THE JOURNAL OF ENERGY

AND DEVELOPMENT

Majed S. Almozaini,

“Oil Booms and Macroeconomic Activities

in OPEC Countries: The Cases
of Saudi Arabia, Nigeria, and Venezuela,”
Volume 43, Number 1

Copyright 2018
 OIL BOOMS AND MACROECONOMIC ACTIVITIES
IN OPEC COUNTRIES: THE CASES OF SAUDI
ARABIA, NIGERIA, AND VENEZUELA

Majed S. Almozaini*

Introduction

T he Organization of the Petroleum Exporting Countries (OPEC) plays a critical

role in influencing world oil prices. Between 1970 and 1973, the global de-
mand for oil increased considerably and OPEC states were significant in meeting
this global demand. Furthermore, an oil shock occurred in 1973 when OPEC
members increased oil prices; in the past, they had only prevented oil companies
from reducing prices. Since then, OPEC has attracted considerable attention from
researchers and the study of the behavior and history of this organization has
intensified.1 A look at the historical events reveals that the oil production of OPEC
countries is a leading factor determining oil prices as it accounts for 40 percent of
the total world production and its exports account for 60 percent of the total oil
traded globally. Given these facts and on the basis of their overall contribution to
global economic growth, we can conclude the importance of these countries and
the importance of a related economic study. If we consider the OPEC member
states in greater detail, we find that Saudi Arabia is the largest OPEC producer of
oil in the Middle East; Nigeria, the largest oil producer in the continent of Africa;

*Majed S. Almozaini, faculty member at the Institute of Public Administration (IPA) in Riyadh,
Saudi Arabia, earned a B.S. degree in finance from Qassim University in Saudi Arabia, a master’s
degree in economics from the Middle Tennessee State University, and currently is a Ph.D. candidate
in the Department of Economics of Howard University. The author currently is the Vice-President of
the Graduate Economics Student Association (GESA) at Howard University, and his academic
interests focus on energy economics, international economics, and growth and development
economics.

The Journal of Energy and Development, Vol. 43, Nos. 1 and 2

Copyright Ó 2018 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.
125
126 THE JOURNAL OF ENERGY AND DEVELOPMENT

and finally, Venezuela is the most abundant producer in South America. Each of
these countries has economic, productive, and political characteristics that are
slightly different from each other, which makes the study of these countries more
critical and very salient.
A discovery of a new resource or a price boom in the natural resource sector
can help spur economic development and raise the standard of living by increasing
the national income. However, it may also result in a slowdown of the other
tradable sectors such as the manufacturing and agriculture sectors in most coun-
tries. The inflow of money can have a positive or negative effect on the country’s
economy, particularly in the long run. This increase in the oil prices, which is the
primary source of income of Nigeria, Saudi Arabia, and Venezuela, will result in
an appreciation of their currencies. Therefore, this change in the real exchange rate
leads to structural changes in the economy, including the effect on other tradable
non-oil sectors in the selected OPEC members.
The Dutch disease refers to a negative effect experienced in the economy
because of the resultant sharp inflows of foreign currency, often attributed to the
presence of natural resources such as large oil reserve discoveries. Because of
currency inflows, a specific central effect entails currency appreciation and, in
turn, reduced price competitiveness in other products traded on the exports mar-
ket.2 According to V. Pontines and R. Siregar, among other researchers, natural
resources can act as a curse or a blessing.3 On the one hand, resources such as oil in
Saudi Arabia, Venezuela, and Nigeria are documented as blessings because they lead
to both increasing income and consumption possibilities for the economy. On the
other hand, these natural resources are perceived to be a curse because they are likely
to translate into the Dutch disease. The latter has severe economic effects in the long
and the short term, acting as obstacles to the nations’ development.4 The Dutch
disease traces its origin to the 1960s when the Netherlands discovered vast resources
of natural gas in sections of the North Sea and attracted large capital inflows that
resulted from increased export revenues.5 Consequently, the Dutch florin was in high
demand and led to an appreciated exchange rate in the Dutch context. The trickle-
down effect proved a difficulty for manufactured goods from this region to compete
on the international market. To this day, the Dutch disease theory remains relevant
and has affected other parts of the world.6 Therefore, this study focuses on this trend
in the spread of the Dutch disease theory and its effect on the manufacturing sector
and the exchange rate of regions where natural resources exist or have been dis-
covered, including the selected OPEC countries. This article will briefly outline the
three case countries—Nigeria, Saudi Arabia, and Venezuela—followed by the re-
search methodology and data utilized. Subsequently, a literature review will be of-
fered, then an overview of this study’s empirical results, and, last, the conclusions.
Overview of the Case Countries—Nigeria, Saudi Arabia, and Venezuela:
According to the World Bank, before 1970, in Nigeria agriculture was the main
 OIL BOOMS AND MACROECONOMIC ACTIVITIES 127

