THE JOURNAL OF ENERGY

AND DEVELOPMENT

Hakima Chouikhi, Rafik Jbir, and

Younés Boujelbène,

“The Role of Oil Price in an Exporting Country:

An Empirical Study of the Libyan Economy,”

Volume 34, Number 2

Copyright 2011
 THE ROLE OF OIL PRICE IN AN EXPORTING
COUNTRY: AN EMPIRICAL STUDY OF THE
LIBYAN ECONOMY

Hakima Chouikhi, Rafik Jbir, and Youne´s Boujelbe`ne*

Introduction

P ersistent oil shocks can have severe macro economic implications, both for oil-
importing and exporting countries. There is an abundance of literature that has
analyzed the impact of oil price on importing countries.1 Most development

*Hakima Chouikhi received his master’s degree in operational research from the University of
Sciences, Economics and Management, University of Sfax in Tunisia. He currently teaches
operational research and statistics at the Higher Institute of Computer and Multimedia (Institut
Superieur d’Informatique et de Multimedia de Sfax) at the University of Sfax. The author’s areas of
academic research include econometrics and energy-related issues.
Rafik Jbir is a university lecturer in economics at the Higher Institute of Management (Institut
Supérieur de Gestion) at the University of Sousse in Tunisia. He obtained his Ph.D. in economics
from the Faculty of Economics and Management (La Faculté des Sciences Economiques et de
Gestion), University of Sfax. His research areas include oil prices and energy challenges. The
author’s publications have appeared in national as well as international journals, including Energy
Policy, The International Journal of Operational Research, Revue Tunisienne d’Economie et de
Gestion, and Energy Sources.
Younés Boujelbène, who earned his Ph.D. in the theory of mathematical economics and
econometrics from the University of Paris, Dauphine, in France, is Professor of Economics at the
Faculty of Economics and Management, University of Sfax. Currently, he is Director of the Higher
Institute of Business Administration (Institut Supérieur d’Administration des Affaires de Sfax) at the
University of Sfax. The author has published in the International Journal of Applied Decision
Sciences, Bankers, Markets and Investors, ICFAI Journal of Behavioral Finance, ICFAI Journal of
Applied Finance, and the International Journal of Quality Engineering and Technology. His areas of
concentration include economics, econometrics, and energy-related issues.

The Journal of Energy and Development, Vol. 34, Nos. 1 and 2

Copyright Ó 2011 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.
173
174 THE JOURNAL OF ENERGY AND DEVELOPMENT

economists agree that variations in world prices are an important source of risk and
instability for importing economies. Empirically, the negative relationship be-
tween oil shocks and economic activity has been investigated by a number of
authors, such as J. D. Hamilton, M. Gisser and T. H. Goodwin, and S. P. Brown
and M. K. Yücel.2
For oil-exporting countries, fewer studies have been undertaken. Among these
analyses we can note those of W. M. Corden and J. P. Neary, W. M. Corden, J.
Rautava, P. A. Adejumo and A. V. Olomola, and M. Reza Farzanegan and G.
Markwardt.3 The literature has shown that oil price fluctuations lead to an ap-
preciation in the real exchange rate in oil-exporting countries, the phenomenon
known as ‘‘Dutch Disease.’’ The Dutch Disease model deals with the analysis of
the sectorial redistribution of the revenue derived from increases in oil prices. Two
effects can result from the Dutch Disease. The first, called the spending effect, is
characterized by an appreciation of the real exchange rate. The second is the re-
source movement effect whereby the ‘‘boom’’ (increase in oil price) results in
a reallocation of resources among various sectors.4 The majority of studies on this
subject have been carried out on developed countries. To our knowledge, there
appears to have been no comprehensive studies undertaken on the effect of Dutch
Disease on the Libyan economy. Indeed, several problems specifically related to
foreign trade have affected the Libyan economy. Until 2003 and mainly because of
political problems, Libyan trade relations with the rest of the world, particularly
with the United States and European countries, were limited or suspended alto-
gether in some cases due to sanctions.
By 2010 the Libyan economy is facing an entirely different situation with the
lifting of sanctions and a global economy characterized by relatively higher oil
prices. Consequently, in an oil-exporting country such as Libya, studying the
effects of oil price fluctuations on the national economy appears to be of greater
relevance. As oil prices increase, this leads to greater revenues for an oil-exporting
nation; this vital revenue stream can affect the economy as indicated by the Dutch
Disease.
In this paper we shall look at the Libyan oil sector followed by our empirical
model of Dutch Disease in Libya, the results, and our concluding remarks.

