International Journal of Economy, Management and Social Sciences, 2(12) December 2013, Pages: 996-1001

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

www.tijournals.com

The Effect of Total Petroleum Consumption on Current Account

Balance: An Application for Upper-Middle Countries
Meliha ENER 1, Cneyt KILI 2, Feyza ARICA *3
1
2
3

Prof. Dr. Canakkale Onsekiz Mart University, Turkey.

Assist. Prof. Dr. Onsekiz Mart University, Turkey.
Res. Assist. Canakkale Onsekiz Mart University, Turkey.

AR TIC LE INF O

AB STR AC T

Keywords:

The current account balance is a key macroeconomic indicator for all countries. One of the reasons
for this importance to the current account balance is that the current account balance reflects an
economys international competitiveness and the extent to which a country is living within its
resources. The current account balance also gives guidance for foreign investors in making
investment decisions as it helps to predict threats to macroeconomic stability. Another of the
reasons taking place prevalently in the literature of the current account balance is that it helps
policymakers in assessing the compatibility of macroeconomic policies with the goal of ensuring a
sustainable external position. In this study, the relationship between total petroleum consumptionthe current account balance in selected countries over the period 1980-2011 was surveyed. The
empirical results show that the petroleum consumption is a crucial factor in deteriorating the
countries current account balance.

Energy consumption
Current account balance
Panel data analysis
JEL:
Q43, F32, C33

2013 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

1.

Introduction

Current account deficits have increased steadily in the almost all of the countries in the world over the past 25 years, and therefore they are
one of the important subjects, which have been researched by the economists. Current account imbalances reflect mostly private saving and
investment decisions. The national income accounts, used in calculating of the countries GDP, provide a useful framework for analyzing
the linkage between the current account balance and net capital flows and, in turn, their relationship to domestic saving and investment.
National income accounting shows that the current account balance is related to domestic saving and investment spending.
Current account has been affected by many factors such as the expectations, fiscal policy, and productivity shocks. Since current account
imbalances reflect intertemporal choices, expectations of future events can be an important factor in determining the size of the current
account deficits and surpluses. Similarly, many economists and policymakers suggest that there exists the link between the changes in fiscal
policy and the changes in the current account. The two deficits were called as twin deficits because both the deficits move in the same
direction. Fiscal policy can affect the current account through the channels of interest rates and country risk premia. Deflationary fiscal
policies have affect in direction of decrease interest rates, thereby improving the current account balance. A drop in risk premia can
stimulate capital inflows, which can boost demand and real appreciation pressures and worsen the current account (Abbas et al. 2010).
Moreover, the fluctuations in the world market prices of primary commodities, the sharp increases in the price of energy products, the
slowdown of economic activity in the industrial countries, and the rise in real interest rates toward the end of the period were all major
contributors to a serious deterioration in the current account balance of most non-oil developing countries (Khan and Knight, 1983).
According to Blanchard (2007), current account deficits reflect mostly private saving and investment decisions, and fiscal deficits often
play a marginal role; and the deficits are financed mostly through equity, foreign direct investment, and own currency bonds rather than
through bank lending.
As well as these variables, the oil balance capturing changes in oil prices, oil production and consumption patterns, is expected to positively
impact on the current account balance. Because higher oil exports revenues would increase the current account balance.
This study aims to investigate the relationship between total petrol consumption and current account balance for upper middle income
countries. To do this, empirical studies on this relationship will be discussed, then the data set and the methodology that will be used in the
application part of the study will be explained and finally empirical results will be evaluated and the study will be concluded.

* Corresponding author.
Email address: feyzarica@gmail.com

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(12) December 2013

2.