driver of the economy. Between 1960 and 1970, agriculture accounted for ap-
proximately 50 percent of the gross domestic product (GDP) and employed 72
percent of the labor force. Since 1970, oil exports have dominated total exports; the oil
exports did not fall below 90 percent of the total exports post-1974.7 In contrast, Saudi
Arabia’s economy relies heavily on oil, accounting for approximately 85 percent of its
exports and 50 percent of its GDP, while the oil exports in Venezuela account for
approximately 95 percent of the total exports and 25 percent of the GDP, which can
cause future economic crises when the energy prices fall. As the economies of Saudi
Arabia, Nigeria, and Venezuela are heavily dependent on oil, it is essential to know
whether the country is suffering from the symptoms of the Dutch disease.
Figure 1 shows the general trends of events that led to oil price fluctuations
from the first oil boom in 1973 to 2011, which reveals the years that had a dif-
ference in the productivity of some tradable sectors.
Many countries rely on oil exports, which are affected by the rise and fall of
this semi-unique source of income. When the price of oil increases, the country
Figure 1
TREND OF OIL PRICES SINCE 1970 TO 2011
(in 2010 U.S. dollars)

Source: WTRG Economics, www.wtrg.com.

128 THE JOURNAL OF ENERGY AND DEVELOPMENT

earns a considerable revenue from this increase and, thus, the local currency was
impacted. Therefore, in this study, we attempted to answer several questions,
including: (1) Has the oil boom caused an appreciation in the real exchange rates
in the selected OPEC nations? (2) What is the effect of the oil boom and the
appreciation of the real exchange rate on the macroeconomic activities in these
countries?
The empirical analysis conducted in the present study seeks to investigate the
following hypotheses.
Hypothesis 1: The relationship of the oil price, GDP, fuel exports, and money
supply with respect to the real effective exchange rate (REER). Here, the fol-
lowing null and alternative hypotheses have been tested:
H0: The independent variables have no significant effect on REER in the se-
lected OPEC countries.
Ha: The independent variables have a significant effect on REER in the selected
OPEC countries.
Hypothesis 2: The relationship of the real effective exchange rate (REER), oil
price, GDP, money supply, and fuel exports with respect to the manufactured
exports. Here, the following null and alternative hypotheses have been tested:
H0: The independent variables have no significant effect on the manufactured
exports in the selected OPEC countries.
Ha: The independent variables have a significant effect on the manufactured
exports in the selected OPEC countries.

Research Methodology and Source of Data

Model: This model includes the logs of the real effective exchange rate
(logREER), the log of the oil price in U.S. dollars per barrel (logOP), the log of the
gross domestic product (GDP) in millions of U.S. dollars (logGDP), fuel exports
as a percentage of merchandize exports (FEX), and broad money as a percentage
of GDP (MS). In the model, a is the intercept, b1, b2, b3, b4, and b5 are the slope
coefficients, and e is the error term.
LogREERt ¼ a þ b1 log OPt þ b2 log GDP þ b3 FEXt þ b4 MS þ et ð1Þ

In equation (2), we include the log of the manufactures’ exports as a percentage

of merchandise exports (logMEX) in addition to our other variables.

LogMEXt ¼ a þ b1 logREERt þ b2 logOPt þ b3 logGDP þ b4 MS

þ b5 FEXt þ et ð2Þ
 OIL BOOMS AND MACROECONOMIC ACTIVITIES 129

Data Sources: In order to examine the impact of the oil boom on the real
exchange rates of the selected OPEC countries and then examine their impact on the
macroeconomic activities of these countries, the variables such as oil prices, GDP, real
effective exchange rate, in goods and services, GDP per capita, inflation, and other
macroeconomic variables used for this paper were obtained from different sources.
Table 1 offers the description and sources of the variables utilized in this paper.
This paper is based on time panel data collected from various sources covering
the period from 1980 to 2016. The three selected countries are members of OPEC:
Nigeria as the most significant oil producer in Africa, Saudi Arabia as the most