The Oil Industry in Libya

As a member of the Organization of Petroleum Exporting Countries (OPEC),

Libya has a production quota of around 1.5 million barrels per day (b/d). It is the
second largest crude oil producer in Africa after Nigeria. According to the U.S.
Department of Energy’s Energy Information Administration, Libya’s goal has
been to increase its production to its historic peak of approximately 3 million b/d
by 2012 (a goal that has been deferred until 2017).
 THE ROLE OF OIL PRICE IN THE LIBYAN ECONOMY 175

Oil is a vital source of income to the country. Oil revenues have fueled Libya’s
economic and a socio-cultural development throughout the latter half of the 20th
century. According to P. Lebrun, in 2003 Libya exported nearly 85 percent of its
oil production, which represented 97 percent of the nation’s exports and accounted
for 42 percent of the country’s gross domestic product (GDP).5 Some 60 percent of
oil is produced by subsidiaries of the state-owned National Oil Company (NOC),
the main oil company in Libya. According to the U.S. Energy Information Ad-
ministration, Libya’s oil reserves total some estimated 46.4 billion barrels, the
largest in Africa, followed by Nigeria and Algeria.6 At the current (2010) pro-
duction levels, this quantity may be sufficient for approximately a half century.

Energy Production and Consumption in Libya: The bulk of energy production in

Libya is composed of oil and natural gas. The country’s crude oil output from 1980
through 2009 shows the impact of international sanctions on the energy sector
(figure 1). In particular, Libya was hit hardest during the 1980s. It was not until the
lifting of sanctions that we see a rebounding in Libyan oil production, and the 1980
output level of around 1.8 million barrels per day was reached in 2006. Oil pro-
duction has hovered around this level through 2009, with the country unable to
reach its historic peak oil output achieved in the 1960s of 3 million b/d. A further
examination of figure 1 shows that during the period of 1981 to 1986, oil pro-
duction fell drastically. Sanctions, in addition to decreased oil prices, may explain
this trough. Since 1986 and particularly after 2003, there has been a progressive
increase in output levels strengthened by the resumption of oil trade with the rest
of the world following the lifting of sanctions. Libyan oil is primarily exported to
European markets with Italy (28 percent), France (15 percent), Germany (10
percent), and Spain (10 percent) as its major markets; but its exports are expanding
into other markets, including China (11 percent) and the United States (3 percent).7
Libyan oil is lighter in gravity and lower in sulfur content, making it attractive to
the European markets.
Energy is an essential source in the production process; simply put, businesses
need energy to produce goods and services. Figure 2 illustrates the growth in
Libyan energy consumption, which has continued to increase steadily since the
1970s. Yet Libya has a relatively small population of less than 7 million people,
resulting in consumption levels far lower than production levels. This has allowed
the country to easily meet the more than doubling of oil consumption from 1980
through 2009 while continuing to fuel its economy with oil exports.

Empirical Study

To study the impact of oil price increases on the Libyan economy, we will
adopt the following methodology. First, we examine the stochastic property of the
176 THE JOURNAL OF ENERGY AND DEVELOPMENT

Figure 1
CRUDE OIL PRODUCTION IN LIBYA, 1980-2009
(in thousands of barrels per day)

Source: The U.S. Department of Energy, Energy Information Adminstration, 2010.

Figure 2
TOTAL OIL CONSUMPTION IN LIBYA, 1980-2009
(in thousands of barrels per day)

Source: The U.S. Department of Energy, Energy Information Adminstration, 2010.