Literature Review

Narayan and Wong (2009) investigate the determinants of oil consumption for Australian states and territories over the period 1985-2006.
Investigating the long-run relationship among oil consumption, oil prices and state income, the study find that the variables panel
cointegrated, oil prices have had a statististically insignificant impact on oil consumption, but income has had a positive and statistically
significant effect on oil consumption in the long run. Moreover, Narayan and Wong (2009) showed that Australias dependence on
imported oil has increased and the effect of this growing import bill is been felt on the current account imbalances.
Buiter (1978), Obstfeld (1980) and Sachs (1981) have analyzed the effect of unexpected oil price increases on current account. They
conclude that permanent unexpected oil price increases lead to current account deficit (Marion, 1981). Adding the expected oil price
increases to the model, Marion (1981) analyzed the current account response to future anticipated increases in real oil prices and
unexpected temporary and permanent oil prices. According to Marion (1981)s analyze, unexpected oil price increases have a stronger
negative effect on the current account surplus than do expected oil price increases reduce welfare for the small economy that is a net oil
importer.
Khan and Knight (1983) examine empirically the effects of external and domestic factors on the current account the in the 32 non-oil
developing countries for the period 1973-1980. They classified variations the terms of trade, the growth rates of industrial countries, and
foreign real interest rates as the external factors, while the changes in fiscal deficits and in real effective exchange rates as the domestic
factors. Khan and Knight (1983) pointed out that oil price increases in 1979-1980 appears to have had a much smaller impact on the current
account of non-oil developing countries than did the earlier increase. They conclude that external factors as well as domestic factors were
statistically significant and relevant factors in explaining the current account imbalances.
Uneze and Ekor (2012) examined whether there was a long-run relationship between the current account balance and the oil variables
capturing oil wealth, oil balance and oil revenue in Nigeria for the period of 1970-2008. Using the Johansen-Julius maximum likelihood
cointegration method, in accordance with the findings of the study is that oil wealth has a significant negative effect on the current account
balance in the long-run. In addition, they found that oil price has significantly positive effect on the current account balance in the shortrun. Thus, the results show that oil variables are the key variables in explaining current account balance.
Morsy (2009) investigate the effects of fiscal balance, demographic factors, net foreign assets, oil balance, oil wealth, economic growth and
degree of maturity in oil production on the current account balance for 28 oil exporting countries using dynamic panel estimation
techniques. According to the Morsy (2009)s empirical results, fiscal balance, oil balance, oil wealth, age dependency ratio and the degree
of maturity in oil production have statistically and economically significant effect on the current account balance for the selected countries.
Beidas-Strom and Cashin (2011) estimate the medium-term current account position for emerging markets, low-income and fragile
economies, and oil exporting countries. According to the empirical results of the authors, the fiscal balance is an important current account
fundamental and the current account balance responds positively to the oil balance in all group of countries selected.
Dobnik (2011) examined the causal relationship between real GDP and energy consumption for 23 OECD countries over the period 19712009. Dobnik (2011), taking into account structural breaks and cross-section dependence in the energy consumption-economic growth
nexus, found that there had been a bidirectional causal relationship between the series in both the short and long run.
According to Constantini and Martini (2010), a reduction in energy consumption due to improvements in energy eciency may raise
productivity, which in turn may stimulate economic growth. Thus, a shift from less ecient and more polluting energy sources to more
ecient energy options may establish a stimulus rather than an obstacle to economic development (Costantini and Martini, 2010).

3.

Data, Model and Econometric Methodology

3.1. Data and Model

This study uses annual data from 1980 to 2011 for 32 upper-middle income countries in order to empirically investigate the impact of total
petroleum consumption on current account balance. These are Albania, Antigua and Barbuda, Argentina, Botswana, Brazil, Bulgaria, Chile,
China, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, Grenada, Jamaica, Jordan, Malaysia, Mauritius, Mexico, Panama,
Peru, Romania, Seychelles, South Africa, St. Lucia, St. Vincent and the Grenadines, Suriname, Thailand, Tunisia Turkey, Uruguay,
Venezuela, RB1. Some countries are excluded from the sample, although they are upper-middle income countries, since these countries
have no available data in selected period.
This empirical study is based on data current account balance, including net exports of goods, services, net income, and net current transfers
(CAB) and energy consumption which is represented by total petroleum consumed in thousand barrels per day (TOT_PET). Current
account balance data have been obtained from the World Banks World Development Indicators, Energy consumption data have been
1

According to World Banks list of economies issued in 18 July 2011, upper-middle income countries have got gross national income (GNI) per capita
between $ 3,976 and 12,275 per year.