Table 1
RESEARCH VARIABLES

Variables Short Definition Code Source

GDP (constant 2010 U.S. $) World Development

GDP, GDP per capita (constant GDP, Indicators databases of the
GDP/capita 2010 U.S. $) GDP_cap World Bank
World Development
Fuel exports (% of Indicators databases of the
Fuel exports merchandise exports) FEX World Bank
World Development
Manufactures’ Manufactures’ exports Indicators databases of the
exports (% of merchandise exports) MEX World Bank
World Development
Inflation, GDP deflator Indicators databases of the
Inflation (annual %) Inf World Bank
World Development
Real effective Real effective exchange rate Indicators databases of the
a
exchange rate (2010 = 100) REER World Bank
Average price in U.S.
Oil price dollars per barrel OP OPEC website
General government final World Development
Government consumption expenditure Indicators databases of the
expenditure (% of GDP) GE World Bank
World Development
Indicators databases of the
Money supply Broad money (% of GDP) MS World Bank

a
The World Bank defines the REER as the nominal effective exchange rate (a measure of the
value of the ratio of domestic to international prices) divided by a price deflator or index.
130 THE JOURNAL OF ENERGY AND DEVELOPMENT

significant producer of oil in Asia and the Middle East, and, finally, Venezuela as
the most significant producer in South America.
Table 2 shows the statistical summary of some variables used in the panel data,
which are contained in equations (1) and (2). Specifically, this table shows the
mean, the standard deviation, and the minimum and the maximum of each vari-
able. The data used are for three countries—Saudi Arabia, Venezuela, and
Nigeria—for the period from 1980 to 2013. The average manufacturing sector of
the total exports for this period is 6.8 percent, which ranges from 0.022 percent to
18.54 percent with a standard deviation of 4.7. On the other hand, not surprisingly,
the average oil exports are 89.4 percent, with the maximum reaching 99 percent of
exports and the minimum 67 percent. From here we conclude that the magnitude
of oil exports in these economies is much higher than that of the manufacturing
sector. Given the inflation statistics, we find that these nations faced high inflation
rates with a maximum of 115 percent and an average of 18 percent. As for the oil
price, it is highly variable, with a maximum of around $110 per barrel, while the
minimum reached around $12.30. This indicates that these oil-exporting countries
have had significant revenues in specific periods and also their revenues have
decreased during periods of oil decline, so it is interesting to study the impact of
the oil boom on different sectors in the economy of these countries.
Graphical Representation of the Relationships between the Real Effective
Exchange Rates and Manufacturing Exports: Through the figures 2A (Saudi
Arabia), 2B (Nigeria), and 2C (Venezuela), we can conclude the nature of the
relationship between real effective exchange rates and the manufacturing exports.
As we estimated in this paper, we expect that the relationship between the real
effective exchange rates and manufacturing exports’ industries in oil-dependent
economies such as Venezuela, Nigeria, and Saudi Arabia to be inversely related.
The appreciation of the REER, for example, leads to a competitive reduction of
sectors such as manufacturing, which is linked to world prices. As expected, these
graphs show the existence of an inverse relationship between the real effective

Table 2
SUMMARY STATISTICS

Manufactures’ Oil Fuel

Exports Price Exports Inflation

Mean 6.75338 40.20 89.36519 18.23716

Median 7.07347 28.10 89.99499 11.67059
Maximum 18.54339 109.45 99.65650 115.52470
Minimum 0.02272 12.28 67.17525 -26.87020
Standard deviation 4.76847 29.51 6.94520 24.04148
 OIL BOOMS AND MACROECONOMIC ACTIVITIES 131

Figure 2A
THE RELATIONSHIP BETWEEN REAL EFFECTIVE EXCHANGE RATES AND
MANUFACTURING EXPORTS: SAUDI ARABIA

Figure 2B
THE RELATIONSHIP BETWEEN REAL EFFECTIVE EXCHANGE RATES AND
MANUFACTURING EXPORTS: NIGERIA
132 THE JOURNAL OF ENERGY AND DEVELOPMENT

Figure 2C
THE RELATIONSHIP BETWEEN REAL EFFECTIVE EXCHANGE RATES AND
MANUFACTURING EXPORTS: VENEZUELA

exchange rates and the manufacturing exports of all the selected countries, and this
makes the next steps in this paper more interesting.

Literature Review

In economies where the oil sector is the main contributor, the Dutch disease has
been documented to assume an oil-induced trend.8 A. Botta indicated that when
the real exchange rate appreciates because of the inflow of capital (such as the
effect of the Dutch disease), the opportunity cost through which tradable goods are
produced is increased.9 Similarly, P. Gala observed an inverse correlation between
the real exchange rate and the real appreciation.10 Thus, operations in regions
where the relative prices of the main trading partners remain unaltered imply
that the home countries are likely to be less competitive than the other operators
on the international market. In particular, this trend is observed in relation to
the production of goods perceived to be tradable according to R. Rajan and
A. Subramanian.11 Under the same assumption, a similar observation was made by
V. Pontines and R. Siregar.12 They asserted that depreciation is likely to cause an
increase in the real exchange rate. In turn, international competitiveness is gained.
When the foreign exchange appreciates, the following two effects are observed:
the resource movement effect and the spending effect. With respect to the latter,
a boom in a country’s energy sector is likely to attract higher foreign exchange
 OIL BOOMS AND MACROECONOMIC ACTIVITIES 133