 THE ROLE OF OIL PRICE IN THE LIBYAN ECONOMY 177

considered variables. Thus, we will employ the unit root tests—Phillips-Perron

test and the Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test. Then we will verify
the existence of Granger causality between the real oil price and other macro-
economic variables. This is followed by an analysis of the impact of real oil price
fluctuations through the use of the pair-wise causality and the block exogeneity
tests. Finally, we investigate the impact of real oil price movements by impulse
responses functions and variance decomposition.

Data: The data utilized in this study are monthly and cover the period January
1997 through December 2008. In order to analyze the oil price-Libyan economy
relationship, we have used four variables: (1) the real oil price (O), which we
obtained from the nominal Libyan crude oil ‘‘Es Sider 37°’’; (2) economic activity
(Y) measured by the gross domestic product (GDP) of Libya; (3) the real exchange
rate (RER); and (4) the inflation rate (P) measured by the change in the consumer
price index. Data used in this paper were collected from the International Mon-
etary Fund.

The Vector Autoregression (VAR) Model: In the following section, we will use
the VAR model to analyze how the unit shock is transmitted to the variables in the
system. Indeed, based upon the seminal 1980 study by C. A. Sims, the VAR model
has become an important tool to assess shocks.8
We consider the following vector autoregression model of order (p):9

X
P
Yt = c + fi Yti + mt ð1Þ
i=1

where Yt is a (nx1) vector of endogenous variables; c is the (nx1) intercept vector

of VAR; fi is the ith (nxn) matrix of auto regressive coefficients for I=1,2,. . . p;
and mt the (nx1) generalization of a white noise process. Three non-linear speci-
fications were used by the empirical literature.10 In our study, we will present
two non-linear transformations based on the specifications outlined in the studies
by K. A. Mork and J. D. Hamilton.11
K. A. Mork defined the rises and falls of oil price (asymmetric specification) as
follows:

Doilt+ = maxð0; Doilt Þ; Doilt+ : Real oil price increases;

ð2Þ
Doilt = minð0; Doilt Þ; Doilt : Real oil price decreases:

where Doilt = ln oilt – ln oilt–1, Doil is the monthly changes of real oil price in
logarithm, and oilt is the real oil price.
178 THE JOURNAL OF ENERGY AND DEVELOPMENT

J. D. Hamilton defined the ‘‘net oil price increase’’ (NOPI) as the percentage of
the rise in oil price if the price of the current quarter (at the date t) exceeds the four
previous quarter maximum (12 quarters) and zero if not. Thus, the NOPI is pre-
sented as follows:

NOPI4 = maxf0; ðlnðoilt Þ  lnðmaxðoilt1 ; . . . ; oilt4 ÞÞÞg

ð3Þ
NOPI12 = maxf0; ðlnðoilt Þ  lnðmaxðoilt1 ; . . . ; oilt12 ÞÞÞg

To obtain the forecast error variance decomposition and the impulse-response

function, the moving average (MA) representation is used. So, the VAR system
can be transformed into its moving average representation in order to analyze the
system’s response to a real oil price shock, that is:
X
‘
Yt = e + g i mti ð4Þ
i=0

where g is the identity matrix and m is the mean of the process.

The Results of Unit Root Tests: To check the propriety of the variables, unit root
tests were used. Table 1 shows the results of the Phillips-Perron and KPSS unit
root tests. From this table, we can conclude that all variables are integrated with
order one (I (1)). The results of the Phillips-Perron test show that there is some
ambiguity in some variables, especially for the model (ii). The KPSS test confirms
that all variables are stationary in the first difference.12

The Results of the Granger Causality Tests

Pair-wise Granger Causality Test: Using the Granger causality test, we analyze
the relationship between real oil price and other key macroeconomic variables,
namely, economic activity, inflation, and real exchange rates. The Granger cau-
sality test is one of the widely used VAR applications. Table 2 displays the results
of pair-wise Granger causality tests of different models. This table shows a cau-
sality from oil price (O+) to economic activity (Y) and inflation (P) in the
asymmetric model only.13
Block Exogeneity Tests: Block exogeneity tests can be used both to examine the
causality between real oil price and other macroeconomic variables and to assess
whether an endogenous variable can be treated as an exogenous variable. In ad-
dition, we use the net oil price increase (NOPI) concept, originally outlined by J.
D. Hamilton, related to measuring the impact of oil price shocks over a period of
time; in this case, we model oil prices for both a 4- and 12-month period, denoted
 THE ROLE OF OIL PRICE IN THE LIBYAN ECONOMY 179