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Internat ional Journal of Economy, Mana ge ment and Social Science s , 2(12) Dece mber 2013

obtained from the U.S. Energy Information Administrations International Energy Statistics. In order to carry out the paper E views 7.0,
Gauss 6.0 and Stata 11.2 are used.
Table 1 presents the descriptive statistics and correlation matrix of the variables used in the study. According to correlation matrix
TOT_PET is positively correlated with CAB and the intensity of this correlation is about twenty three percent.
Table 1. Descriptive Statistics and Correlation Matrix of the Variables
Mean
Median
Maximum
Minimum
Std. Dev.
Correlation Matrix
CAB
TOT_PET

CAB
1.03E+09
-1.71E+08
4.21E+11
-7.69E+10
2.42E+10
CAB
1.000
0.232

TOT_PET
387.3662
88.00000
9850.000
0.000000
938.0190
TOT_PET
0.232
1.000

Model
To investigate the relationship between petrol consumption and current account balance, we pursue a panel data analysis. The model is
following as:
CABit 0 1.TOT _ PETit eit

(1)

According to Baltagi (2005), panel data technique or longitudinal data technique that is used in empirical section of the study has some
advantages. These advantages are summarized as:
1.
2.
3.
4.

Panel data are able to control the heterogeneity that occurs among individuals, firms, states or countries whereas time-series and
cross-section studies do not control the heterogeneity for these units.
Panel data give more informative data, more variability, less co-linearity among the variables, more degrees of freedom and so,
more efficiency.
Panel data are relatively more suitable about the dynamics of adjustment than other techniques.
Panel data model is better able to study than more complicated behavioral models in which pure time-series or pure cross-section
models cannot study.

3.2. Econometric methods and findings

As a rst step, this study applies Pesaran and Yamagatas (2008) homogeneity test, who modified Swamys (1970) dispersion test for the
panels with a large number of units.
3.2.1. Pesaran and Yamagata (2008)s Homogeneity Test
An homogenous panel data model (or pooled model) is a model in which all coefficients are common while an heterogenous panel data
model is defined as a model in which all parameters (constant and slope coefficient) vary across individuals (Hurlin, 2010). The estimation
methods differentiate in accordance with the selection of a homogenous panel or heterogeneous panel data.
Existing tests for slope homogeneity (Lin, 2011):
1) T is large relatively to N
a. Swamy (1970)
b. LR test or LM test
2) N is large relatively to T
a. Pesaran, Smith, and Im (1996)_Hausman type test
b. Pesaran and Yamagata (2008), Lin (2009)_Dispersion type
3) N is much larger relatively to T
a. Sakata (2009)_Score type
In this study, we follow Pesaran and Yamagata (2008)s delta_tilde test statistic in order to determine whether slope coefficients vary across
individuals because the cross section dimension is large relatively to the time dimension in study.
Results for the homogeneity test of Pesaran and Yamagata (2008) are illustrated in Table 2. According to Pesaran and Yamagata (2008), the
problem of the small sample can be overcome under the normally distributed errors by considering mean and variance bias adjusted
version, delta_tilde_adjusted. Thus, we rely on the result regarding delta_tilde_adjusted statistic in Table 2. Because the p-value of
delta_tilde_adjusted is bigger than 0.05 significance level, we cannot reject that slope coefficients dont vary across individuals. That is, it
is clear that the null of hypothesis Pesaran and Yamagata (2008)s homogeneous test isnt rejected at 95%.

The Effect of Total Petroleum Consumption on Current Account Balance: An Application for Upper-Middle Countries

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(12) December 2013

Table 2. Pesaran and Yamagata (2008)s Homogeneity Test

Test statistic
-2.022
-2.120

delta_tilde
delta_tilde_adjusted

P-value
0.978
0.983

Source: Authors calculations

3.2.2. Unit root characteristics

According to Yule (1926), who introduced spurious regression problem that is further analysed by Granger and Newbold (1974), using
non-stationary time series steadily diverging from long-run mean will produce biased standard errors, which causes to unreliable
correlations and unbiased estimations within the regression analysis leading to unbounded variance process (Korap, 2007).
For the second step of the study, we have examined stationary properties of the data. Firstly, we have applied the cross-section dependence
LM (CDLM) tests developed by Pesaran (2004) to verify the consideration of cross-section dependence in the analysis of the energy
consumption-current account balance nexus. Three LM tests have been applied to check cross sectional dependency. One of them, CDLM1
was developed by Breusch Pagan (1980). Other LM tests are CLM2 and CDLM tests that were developed by Pesaran (2004). CDLM1 test
is useful when N is fixed and T goes to infinity. CDLM is better to use when N is larger and T is smaller. CDLM2 test is useful when T and
N are larger enough (Guloglu and Ivrendi, 2008: 4). All CDLM tests with the null hypothesis of no cross section dependency across units
are illustrated in Table 3. We have been taken into account the results of CDLM2 test in that T and N are larger.
Table 3. Cross Section Dependence Test Results
CD LM1
2907.37*
678.49*