inflows and increase the disposable income.13 Assuming the presence of positive
income elasticity, higher amounts of disposable income attract higher demand and
spending for both non-tradable and tradable goods. In turn, an increase in asym-
metric prices causes appreciated real exchange rates, with the tradable goods
becoming less competitive on the global market. In relation to the resource
movement effect resulting from an appreciated exchange rate, an unchanged de-
mand for non-tradable goods leads to excess demand due to reduced supply,
translating into increased prices.14 These observations are important because they
provide an insight into the relationship between foreign exchange and the nature of
the economy in contexts marked by the presence of natural resources; they falter in
such a way that they are not context-specific.
According to F. Gasmi and I. Laourari in a study on Algeria, the evidence failed
to support the presence of a spending effect within the economy of the country.15
This past study relied on data from 1960 to 2013, where the focus was the long-
term relationship between the real oil prices and the REER of the currency in
Algeria. The results of the study revealed that the real oil prices had a negative
effect on the manufacturing sector of Algeria. However, the indications of these
symptoms resulted in an ambiguous conclusion regarding Algeria displaying the
Dutch disease. The implications for the study were that, while the country dis-
played indications of the Dutch disease, a range of other political and economic
factors could explain the trends of the economy.
A further investigation of the oil-producing countries produced evidence of
the Dutch disease. O. Saibu investigated the presence of the Dutch disease and
the resource course phenomena within Nigeria.16 The study applied investigative
data on energy dependence and the price change rates and the exchange rate.
According to the study, the energy abundance in Nigeria was significant and
negative. This was perceived to be an indication of the resource curse in Nigeria.
Specific reference to the Dutch disease focused on the effect of the energy
abundance on the overall economic well-being of the country. The evidence in-
dicated that energy depressed the growth of investment instead of enhancing it. The
oil sector itself experienced negative growth in the country in the years recent to the
study, evidencing symptoms of the Dutch disease.17 Using data from 1970-2009, T.
Oyesanmi reported similar symptoms of the Dutch disease in Nigeria and objec-
tively confirmed the existence of the Dutch disease in the country.18
Further evidence from Nigeria confirmed the symptoms of the Dutch disease.
According to I. Ogbonna et al., an increase of 1 percent in the oil exports results in
a decline in the exports of agricultural commodities.19 The study explored data from
1970 to 2011, focusing on the relationship between the production growth and the
oil exports against the same trends in agricultural production. The study annualized
the time series data and used the co-integration and vector error-correction model
(VECM) approach for the analysis. The decline in the productivity of the traditional
agricultural sector in Nigeria was treated as evidence of the symptoms of the Dutch
134 THE JOURNAL OF ENERGY AND DEVELOPMENT

disease. Controlling for other factors that could determine the directionality of these
trends enabled a definite diagnosis of the disease in Nigeria.
In a study based in Iran, K. Karimi and M. Babazadeh found that the Dutch
disease is visible in the context of this country.20 The research draws on evidence
from 1963 to 2013, using the Johansson–Juselius approach to determine the
correlations between the trends in energy resources and prices and the economic
variables of employment and the GDP. The study elaborated that an increase in the
oil prices, which it lists as a symptom of the Dutch disease, had a reverse effect on
the employment rates in Iran. In particular, they reported that the increase in the oil
prices of Iran caused the entrance of foreign currency, inflating the economy and
lowering the production in the manufacturing sector. The evidence of the disease
is visible in a wider range of areas involving employment trends.
U. Al-Mulali and N. Che Sab investigated the evidence of the Dutch disease in
Kuwait, focusing on the relationships between the oil shocks and the exchange
rates of the country.21 They used the vector autoregression (VAR) model, the
Johansen–Juselius multivariate cointegration test, and the Granger causality test
(allowing for the VECM) to analyze data from 1970 to 2008. According to these
researchers, the country managed to avoid the Dutch disease despite being a major
producer of oil. The successful trend was attributed to its use of the pegged basket
regime of exchange rates, which cushioned against variations in the global oil
prices. They then cemented the conclusion of the absence of the Dutch disease
with the postulation that it was better for Kuwait to maintain its exchange rate
regime (pegged to a basket of currencies) or use a crawling peg regime that helped
Indonesia reduce the Dutch disease effect and maintain its currency value.
M. Chowdhury and F. Rabbi investigated the symptoms of the Dutch disease in
Bangladesh.22 They applied the VECM model to analyze data from 1971 to 2008.
The research focused on the possible adverse effects on the international com-
petitiveness of an economy of the inflows in the earnings from foreign exchange.
According to the study, Bangladesh exhibited symptoms of the Dutch disease
through the appreciated REER as an outcome of remittances from the energy
sector in the country. They did not conclude the presence of the Dutch disease in
the country and noted a single symptom. However, they recommended greater
trade openness to enable the country to counter the possible effects of foreign
remittances and avoid the occurrence of the disease in Bangladesh.
While Russia is not among the OPEC countries, its role in the global energy
economy has attracted considerable attention in the investigation of the previous
findings on the Dutch disease. B. Algieri investigated the symptoms of the Dutch
disease in Russia, using the data from 1993 to 2009.23 The study focused on a real
exchange rate appreciation, a flourishing economic situation pushed by higher
oil prices, and a relative de-industrialization using the VECM model. The evi-
dence proved that Russia did suffer from the symptoms of the Dutch disease,
which included de-industrialization. Moreover, the study reported that important
 OIL BOOMS AND MACROECONOMIC ACTIVITIES 135