Table 1
UNIT ROOT TESTS: PHILLIPS-PERRON AND KWIATKOWSKI-PHILLIPS-
SCHMIDT-SHIN (KPSS)

Intercept (i) Trend and Intercept (ii)

Variables Level First difference Level First difference

Phillips-Perron
a a a a
Inflation (P) -5.38 -16.96 -5.18 -16.92
a b a
Economic activity (Y) -0.006 -16.04 -3.79 -16.21
a a a
Real exchange rate (RER) -2.01 -16.48 -5.00 -18.20
a a
Oil price (O) -2.22 -9.99 -3.53 -9.98
KPSS
b a
Inflation (P) 0.30 0.09 0.17 0.07
b a
Economic activity (Y) 1.40 0.26 0.38 0.07
a a
Real exchange rate (RER) 1.36 0.16 0.35 0.11
a a
Oil price (O) 1.16 0.05 0.27 0.05
c
Critical levels KPSS
1 percent 0.73 0.21
5 percent 0.46 0.14
10 percent 0.34 0.11

a
Denotes significance at the 5-percent level.
b
Denotes significance at the10-percent level.
c
Critical levels (i): -3.51, -2.89, and -2.58, and critical levels (ii): -4.04, -3.40, and -3.15.

as NOPI 4 and NOPI 12, respectively. The results of our test are summarized in
table 3.
The finding of table 3 was that oil price can be considered as an exogenous
variable except in the linear models of NOPI 4 and NOPI12. Indeed, the statistic of
the last column (all variables together) for the oil price equation confirms this
result. Furthermore, table 3 shows that there is causality from the real oil price
variable (O+) to economic activity (Y) in the asymmetric model (O+), and from
the real oil price variable to inflation rate (P) in (O+) and NOPI 4 models. Also,
there is a unidirectional causality from the inflation rate (P) to economic activity
(Y) and the real exchange rate (RER) in all models. Finally, the causality exists
between economic activity (Y) and real exchange rate (RER) in all models.

Oil Price Impact

In this section we seek to study the impact of the oil price on Libyan macro-
economic variables. To do this, we shall analyze the impulse response functions
and variance decomposition. In order to build orthogonalized impulse response
functions and variance decomposition using Cholesky decomposition, we need to
classify the system’s variables from the most exogenous to the least exogenous.
180 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 2
PAIR-WISE GRANGER CAUSALITY TEST RESULTS

a b
Null Hypothesis F-statistic

Asymmetric (increase)
c
O+ !j Y 83.89 (0.00)
Y !j O+ 0.18 (0.83)
O+ !j RER 0.21 (0.80)
RER !j O+ 0.76 (0.46)
c
O+ !j P 111.7 (0.00)
c
P !j O+ 4.44 (0.01)

a
O+ = increase in real oil price; Y = economic activity; P = the inflation rate; and RER = the real
exchange rate.
b
Probabilities in parentheses.
c
Denotes significance at the 1-percent level.

Therefore, we shall refer to the economic literature and retain the following
classification: real oil price (O), inflation rate (P), real exchange rate (RER), and
economic activity (Y).
Impulse Response Functions: The impulse response function represents the ef-
fect of an impact of an innovation on current and future values of endogenous
variables. A shock on one variable directly may affect this variable, but it also is
transmitted to all other variables through the dynamic structure of the VAR. The
impulse response functions of macroeconomic variables to an oil price shock are
used to study the oil price impact on the Libyan economy. The confidence bands
are calculated by analytic (asymptotic) method.
From the results of impulse response functions studies, we can conclude that an
oil price shock affects different variables for all models except an asymmetric
decrease model (O-). Confidence bands show that an oil price shock initially hits
the economic activity negatively in all models in the short term (two or three
months). Thereafter, the response is stabilized and becomes positive between the
fourth and the seventh month. Also, in an asymmetric increase model (O+), at the
beginning there is a positive response (increase) of the inflation rate (P) after two
months, then the response is stabilized.
As we noted, this may be explained by the fact that until the lifting of the
United Nations sanctions in 2003, oil trade between Libya and other countries was
constrained. Conditions in the Libyan economy worsened in the 1990s as a result
of these international sanctions. Since 2003, Libya has moved to rejoin the in-
ternational community and has been implementing measures to open up its
economy, but progress has been slow and erratic. Additionally, the response of the
inflation rate to an oil price shock is negative. This negative response is due, in
 THE ROLE OF OIL PRICE IN THE LIBYAN ECONOMY 181

