Disturbing Effects of Global Oil Price Changes: Case of Azerbaijan

Abstract

General topic in this paper is the role of oil industry in global economy and the result of changing oil prices on economic variables in Azerbaijan. The major aim is to analyze the effects of crude oil price changes on Azerbaijan economy in order to measure how changes in oil prices affect its basic economic variables. At the beginning, a general outlook on oil industry will be given and the main oil exporting economies will be analized. However, main focus will be on the structure of Azerbaijan’s economy and it will examine the example of Azerbaijan as a transition economy where oil and gas production and exports have steadily increased from the mid ‘90s. Many critical oil and gas extraction projects have been implemented; while the oil and gas sector's dominance in the economy poses a number of threats to the balanced development of the country's economy. It will show how the economy of Azerbaijan was affected after the oil crisis, such as other developing countries that mainly depending on oil and petroleum products. For this purpose, VEC Model has been applied, consdering Azerbaijan Statistic Data and analized the effects of oil price fluctuations on its economic variables parallel with the oil industry. The main findings indicate that Azerbaijan's economy is strongly dependent on resource exports, which produce high growth rates when commodity prices are favorable, but end up with lower macroeconomic performance when global oil prices fall. It is clear that the main income of Azerbaijan comes from oil and oil products, so the export of oil will have a high impact on the saving level of the population. At the time of high revenues come from export and the low exchange rate of the foreign currency in Azerbaijan has also led to the low cost of imported goods. As well demonstrated in the research, Azerbaijan economy has been widely exposed to major crude oil price distortions. It can be said that in order to avoid increasing overdependence on oil earnings, diversifying the economy should be a top priority.