manufacturing exports were crowded out from the Russian trade. A 10-percent
increase in the oil prices resulted in a 3-percent decline of domestic manufacturing.
Similar findings were reported by K. Kalcheva and N. Oomes, but the study
revealed that while the symptoms were evident, it was impossible to objectively
diagnose Russia with the Dutch disease.24
Prior to the establishment of the Kingdom of Saudi Arabia in 1932, several
heterogeneous and separate regions existed. These regions performed different
activities and had specific resources. Upon their unification into one kingdom and
the discovery of oil six years later, a widespread economic change was wit-
nessed.25 Initially, the ruling family and other tribal allies kept the oil revenues.
Note that the government operated in a context marked by financial constraints,
while the oil revenues increased slowly.26
Currently, Saudi Arabia is the world’s largest oil producer with a heavy reliance
on the reported oil revenues, which accounts for approximately 50 percent of the
GDP. With respect to the Dutch disease theory, an appreciation in the real exchange
rate due to the capital inflows from the resource booms was predicted by K. Akikina
and H. Al-Hoshan.27 While the documentation was relevant because it highlighted
the relationship between oil production and the real exchange rate in the context of
Saudi Arabia, it did not explain the current trend in the nature of the real exchange
rate and the predicted outcome of this trend in relation to the Dutch disease.
The observations did not explain some of the differences in the natural resource
abilities among the various regions of the world and the effect of these differences
on the resultant nature of the Dutch disease. Therefore, the current study filled this
gap by examining the correlation between the existence of the oil resource in Saudi
Arabia, Nigeria, and Venezuela and its effect on the exchange rate, with the Dutch
disease formed a theoretical framework on which the study was based. Therefore,
this work has relevance because it revealed the possibility of the existence or the
non-existence of an economic scenario that assumed the Dutch disease with re-
spect to oil and the exchange rate in the selected countries.

Empirical Results

Table 3 provides the results of the unit root test and through which we can
know if the variables are stationary at the level or are they stationary in the first
difference. The results showed that all the variables have unit root at the levels, but
they are stationary in the first difference at the 1-percent level of significance. One
of the conclusions that we can take away from this test is that the variables are
integrated of order one, I (1).
Resource Movement Effect: As expected, and consistent with the Dutch
disease theory, we note through the ordinary least squares (OLS) regression that
136 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 3
AUGMENTED DICKEY-FULLER (ADF) AND PHILLIPS–PERRON (PP) UNIT ROOT TEST
a
RESULTS

ADF PP
Variables Levels First difference Levels First difference

Real effective exchange rate 6.99125(0) 37.7851 (0) *** 7.39899 37.6552***
Log oil price 2.37359(0) 61.5421(0) *** 2.49941 61.4729***
LGDP 0.11747(0) 44.6668(0) *** 0.12722 45.4145***
Fuel exports 6.07578(2) 45.2113(1) *** 9.32116 59.0389***
Net trade 12.2048(1) 58.9944(3) *** 10.7053 61.6170***
Log manufactured exports 4.79692(2) 38.0418(1) *** 5.15359 37.4765***
Money supply 9.70996(1) 52.7543(0) *** 6.23898 67.5466***

a
*** denotes significance at the 1-percent level.

there is an inverse relationship between the manufacturing industries and the

exchange rate. Based on the results in table 4, an increase of 1 percent in the real
effective exchange rate leads to a decrease in the manufacturing industry by 0.93
percent. As M. Shakeri pointed out, the manufacturing sector apparently responds
to the appreciation of the real exchange rates.28

Table 4
RESOURCE MOVEMENT EFFECT: ORDINARY LEAST SQUARES (OLS) REGRESSION
RESULTS

Variable Coefficient Std. Error T-Statistic t-Statistic Prob.

