IDEAS home Printed from https://ideas.repec.org/p/etd/wpaper/008.html
   My bibliography  Save this paper

Implications of Oil Price Shocks and Subsidizing Oil Prices to the Ethiopian Economy: A CGE Analysis

Author

Listed:
  • Birouke Tefera

    (Ethiopian Development Research Institute)

  • Frehiwot Worku

    (Ethiopian Development Research Institute)

  • Zewdu Ayalew

    (Ethiopian Development Research Institute)

Abstract

Economic growth is largely dependent on the availability of reliable sources of energy. As an importer of oil and petroleum products, Ethiopia’s economy is potentially vulnerable to fluctuations in the world price of crude oil. The recent oil price shocks adversely affected oil-importing developing countries such as Ethiopia. The paper attempts to quantify the impact of an increase in international price of crude oil and oil subsidy scheme on the Ethiopian Economy by applying the IFPRI’s static CGE model using the EDRI’s 2005/06 SAM. The results show that the oil price shock causes a depreciation of the Ethiopian Birr (ETB) and brings about an increase in exports and a decline in imports. The depreciation of the ETB also brings a rise in agricultural tradable goods output and a decline in manufacturing and service sectors output. The shock also deteriorates income and consumption of all households. In general, rural households are more negatively affected by the oil price shock as compared to urban households. The oil subsidy scheme increases government expenditure and reduces government savings, hence total investment falls. Output of the construction sector goes down because of the fall in investment demand. On the other hand, the oil subsidy improves consumption of all households. In the short run, the oil price subsidy scheme improves household welfare. Nevertheless, in the long run it is harmful since it absorbs a high share of limited public resources, leads to lower investments and reduces future growth. Financing the oil subsidy scheme by increasing taxes on other goods brings improvement in investments but it distorts the level of domestic production and household welfare. We conclude that this type of subsidy is an inefficient tool to reverse the high oil price increase in developing countries. Rather, finding ways to substitute oil by other energy sources could be a better solution in the medium to long-run.

Suggested Citation

  • Birouke Tefera & Frehiwot Worku & Zewdu Ayalew, 2012. "Implications of Oil Price Shocks and Subsidizing Oil Prices to the Ethiopian Economy: A CGE Analysis," Working Papers 008, Policy Studies Institute.
    • Handle: RePEc:etd:wpaper:008
    as