Table 3
a
BLOCK EXOGENEITY TEST

Dependent Excluded Variables Block Exogeneity

Variable Y RER P O (All variables together)

Linear model
b b
Y 1.20 (0.54) 35.06 (0.00) 0.96(0.61) 38.54 (0.00)
b b
RER 3.42 (0.18) 10.49 (0.00) 0.79 (0.67) 15.31 (0.01)
P 0.37 (0.82) 1.16 (0.55) 0.75(0.68) 4.00 (0.67)
b b
O 0.15 (0.92) 1.41 (0.49) 15.36 (0.00) 22.21 (0.00)
Asymmetric (increase)
b b
Y 0.32(0.85) 23.75 (0.00) 141.54 (0.00) 219.16(0.00)
c c c
RER 7.63 (0.02) 10.00 (0.00) 0.11(0.94) 14.56 (0.02)
b b
P 1.39(0.49) 0.25(0.87) 212.11 (0.00) 220.57 (0.00)
c
O+ 0.24(0.88) 1.04(0.59) 7.76 (0.02) 10.09(0.12)
Asymmetric (decrease)
b b
Y 0.91(0.63) 31.80 (0.00) 2.12(0.34) 40.03 (0.00)
b b b
RER 8.30 (0.01) 11.37 (0.00) 1.28(0.52) 15.85 (0.01)
P 1.75(0.41) 0.90 (0.63) 1.97(0.37) 5.25(0.51)
O- 0.19(0.90) 0.43(0.80) 0.92(0.63) 2.00(0.91)
NOPI 4 model
b b
Y 0.82(0.66) 32.71 (0.00) 0.36(0.83) 37.03 (0.00)
c c c
RER 6.67 (0.03) 10.45 (0.00) 2.14(0.34) 17.16 (0.00)
P 0.24(0.88) 0.81(0.66) 0.36(0.83) 3.65(0.72)
b b
NOPI4 1.39(0.49) 0.99(0.60) 21.89 (0.00) 25.06 (0.00)
NOPI 12 model
b b
Y 1.14(0.56) 30.73 (0.00) 0.23(0.88) 34.34 (0.00)
c b c
RER 7.02 (0.02) 9.67 (0.00) 0.18(0.91) 14.83 (0.02)
P 1.75(0.41) 0.90(0.63) 1.978(0.37) 5.25 (0.51)
b c
NOPI12 0.27(0.87) 1.40(0.49) 9.43 (0.00) 12.81 (0.04)

a
O+ = increase in real oil price; O- = decrease in real oil price; Y = economic activity; P = the
inflation rate; RER = the real exchange rate; NOPI 4 = net oil price increase over previous four
months; and NOPI 12 = net oil price increase over previous 12 months. Probabilities in parentheses.
b
Denotes significance at the 1-percent level.
c
Denotes significance at the 5-percent level.

large part, to the subsidy policy enacted by the Libyan government.14 The aim of
this policy is the decoupling of domestic energy prices and international oil prices.
Thus, domestic prices are fixed by Libyan authorities at a lower-than-world-
market rate. Consequently, any fluctuation in oil prices does not increase the in-
flation rate. In addition, the results show that there is no immediate impact of oil
price shocks on the real exchange rates. The positive impact leads to an appre-
ciation in the real exchange rate that appears after four months. This real appre-
ciation constitutes the spending effect that can lead to symptoms of Dutch Disease
in the economy.
182 THE JOURNAL OF ENERGY AND DEVELOPMENT

Variance Decomposition: The variance decomposition shows the proportion of

the unanticipated change of a variable that is attributable to its own innovations
and that of shocks of other variables in the system. Table 4 presents the results of
the estimated variance decomposition for all models. The principal general con-
clusion we can draw from table 4 is that real oil price constitutes the main source
of variation in economic activity and inflation for all models except the asym-
metric model decrease (O-).

