Crude oil prices and the balance of trade: Asymmetric evidence from selected OPEC member countries

ABSTRACT

The contribution of this article is to assess whether the effects of crude oil price fluctuations on the trade balance are symmetric or asymmetric in the context of an individual oil-exporting country, specifically four OPEC member countries – Iran, Nigeria, Saudi Arabia, and Venezuela. To examine this subject thoroughly, we use three different measures of trade balances such as oil trade balance, non-oil trade balance, and total trade balance, and examine whether oil prices are asymmetrically passed on to the trade balances for those OPEC countries in the long- and short-run. After implementation of the nonlinear autoregressive distributed lag (ARDL) model, we find that changes in oil prices indeed have asymmetric effects on the oil trade balance for all four OPEC countries in the long-run, though not in the short-run. In the case of the non-oil and total trade balance, however, the asymmetry of oil price changes is not detected in both the long- and short-run.

KEYWORDS:

• Asymmetry
• nonlinear ARDL
• oil prices
• OPEC
• trade balance

JEL CLASSIFICATIONS:

• C22
• F14
• Q43

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Shin, Yu, and Greenwood-Nimmo (2014) originally suggest what is known as the approach to modeling asymmetric cointegration based on partial sum decomposition.

2. As a cross-check, we also apply the bounds t-test to the lagged dependent variable. If the computed t-statistic is below the upper critical value, we reject the null hypothesis H₀: θ₀ = 0 against the alternative hypothesis H₁: θ₀ < 0, supporting cointegration. The results verify our conclusion of the F-test that there is a long-run relationship between the variables in all models except the total trade balance that belongs to Venezuela (Panel C of Table 4).

3. The log-log model is known as the constant elasticity model. Thus, each of the coefficients gives the estimated percentage change in the trade balance, given one percent change in the corresponding independent variable (Wooldridge 2015).

4. The violence in the Niger Delta Region that occurred in the early 2010s may have a detrimental effect on crude oil production in Nigeria. The Niger Delta Region, located in the south-south geopolitical zone of Nigeria, is the region that accounts for nearly 90% of Nigeria's oil production. The conflict in the Niger Delta Region first arose in the early 1990s when the region's minority ethnic groups (i.e., Ogoni) started to protest against the degradation of the environment by foreign oil companies (i.e., Royal Dutch Shell). These civil disturbances by the indigent communities peaked from 2011 through 2015 and crude oil production in the region was severely damaged by such activities as oil bunkering and oil pipeline vandalization. By including a dummy variable representing the conflict directly in the analysis, therefore, we explicitly can control for its impact on the trade balances for Nigeria. The dummy variable is a unity from 2011 to 2015 when the Niger Delta Region is involved in the conflict. The results show a substantial fall in the oil trade balance and hence total trade balance during the conflict in the Niger Delta Region; for example, the conflict causes the oil (total) trade balance to fall by about 43% (29%) for the years 2011 through 2015.

5. The trade balances can only be traced back to as early as 1980. In addition, 2016 is the last date for which complete data are available. Thus, our data set covers for period 1980–2016. To some, this period would seem to be a bit short; our findings should thus be viewed with caution.