    Download full text from publisher

    File URL: https://psi.gov.et/index.php/working-papers?download=8:implications-of-oil-price-shocks-and-subsidizing-oil-prices-to-the-ethiopian-economy-a-cge-analysis
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ahmed, Vaqar & O' Donoghue, Cathal, 2008. "Welfare impact of external balance in pakistan: CGE-microsimulation analysis," MPRA Paper 9267, University Library of Munich, Germany.
    2. Junhee Lee & Joonhyuk Song, 2009. "Nature of Oil Price Shocks and Monetary Policy," NBER Working Papers 15306, National Bureau of Economic Research, Inc.
    3. Ibrahim Worku, 2011. "Road Sector Development and Economic Growth in Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 19(2), November.
    4. Bahre Gebru & Sosina Bezu, 2012. "Environmental Resource Collection versus Children’s Schooling: Evidence from Tigray, Northern Ethiopia," Working Papers 007, Policy Studies Institute.
    5. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
    6. Kefyalew Endale, 2011. "Fertilizer Consumption and Agricultural Productivity in Ethiopia," Working Papers 003, Policy Studies Institute.
    7. Ibrahim Worku, 2011. "Road Sector Development and Economic Growth in Ethiopia," Working Papers 004, Policy Studies Institute.
    8. Mr. Kangni R Kpodar, 2006. "Distributional Effects of Oil Price Changeson Household Expenditures: Evidence From Mali," IMF Working Papers 2006/091, International Monetary Fund.
    9. Tadesse Kuma (PhD), 2010. "Analysis of Changes in Food Consumption Patterns in Urban Ethiopia," Working Papers 002, Policy Studies Institute.
    10. A Carruth & M Hooker & A Oswald, 1994. "Unemployment, Oil Prices and the Real Interest Rate: Evidence from Canada and the UK," CEP Discussion Papers dp0188, Centre for Economic Performance, LSE.
    11. McDonald, Scott & van Schoor, Melt, 2005. "A Computable General Equilibrium (CGE) Analysis of the Impact of an Oil Price Increase in South Africa," Working Paper Series 15633, PROVIDE Project.
    12. Schubert, Stefan F., 2014. "Dynamic Effects Of Oil Price Shocks And Their Impact On The Current Account," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 316-337, March.
    13. Abul Quasem Al-Amin & Siwar Chamhuri & Abdul Hamir Jaafar, 2008. "Impacts Of External Price Shocks On Malaysian Macro Economy-An Applied General Equilibrium Analysis," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 7, pages 1-24, October.
    14. Yabibal Mulualem Walle, 2010. "Tourist Flows and Its Determinants in Ethiopia," Working Papers 001, Policy Studies Institute.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Junhee Lee & Joonhyuk Song, 2011. "Oil and Macroeconomy: The Case of Korea," NBER Chapters, in: Commodity Prices and Markets, pages 263-290, National Bureau of Economic Research, Inc.
    2. Wassie, Solomon Bizuayehu, 2017. "Long Run Determinants Of Cereal Production In Ethiopia: Does Co2 Emission Matter?," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 5(2), April.
    3. Rajesh H. Acharya & Anver C. Sadath, 2018. "Revisiting the relationship between oil price and macro economy: Evidence from India," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2018(1), pages 173-190.
    4. Elena Perra, & Sanfilippo, Marco & Sundaram, Asha, 2022. "Roads, Competition, and the Informal Sector," Department of Economics and Statistics Cognetti de Martiis. Working Papers 202221, University of Turin.
    5. Alfredo Pereira & Rui Pereira, 2013. "Fossil fuel prices and the economic and budgetary challenges of a small energy-importing economy: the case of Portugal," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 12(3), pages 181-214, December.
    6. Naser, Hanan, 2015. "Analysing the long-run relationship among oil market, nuclear energy consumption, and economic growth: An evidence from emerging economies," Energy, Elsevier, vol. 89(C), pages 421-434.
    7. Jonathan Demenge & Rossella Alba & Katharina Welle & Kebede Manjur & Alemu Addisu & Lyla Mehta & Kifle Woldearegay, 2015. "Multifunctional Roads," Journal of Infrastructure Development, India Development Foundation, vol. 7(2), pages 165-180, December.
    8. Elena Perra, 2022. "Road to Division: Ethnic Favouritism in the Provision of Road Infrastructure in Ethiopia," Working Papers - Economics wp2022_01.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    9. Lee, Chi-Chuan & Lee, Chien-Chiang & Ning, Shao-Lin, 2017. "Dynamic relationship of oil price shocks and country risks," Energy Economics, Elsevier, vol. 66(C), pages 571-581.
    10. Reitz, Stefan & Rülke, Jan & Stadtmann, Georg, 2012. "Nonlinear Expectations in Speculative Markets," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62045, Verein für Socialpolitik / German Economic Association.
    11. Reitz, Stefan & Rülke, Jan-Christoph & Stadtmann, Georg, 2012. "Nonlinear expectations in speculative markets – Evidence from the ECB survey of professional forecasters," Journal of Economic Dynamics and Control, Elsevier, vol. 36(9), pages 1349-1363.
    12. Samuel Sebsibie & Workineh Asmare & Tessema Endalkachew, 2015. "Agricultural Technology Adoption and Rural Poverty: a Study on Smallholders in Amhara Regional State, Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 23(2), December.
    13. Haugom, Erik & Mydland, Ørjan & Pichler, Alois, 2016. "Long term oil prices," Energy Economics, Elsevier, vol. 58(C), pages 84-94.
    14. Mohammad I. Elian & Khalid M. Kisswani, 2018. "Oil price changes and stock market returns: cointegration evidence from emerging market," Economic Change and Restructuring, Springer, vol. 51(4), pages 317-337, November.
    15. Pham T. T. Trinh & Bui T. T. My, 2023. "The impact of world oil price shocks on macroeconomic variables in Vietnam: the transmission through domestic oil price," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 37(1), pages 67-87, May.
    16. Tokic, Damir, 2011. "Rational destabilizing speculation, positive feedback trading, and the oil bubble of 2008," Energy Policy, Elsevier, vol. 39(4), pages 2051-2061, April.
    17. Umar, Muhammad & Su, Chi-Wei & Rizvi, Syed Kumail Abbas & Lobonţ, Oana-Ramona, 2021. "Driven by fundamentals or exploded by emotions: Detecting bubbles in oil prices," Energy, Elsevier, vol. 231(C).
    18. Wang, Yudong & Hao, Xianfeng, 2022. "Forecasting the real prices of crude oil: A robust weighted least squares approach," Energy Economics, Elsevier, vol. 116(C).
    19. de Albuquerquemello, Vinícius Phillipe & de Medeiros, Rennan Kertlly & da Nóbrega Besarria, Cássio & Maia, Sinézio Fernandes, 2018. "Forecasting crude oil price: Does exist an optimal econometric model?," Energy, Elsevier, vol. 155(C), pages 578-591.
    20. Natanelov, Valeri & McKenzie, Andrew M. & Van Huylenbroeck, Guido, 2013. "Crude oil–corn–ethanol – nexus: A contextual approach," Energy Policy, Elsevier, vol. 63(C), pages 504-513.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:etd:wpaper:008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dagmawi Atnafu (email available below). General contact details of provider: https://www.psi.gov.et .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.