS countries.
Recently the price of crude oil rose from $ 38.27 (bbl) a barrel in 2004 to a rate of $70.85 a bbl in August 2005. While the price of oil fell slightly in December 2005, it regained its upward trend in the early part of 2006, exceeding $70 a bbl in April 2006. In December 2007 and July 2008, the price of crude oil reached $100 (bbl) and $140 (bbl) respectively. The origin of the increase in the price of crude oil can be linked to both demand- and supply-side explanatory factors, although the former effects far outweigh the latter. The high demand for oil from East Asia, especially China, and to a lesser extent India, largely explained the upsurge in the price of this essential commodity.
In addition to the above strong demand-driven factors, there were also supply-side determinants to the high increase in the price of crude oil. These relate to the upheavals in oil-producing countries as well as refineries capacity constraints, which have created additional pressures in the oil market. Although these supply-side constraints could be addressed in the short- to medium-term, all indications are that the strong demand will prevail in the outlook period and beyond, and thus continue to keep the price of oil high, even if we do not totally exclude the possibility of some decline.
The ECOWAS sub-region, comprising of Nigeria (a dominant economy and oil-producing) and a majority of oil-importing countries presents a unique feature which makes it important to understand the dynamics in the price of oil and its implications on key macroeconomic variables. Under the ECOWAS Monetary Cooperation Programme, fluctuations in oil prices affect, directly or indirectly the primary convergence criteria. For instance, the African Development Bank estimated that the high price of oil translated, as a first round effect, into a higher average inflation of 1.3 and 2.6 percentage points for oil importing African Countries in 2005 and 2006 respectively, while oil exporting countries were expected to grow, on average, by 6 percent per year.
Over the years, it has been observed that meeting the convergence criteria, on a sustained basis remained an impossibility for all ECOWAS Member States, which necessitates more policy oriented research, to better understand the impact of oil shocks on macroeconomic convergence. This could also help bring reflections on the relevant criteria we have to monitor e.g. Core inflation (which isolates some of these seasonal/external factors) instead of headline inflation (which does not). In this regard, high level research therefore becomes an important task, for an institution that is mandated to monitor the processes leading to the single currency goal of ECOWAS, in which observance of the convergence criteria constitutes an important element.
In the light of the above, it could be understood that the high price of oil will invariably affect revenue mobilisation, expenditure (and therefore the fiscal position of government) and inflation. The study is an attempt to analyse the macroeconomic impact of oil price fluctuations in selected ECOWAS member countries using annual data from 1980-2007.