The impact of oil price volatility on economic growth in South Africa : a cointegration approach

Abstract

Oil is an essential commodity in the South African economy and a source of energy that is used for electricity generation, heating, and cooking. It is vital for the transportation system on which the very livelihood of the economy depends. 14% of South African primary energy needs are met by oil while 95% of crude oil is imported, primarily, from Saudi Arabia and Iran. This study investigates the impact of oil price volatility on economic growth in South Africa from 1994Q1-2010Q4. The study employs the VECM and shows that there exists both a long run and short run relationship between the following variables: crude oil price, GDP, gross fixed investment, real interest rate and real exchange rate. In a long-run analysis there is a positive relationship between oil price and GDP while there is negative relationship in the short-run. The study also shows that, as an oil importing country, South Africa‟s economic growth depends on imported oil which makes the country vulnerable to oil price shocks. Based on the findings of this study it is recommended that policy interventions should include both monetary and fiscal policies. It is in this regard that promoting a regional integration in order to reduce oil dependence, by optimizing electricity supplies across the region, is essential. This will improve efficiency and, owing to economies of scale, lower generation costs.