Constant –57.88204 8.06467 –7.17724 0.0000

Log real effective
exchange rate –0.93001 0.16673 –5.57804 0.0000
Log oil price –0.74289 0.17707 –4.19556 0.0001
Log GDP 2.63783 0.29583 8.91686 0.0000
Money supply 0.00083 0.00721 0.11493 0.9088
Net trade –1.63E–12 2.50E–12 –0.64972 0.5178
Fuel exports –0.03906 0.01635 –2.38905 0.0193
R-square 0.81111 Mean dependent var. 1.36269
Adjusted R-square 0.79658 S.D. dependent var. 1.54209
S.E. of regression 0.69552 Akaike information criterion 2.19045
Sum squared resid 37.73237 Schwarz criterion 2.39161
Log likelihood –86.09413 Hannan–Quinn alter. 2.27136
F-statistic 55.82241 Durbin–Watson stat. 0.95039
Prob(F-statistic) 0.00000
 OIL BOOMS AND MACROECONOMIC ACTIVITIES 137

As for the oil price, it shows that there is also an inverse relationship with the
manufacturing sector, which is also statistically significant. This indicates that if
the price of oil increases by 1 percent, the manufacturing sector is declining by
0.74 percent. These two indicators show that there is a de-industrialization in these
three countries, which stems from the increase of oil price and appreciation of the
real effective exchange rate.
Johansen Fisher Panel Cointegration Test Results: Since we found that the
variables have a unit root in the levels and they are stationary in the first differ-
ence, we can test the cointegration; therefore, we can determine whether there is
a long-run relationship between the independent variables and the dependent
variable in the real exchange rate model and manufactures’ exports model. Before
starting the cointegration, the optimal lag length of both models should be
tested. From table 5 in the first model and through VAR lag order selection cri-
teria, we find the optimum lag would be 2, which will be used in the Johansen test
of cointegration and VECM.
From the real effective exchange rate model and through VAR lag order se-
lection criteria, we find the optimum lag would be 2, which will be used in the
Johansen test of cointegration and VECM.
From the manufactures’ exports model and through the VAR lag order selec-
tion criteria in table 6, we find the optimum lag would be 5, which will be used in
the Johansen test of cointegration and VECM.
By looking at the trace and maximum Eigenvalue tests in table 7, we reject the
null hypothesis that states there is no cointegration, at most 1, at most 2, and 3
cointegrations; however, we cannot reject the null that states there is at most 4 and
5 cointegrating equations, which means there is a cointegration among the

Table 5
LAG LENGTH SELECTION FROM VECTOR AUTOREGRESSION (VAR) ESTIMATES
a
(MODEL I)

VAR lag order selection criteria

Lag LogL LR FPE AIC SC HQ

0 –1749.078 NA 8.34E+21 67.50301 67.72815 67.58932

1 –1434.730 544.0634 1.89E+17 56.79732 58.37333* 57.40153*
2 –1394.195 60.8028* 1.68E+17* 56.62289* 59.54976 57.74499
3 –1359.821 43.6291 2.07E+17 56.58542 60.96314 58.32539
4 –1326.691 34.4043 3.14E+17 56.79580 62.42438 58.95366

a
* indicates the lag order selected by the criterion. LR = sequential modified LR test statistic
(each test at the 5-percent level); FPE = final prediction error; AIC = Akaike information criterion;
SC = Schwarz information criterion; and HQ = Hannan–Quinn information criterion.
138 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 6
LAG LENGTH SELECTION FROM VECTOR AUTOREGRESSION (VAR) ESTIMATES
a
(MODEL II)

VAR lag order selection criteria

Lag LogL LR FPE AIC SC HQ

0 –1554.276 NA 7.13E+20 67.88156 68.15983 67.98580

1 –1254.544 495.2089 1.35E+16 56.98018 59.20635 57.81412
2 –1195.533 79.53678 1.01E+16 56.54491 60.71898 58.10854
3 –1123.707 74.94837 5.72E+15 55.55250 61.67447 57.84583
4 –1005.420 87.42986* 7.41E+14 52.54000 60.60987 55.56302
5 –861.470 62.58708 1.09E+14* 48.41173* 58.42950* 52.16444*

a
* indicates the lag order selected by the criterion. LR = sequential modified LR test statistic
(each test at the 5-percent level); FPE = final prediction error; AIC = Akaike information criterion;
SC = Schwarz information criterion; and HQ = Hannan–Quinn information criterion.

variables. Therefore, in the long run, these variables are moving together. In this
case, we can run a vector error-correction model. Cointegration indicates that
causality exists between the variables but it does not show the direction of the
casual relationship. This shows a long-run relationship between REER (real ef-
fective exchange rates) and the independent variables LOP (oil prices), FEX (fuel
exports), and LGDP (GDP). Also, when we look at the P-value of the individual
cross-section results, we can also conclude that the relationship exists between the
dependent variable and independent variables.
Based upon the trace and maximum Eigenvalue tests in table 8, we reject the
null hypothesis that states there is no cointegration, at most 1, at most 2, and 3;

Table 7
a
JOHANSEN FISHER PANEL COINTEGRATION TEST (MODEL I)

Unrestricted cointegration rank test (trace and maximum Eigenvalue)

Hypothesized Fisher stat.* Fisher stat.*
no. of CE(s) prob. (from trace test) Prob. (from max Eigen test) Prob.