Linear Model: Oil prices and inflation rate appear the main sources of eco-
nomic activity changes (Y). They contributed, respectively, with about 41.09
percent and 56.64 percent over the two-year time period to the economic activity
variation. However, the real exchange rate (RER) does not seem to be an im-
portant factor in contributing to economic activity volatility. For inflation (P), oil
price contributes about 48.81 percent to its variation in one month, and about
52.1 percent in one year. The contribution of the other variables (RER and Y) is
not significant (0.9 percent and 0.1 percent, respectively). In addition, our results
suggest that the role of oil price in real exchange appreciation is weak; it does not
exceed 4.5 percent.
Asymmetric Models: In this section we shall consider only the asymmetric
model of an oil price increase (O+), since the results of the asymmetric model of
an oil price decrease (O-) were not significant. Initially, over the short term (one
month) the contribution of oil price to economic activity variation is modest
(3.24 percent). However, after 12 months, this increased to reach 54.92 percent.
As in the linear model, oil price constitutes the major source of inflation rate
changes. Its contribution is around 56.05 percent over a two-year period.The real
exchange rate and the economic activity explain relatively little of the variation
in the inflation rate (respectively, 0.18 percent and 1.16 percent). However, the
oil price shock does not explain the real appreciation of the exchange rate (4.11
percent in two years).
Net Oil Price Increase (NOPI) Models: For the economic activity, the oil price
shock and inflation changes constitute the principal origin of recessions in both
NOPI4 and NOPI12 models. They contributed 77.2 percent and 20.93 percent,
respectively, in the NOPI 4 model and 29.84 percent and 68.45 percent in the
NOPI12 model in two years. Similarly, for the inflation variable, the largest shares
of its volatility are oil price and inflation. The percentages of their contribution
reached, respectively, 85.33 percent and 14.1 percent in the NOPI 4 model and
41.55 percent and 57.43 percent in the NOPI12 model in nearly two years. Thus,
over the longer term, little of the real appreciation in the exchange rate can be
attributed to oil price and inflation. Respectively, their percentages are 7.04 per-
cent and 1.9 percent in the NOPI 4 model and 3.47 percent and 4.89 percent in the
NOPI12 model for the two-year period.
 THE ROLE OF OIL PRICE IN THE LIBYAN ECONOMY 183

Table 4
a
VARIANCE DECOMPOSITION

Variables O RER Y P

Linear model
Economic activity (Y)
M1 41.027 0.000 1.814 57.157
M12 41.097 0.790 1.466 56.645
M24 41.097 0.790 1.466 56.645
Inflation rate (P)
M1 48.814 0.000 0.000 51.185
M12 52.168 0.905 0.103 46.822
M24 52.168 0.905 0.103 46.822
Real exchange rate (RER)
M1 0.257 99.455 0.000 0.287
M12 4.300 91.648 0.059 3.991
M24 4.300 91.647 0.059 3.992
Asymmetric model (increase)
Economic activity (Y)
M1 3.244 0.00078 2.923 93.830
M12 54.921 0.715 1.279 43.084
M24 54.924 0.715 1.279 43.081
Inflation rate (P)
M1 3.063 0.000 0.000 96.936
M12 56.055 1.169 0.188 42.586
M24 56.059 1.169 0.188 42.583
Real exchange rate (RER)
M1 0.0054 99.809 0.000 0.185
M12 4.107 92.363 0.232 3.296
M24 4.111 92.357 0.232 3.297
Asymmetric model (decrease)
Economic activity (Y)
M1 0.259 0.0005 2.327 97.412
M12 2.475 0.706 1.923 94.893
M24 2.477 0.706 1.923 94.891
Inflation rate (P)
M1 0.263 0.000 0.000 99.736
M12 1.889 0.587 0.173 97.349
M24 1.920 0.587 0.173 97.318
Real exchange rate (RER)
M1 0.823 99.164 0.000 0.0123
M12 2.610 89.843 0.330 7.215
M24 2.683 89.775 0.330 7.211
Net oil price increase over previous four months (NOPI 4 model)
Economic activity (Y)
M1 76.571 0.0012 1.780 21.647

