Oil Speculation: The Impact On Prices, Inflation, Interest Rates And The Economy

Abstract

The vector autoregression process is used to estimate a reformulated model of the equation of exchange developed from the quantity theory of money. In describing the effect of oil speculation, represented by spot oil price, on general price level and the overall economy, new variables are incorporated to take into account current global economic conditions and realities. A variable, which was introduced in Ajuzie et al, 2008 paper, import of goods and services, is included and impulse-response function is used to forecast future economy and determine policy scenarios. Results show that an increase in spot oil price last period has a highly statistically significant positive effect on CPI inflation. This effect is strong enough to eliminate the negative significant impact of import of goods and services on CPI inflation found in the paper of May 2008. Based on this finding, it is highly recommended that oil speculation should be discouraged and trade relations be bases purely on the principles of comparative advantage.