None 60.83 0.0000 43.99 0.0000

At most 1 23.75 0.0006 18.31 0.0055
At most 2 27.13 0.0001 27.38 0.0001
At most 3 9.33 0.1560 11.60 0.0716
At most 4 2.16 0.9045 2.76 0.8389
At most 5 1.72 0.9435 1.72 0.9435

a
Probabilities are computed using the asymptotic chi-squared distribution.
 OIL BOOMS AND MACROECONOMIC ACTIVITIES 139

Table 8
a
JOHANSEN FISHER PANEL COINTEGRATION TEST (MODEL II)

Unrestricted cointegration rank test (trace and maximum Eigenvalue)

Hypothesized Fisher stat.* Fisher stat.*
no. of CE(s) prob. (from trace test) Prob. (from max Eigen test) Prob.

None 146.0 0.0000 75.91 0.0000

At most 1 123.2 0.0000 164.90 0.0000
At most 2 53.09 0.0000 39.61 0.0000
At most 3 20.09 0.0005 22.65 0.0001
At most 4 4.011 0.4045 5.25 0.2630
At most 5 1.25 0.8705 1.43 0.8383
At most 6 1.30 0.8623 1.30 0.8623

a
Probabilities are computed using the asymptotic chi-squared distribution.

however, we cannot reject the null that states there is at most 4, 5, and 6 cointe-
grations, which means there is a cointegration among the variables. Therefore, in
the long run, these variables are moving together. In this case we can run a vector
error-correction model. Cointegration indicates that causality exists between the
variables but it does not show the direction of the casual relationship. In addition,
this indicates a long-run relationship between LMEX (manufacturers’ exports)
and the independent variables LREER (real effective exchange rate), LOP (oil
price), LGDP (GDP), MS (money supply), and FEX (fuel exports).
Results for the Vector Error-Correction Estimates for Model I: VECM
results in model 1 show that there is a long-run causality running from independent
variables to the real effective exchange rate. On the other hand, when we check the
short-run causality between real effective exchange rate and the independent
variables using the Wald test, we conclude that there is a short-run casualty
running from oil price and fuel exports to real effective exchange rate and there is
no short-run casualty running from GDP and money supply to the dependent
variable trade.
Results for the Vector Error-Correction Estimates for Model II: VECM
results in model 2 show that there is a long-run causality running from independent
variables to manufactures’ exports. As for the short-run causality relationship and
through the Wald test, the results showed that there is a short-run casualty running
from the real effective exchange rate (REER), oil price (OP), and GDP to man-
ufacturers’ exports (MEX). In contrast there is no causal relationship between
money supply (MS), fuel exports (FEX), and manufacturers’ exports (MEX).
140 THE JOURNAL OF ENERGY AND DEVELOPMENT

Conclusion

This study examined whether the oil boom had any negative effects on various
sectors in the economy of the three main OPEC countries, namely, Saudi Arabia,
Nigeria, and Venezuela. In particular, there was a focus on knowing whether there
is an appreciation of the real effective exchange rate, which may result from the
increases in the oil prices and may, in turn, slow down the manufacturing and other
sectors. Panel data were sourced from official sources such as the World Bank and
OPEC for the period 1980–2013 by using the Johansen cointegration test and
VECM.
The results revealed an inverse relationship between the manufacturing exports
and the real effective exchange rate, that is, an appreciation of these countries’
currencies led to a slowdown in manufacturing exports; this finding agreed well
with the theory. Further, the results of the OLS revealed that as oil prices had
a significant effect on different sectors of the economies of these countries, the
relationship between oil prices and manufacturing exports was reversed. In view
of the variables used in this study and using the unit root tests, this work proved
that the variables were stationary at the same level, which allowed us to proceed
with the cointegration test. This revealed a long-term relationship between the
variables. As for the causal relationship, this study used VECM that showed
a long-term causality from the independent variables to real effective exchange
rate in the first model and from the independent variables to the manufactured
exports. However, the short-term causality relationship and the Wald test revealed
a short-term causality from the real effective exchange rate, oil price, and GDP to
the manufacturing exports. In contrast, no causal relationship was observed be-
tween the money supply, fuel exports, and manufacturing exports.