(continued)
184 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 4 (continued)
a
VARIANCE DECOMPOSITION

Variables O RER Y P

M12 77.200 0.417 1.449 20.932

M24 77.200 0.417 1.449 20.932
Inflation rate (P)
M1 83.669 0.000 0.000 16.330
M12 85.331 0.404 0.164 14.100
M24 85.331 0.404 0.164 14.100
Real exchange rate (RER)
M1 0.0093 99.984 0.000 0.006
M12 7.043 90.018 1.029 1.908
M24 7.044 90.016 1.029 1.908
Net oil price increase over previous twelve months (NOPI 12 model)
Economic activity (Y)
M1 29.849 0.001 1.693 68.455
M12 31.240 0.793 1.355 66.610
M24 29.849 0.001 1.693 68.455
Inflation rate (P)
M1 38.384 0.000 0.000 61.616
M12 41.554 0.947 0.062 57.435
M24 41.554 0.947 0.062 57.435
Real exchange rate (RER)
M1 0.0149 99.984 0.000 0.001
M12 3.475 91.424 0.209 4.890
M24 3.475 91.424 0.209 4.891

a
O = real oil price; Y = economic activity; P = the inflation rate; RER = the real exchange rate;
NOPI 4 = net oil price increase over previous four months; and NOPI 12 = net oil price increase over
previous 12 month.

Conclusion

Through this paper, we have investigated the oil price-macroeconomic vari-

ables relationship for the Libyan economy using both linear and non-linear
models. Our findings indicate that, as in the case of oil-importing countries, oil
price shocks affect Libyan macroeconomic variables. Indeed, the results of im-
pulse response functions and variance decomposition of different variables have
demonstrated that the decrease of economic activity is largely dependent on oil
price changes. Oil price shocks negatively affect the inflation rate. Although this
result seems to be at odds with some academic work on oil-importing countries,15
it was confirmed by other research for oil exporters, most notably P. A. Olomola
and A. V. Adejumo.16 Also, an increase in oil price leads to an appreciation of the
real exchange rate. This appreciation, combined with a decrease in economic
 THE ROLE OF OIL PRICE IN THE LIBYAN ECONOMY 185

activity, can be interpreted as the result of the spending effect, which is symp-
tomatic of the Dutch Disease. Thus, this implies that Libya seems to be affected by
the Dutch Disease in the short term. In order to reduce the effects of the Dutch
Disease, the Libyan authorities could create a regulation fund of oil revenue. The
objective of this fund would be to provide money for the government in the case of
an oil price decrease and allow for a money-saving mechanism during times of
increased oil prices.

