Document Type

Thesis

Publication Date

1984

Abstract

This study is concerned with examining the effects of recent developments in the world oil market on the development of Libya, which is heavily dependent on revenues from its oil exports. Our goal in this study is to determine quantitatively how sensitive and vulnerable the Libyan economy's aggregates are to fluctuations in world oil prices. In order to achieve our goal, a macroeconomic model of the Libyan economy was constructed using annual data from 1962-1978. The model contains 36 relations, of which 19 are behavioral equations and 17 are identities. The model was validated by both historical simulation and a one-period out-of-sample forecast. Having established the predictive ability of the model, alternative future scenarios of the Libyan economy were examined from 1980-1987 by performing an ex-ante simulation for this period. This simulation was divided into two sections. The first covers the period 1980-1983, for which actual data for Libyan oil prices and the volume of Libyan oil exports are available. The second section covers the period 1984-1987. In this section the future of the Libyan economy was simulated under a basic price scenario which reflects the most likely forecast regarding the world oil price level from 1984-1987. In addition, a sensitivity analysis was performed by establishing a new scenario for the world oil price level from 1984-1987. A comparison of the results of these simulations shows the effects resulting from changes in the world oil price level on the Libyan economy. A 10% increase in the world oil price level as compared to our basic scenario was found to stimulate the economy at a decreasing rate. It was also found that the expansion of the economy would have little side effects in terms of higher levels of the consumer price index. The wage rate in the non-oil sector showed more sensitivity with respect to changes in world oil price level than did the wage rate in the oil sector. In addition, government total expenditures and money supply were found to be relatively insensitive to changes in world oil price level.

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