NOTES
1
B. Fattouh, OPEC Pricing Power: The Need for a New Perspective (Oxford: Oxford Institute
for Energy Studies, 2007).
2
R. G. Rajan and A. Subramanian, “Aid, Dutch Disease and Manufacturing Growth,” Journal of
Development Economics, vol. 94, no. 1 (2011), pp. 106–18.
3
V. Pontines and R. Y. Siregar, “Exchange Rate Asymmetry and Flexible Exchange Rates under
Inflation Targeting Regimes: Evidence from Four East and Southeast Asian Countries,” Review of
International Economics, vol. 20, no. 5 (2012), pp. 893–908
4
K. R. Akikina and H. Al-Hoshan, “Independence of Monetary Policy under Fixed Exchange
Rates: The Case of Saudi Arabia,” Applied Economics, vol. 35, no. 4 (2003), pp. 437–48.
5
A. Botta, “The Macroeconomics of a Financial Dutch Disease,” Levy Economics Institute
Working Paper no. 850, Bard College, Annandale-on-Hudson, New York, 2015.
 OIL BOOMS AND MACROECONOMIC ACTIVITIES 141
6
P. Gala, “Real Exchange Rate Levels and Economic Development: Theoretical Analysis and
Econometric Evidence,” Cambridge Journal of Economics, vol. 32, no. 2 (2007), pp. 273–88.
7
J. O. Olusi and M. A. Olagunju, “The Primary Sectors of the Economy and the Dutch Disease
in Nigeria,” The Pakistan Development Review, vol. 44, no. 2 (2005), pp. 159–75.
8
R. G. Rajan and A. Subramanian, op. cit.
9
A. Botta, op. cit.
10
P. Gala, op. cit.
11
R. G. Rajan and A. Subramanian, op. cit.
12
V. Pontines and R. Y. Siregar, op. cit.
13
E. R. Larsen, “Escaping the Resource Curse and the Dutch Disease?,” American Journal of
Economics and Sociology, vol. 65, no. 3 (2006), pp. 605–40.
14
K. R. Akikina and H. Al-Hoshan, op. cit.
15
F. Gasmi and I. Laourari, “Has Algeria Suffered from the Dutch Disease?: Evidence from
1960–2013 Data,” Toulouse School of Economics (TSE) Paper no. 17-780, Toulouse, France, 2017.
16
O. M. Saibu, “Energy Resources, Domestic Investment and Economic Growth: Empirical
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many, 2012.
17
Ibid.
18
T. A. Oyesanmi, “Investigating Dutch Disease: The Case of Nigeria,” (Ph.D. dissertation,
Eastern Mediterranean University (EMU), 2011).
19
I. C. Ogbonna, N. R. Uwajumogu, G. Chijioke, and E. S. Nwokoye, “Oil Exploitation and
Agricultural Commodity Export in Nigeria: An Empirical Evaluation of the Extent and Impact of
the Dutch,” Journal of Humanities and Social Science, vol. 14, no. 1 (2013), pp. 1–9.
20
K. Karimi and M. Babazadeh, “Investigating the Effect of Dutch Disease on the Process of
Employment in Iran,” International Journal of Biology, Pharmacy, and Allied Sciences, vol. 4, no.
8 (2015), pp. 332–31.
21
U. Al-mulali and N. Che Sab, “Oil Shocks and Kuwait’s Dinar Exchange Rate: The Dutch
Disease Effect,”MPRA Paper no. 26844, University Library of Munich, Munich, Germany, 2010.
22
M. B. Chowdhury and F. Rabbi, “Workers’ Remittances and Dutch Disease in Bangladesh,”
The Journal of International Trade & Economic Development, vol. 23, no. 4 (2014), pp. 455–75.
23
B. Algieri, “The Dutch Disease: Evidences from Russia,” Economic Change and Restruc-
turing, vol. 44, no. 3 (2011), pp. 243–77.
24
K. Kalcheva and N. Oomes, Diagnosing Dutch Disease: Does Russia Have the Symptoms?
(Washington, D.C.: International Monetary Fund, 2007).
142 THE JOURNAL OF ENERGY AND DEVELOPMENT
25
V. Pontines and R. Y. Siregar, op. cit.
26
E. R. Larsen, op. cit.
27
K. R. Akikina and H. Al-Hoshan, op. cit.
28
M. Shakeri, “Essays on Dutch Disease and Exchange Rate Pass-Through: Evidence from
Canadian Manufacturing Industries,” (Ph.D. dissertation, Department of Bioresource Policy,
Business and Economics, University of Saskatchewan, Canada, 2009).