NOTES
1
R. H. Rasche and J. A. Tatom, ‘‘Energy Price Shocks, Aggregate Supply, and Monetary Policy:
the Theory and International Evidence,’’ in Supply Shocks, Incentives, and National Wealth, K.
Brunner and A. H. Meltzer, eds. (Amsterdam: North-Holland, 1981); Michael Bruno and Jeffrey
Sachs, ‘‘Input Price Shocks and the Slowdown in Economic Growth: The Case of UK
Manufacturing,’’ Review of Economic Studies, February 1982, pp. 679–705; M. R. Darby, ‘‘The
Price of Oil and World Inflation and Recessions,’’ American Economic Review, vol. 72, no. 4
(1982), pp. 738–51; James D. Hamilton, ‘‘Oil and the Marcoeconomy since World War II,’’ The
Journal of Political Economy, April 1983, pp. 228–48; James D. Hamilton, ‘‘This is What Hap-
pened to the Oil Price-Macroeconomy Relationship,’’ Journal of Monetary Economics, October
1996, pp. 215–20; John Burbridge and Alan Harrison, ‘‘Testing for the Effects of Oil-Prices Rises
Using Vector Autoregressions,’’ International Economic Review, June 1984, pp. 459–84; M. Gisser
and T. H. Goodwin, ‘‘Crude Oil and the Macroeconomy: Tests of Some Popular Notions,’’ Journal
of Money, Credit and Banking, February 1986, pp. 95–103; and Knut A. Mork, ‘‘Oil and the Macro-
economy, When Prices Go Up and Down: An Extension of Hamilton’s Results,’’ Journal of Po-
litical Economy, June 1989, pp. 740–44.
2
J. D. Hamilton, ‘‘Oil and the Macroeconomy since World War II’’; M. Gisser and T. H.
Goodwin, op. cit.; and Stephen P. Brown and Mine K. Yücel, ‘‘Energy Prices and Aggregate
Economic Activity: An Interpretative Survey,’’ The Quarterly Review of Economics and Finance,
summer 2002, pp. 193-208.
3
W. M. Corden and J. P. Neary, ‘‘Booming Sector and De-industrialisation in a Small Open
Economy,’’ The Economic Journal, December 1982, pp. 825-48; W. M. Corden, ‘‘Booming Sector
and Dutch Disease Economics: Survey and Consolidation,’’Oxford Economic Papers, November
1984, pp. 359-80; Jouko Rautava, ‘‘The Role of Oil Prices and the Real Exchange Rate in Russia’s
Economy—a Cointegration Approach,’’ Journal of Comparative Economics, June 2004, pp. 315–
27; Philip A. Adejumo and Akintoye V. Olomola, ‘‘Oil Price Shock and Macroeconomic Activities
in Nigeria,’’ International Research Journal of Finance and Economics, May 2006, pp. 28-34; and
Mohammad Reza Farzanegan and Gunther Markwardt, ‘‘The Effects of Oil Price Shocks on the
Iranian Economy,’’ Energy Economics, January 2009, pp. 134–51.
4
For more details, see W. M. Corden and J. P. Neary, op. cit., and W. M. Corden, op. cit.
5
P. Lebrun, ‘‘Situation économique et financière de la Libye,’’ MINEFI - DREE/TRÉSO,
Ambassade de France en Libye-Mission Économique a Tripoli, March 3, 2004, available at http://
www.financesmediterranee.com/pdf/pays/Lybie_situa_eco&f_3_03_04.pdf.
6
This number is cited by the U.S. Department of Energy, Energy Information Administration
(EIA), ‘‘Libya Country Analysis Brief,’’ (Washington, D.C.: EIA, February 2011), available at
186 THE JOURNAL OF ENERGY AND DEVELOPMENT

http://www.eia.doe.gov/cabs/libya/Background.html, and is based on oil reserve assessments by

The Oil & Gas Journal.
7
Ibid. Libyan oil exports by destination for period January-November, 2010.
8
C. A. Sims, ‘‘Macroeconomics and Reality,’’ Econometrica, January 1980, pp. 1-48.
9
The optimal lag length of the VAR model is equal to two and was examined by the Akaike
information criterion (AIC) and Schwartz (SIC).
10
Theses specifications are K. A. Mork, op. cit.; Kiseok Lee, Shawn Ni, and Ronald A. Ratti,
‘‘Oil Price Shocks and the Macroeconomy: The Role of Price Variability,’’ The Energy Journal,
vol. 16, no.4 (1995), pp. 39-56; and J. D. Hamilton, ‘‘This is What Happened to the Oil Price-
Macroeconomy Relationship.’’
11
The results of non-linear specification (SOPI and SOPD) of Lee et al. are available. These
latter are non-significant.
12
The VAR model will be conducted in first difference.
13
The results of these models are available upon request from the authors.
14
For more details, see Rafik Jbir and Sonia Zouari-Ghorbel, ‘‘Recent Oil Price Shocks and
Tunisian Economy,’’ Energy Policy, March 2009, pp. 1041-051.
15
For example, K. A. Mork, op. cit., and Rebeca Jimenez-Rodriguez and Marcelo Sanchez, ‘‘Oil
Price Shocks and Real GDP Growth: Empirical Evidence for Some OECD Countries,’’ Applied
Economics, vol. 37, no. 2 (2005), pp. 201-28.
16
P. A. Olomola and A. V. Adejumo, op. cit.