ABSTRACT
Crude oil is one of the main drivers of economic growth and a key ingredient to
sustainable development. It is therefore vital that crude oil products be efficiently and
competitively priced in order to accelerate economic growth. Realization of a 10
percent economic growth in Kenya by the year 2030 requires a massive development
in the energy sector. Kenya suffers from a shortage of internal energy resources,
including oil and as a result, Kenya continues to be in the category of net oil importing
developing countries; this subjects the economy to vulnerability to external shocks,
notably oil price fluctuations, exposing the country to risks associated with oil prices
such as a reduction in aggregate demand, increase in consumption price deflator and
reduction in real income. This study empirically explored the effects of crude oil on
GDP growth and selected macroeconomic variables in Kenya. This was achieved by
investigating how crude oil prices affect GDP growth, inflation rate and real exchange
rate. Literature has presented these three variables as the main indicators of economic
health and key variables affected by crude oil prices. Demand for oil in Kenya has
been progressively increasing since the 1970s and this is expected to increase even
further from the current consumption of 4.2 million Metric tons per year to 12 million
Metric tons by the year 2030. The forecasted rise in demand has been attributed to the
achievement and sustainability of the desired 10 percent economic growth, as
envisioned in the national vision 2030 blueprint. The study used time series data
sourced from BP, WDI and CBK covering the period 1970 to 2016. This period was
chosen so as to capture different oil shocks that have been shown through empirical
and theoretical literature to have had an effect on the economy. The study estimated
three Autoregressive Distributed lag (ARDL) models to analyse the effect of crude oil
on the selected variables in the study. The findings of the study revealed that, crude
oil prices have a positive long-run effect on GDP growth. This can be attributed to the
fact that Kenya imports oil and re-exports it to Uganda, Rwanda and South Sudan.
The findings also established that Crude Oil Prices have a positive effect on inflation
in the long run, while in the short run its lag of one has the effect on inflation rate,
meaning that the Crude oil prices for the previous one year affects the current year’s
inflation. The relationship between crude oil prices and Real Exchange Rate was
negative in the long run. CUSUM and CUSUMQ tests were also conducted and the
three models were stable. The study recommends that the government should revive
the oil refinery in Changamwe in order to improve the oil value chain and therefore
gain from exporting petroleum products as opposed to crude oil. The Energy
Regulatory Commission should also moderate oil prices in a way that considers social
equity in order to mitigate its effect on inflation.
KINYANJUI, A (2021). Effects Of Crude Oil Prices On Gross Domestic Product Growth And Selected Macroeconomic Variables In Kenya. Afribary. Retrieved from https://afribary.com/works/effects-of-crude-oil-prices-on-gross-domestic-product-growth-and-selected-macroeconomic-variables-in-kenya
KINYANJUI, ANTONY "Effects Of Crude Oil Prices On Gross Domestic Product Growth And Selected Macroeconomic Variables In Kenya" Afribary. Afribary, 01 Jun. 2021, https://afribary.com/works/effects-of-crude-oil-prices-on-gross-domestic-product-growth-and-selected-macroeconomic-variables-in-kenya. Accessed 09 Oct. 2024.
KINYANJUI, ANTONY . "Effects Of Crude Oil Prices On Gross Domestic Product Growth And Selected Macroeconomic Variables In Kenya". Afribary, Afribary, 01 Jun. 2021. Web. 09 Oct. 2024. < https://afribary.com/works/effects-of-crude-oil-prices-on-gross-domestic-product-growth-and-selected-macroeconomic-variables-in-kenya >.
KINYANJUI, ANTONY . "Effects Of Crude Oil Prices On Gross Domestic Product Growth And Selected Macroeconomic Variables In Kenya" Afribary (2021). Accessed October 09, 2024. https://afribary.com/works/effects-of-crude-oil-prices-on-gross-domestic-product-growth-and-selected-macroeconomic-variables-in-kenya