CAB
TOT_PET

CD LM2
76.56*
5.79*

CD LM
6.60*
0.02

Note:* indicate rejection of null hypothesis at 1 percent level of significance. Critical values obtained from Pesaran (2006) Table I
(c). The critical values at 1, 5, and 10 percent level of significance are -4.69, -3.88, and -3.49.

As a consequence of cross dependency tests, the null of hypothesis of cross-section independence can be clearly rejected by a value 36.16
for CAB_GDP and 5.79 for TOT_PET. Thus, the results of the CD tests indicate that energy consumption and current account balance are
highly dependent across countries. As a consequence of cross dependency tests and homogeneity tests, we take into account CrossSectionally Augmented IPS (thereafter CIPS) statistic value, which is average of Cross-Sectionally Augmented Dickey Fuller (thereafter
CADF) statistics from second generation unit root tests, allowing cross section dependence.
Pesaran (2003) proposes a test based on standard unit root statistics in a CADF regression. CADF process can be reduced with an
estimation of this equation:
pi

pi

Yit i i .Yi , t 1 ij .Yi , t j di . ci .Yt 1 ij .Yi ,t j it

j 1

where Yt N 1.

(2)

j 0

N
jt

, Yi , t N 1

j 1

jt

and

it is regression errors. Let CADFi be the ADF statistics for the i-th cross-sectional unit

j 1

given by the t-ratio of the OLS estimate

of

in the CADF regression. Individual CADF statistics are used to develop a modified

version of IPS t-bar test (denoted CIPS for Cross-Sectionally Augmented IPS) that simultaneously take account of cross-section
dependence and residual serial correlation:
n

CIPS N 1 CADFi
i 1

The null hypothesis and the alternative hypothesis of CIPS are formulated as:
H o : i 0 This hypothesis implies that all the time series are non-stationary
H A : i 0 This hypothesis implies that all the time series are stationary process.
Table 4. The Results of Cross-Sectionally Augmented IPS and Hadri Kurozumi (2012) Panel Stationary Test Extended to Account for a Structural Break
CIPS_stat
Lag-augmented (LA) method proposed by Choi (1993) and Toda and Yamamoto (1995)

CAB
-2.207***
1.6637

TOT_PET
-1.597
-2.1236

DCAB
-4.37***
0.722

Note: D is first difference operator; *, ** and *** indicate rejection of null hypothesis at 10, 5, and 1 percent level of significance. Critical values obtained from Pesaran (2006)
Table II(b). The critical values at 1, 5, and 10 percent level of significance are -2.30, -2.15, and -2.07. The null hypothesis of LA method that the selected variable is stationary is
rejected when the LA statistic is greater than 1.645 while the stationarity is accepted when the LA is negative or less than 1.645.

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According to the results of CIPS-stat, CAB is level stationary variable whereas TOT_PET is not level stationary. In addition to CIPS_stat,
we have used Hadri and Kurozumi (2012)s panel stationarity test, allowing serial correlation and cross-sectional dependence. The results
of the test employing Hadri and Kurozumi (2012), accounting for cross-section dependence la Pesaran (2007) and extended to allow for a
structural break are given in Table 4. The null hypothesis that CAB is level stationary is rejected in Table 4 according to LA test statistic.
The null hypothesis is not rejected in Table 4 for PET_CONS variable.
3.2.3. Static Panel Data Analysis
We use a specific country group (upper-middle income countries) in the study so fixed effect panel data analysis is useful (Baltagi, 2008:
14). Panel data may have group effects, time effects, or both. These effects are either fixed effect or random effect. A fixed effect model
assumes differences in intercepts across groups or time periods. Fixed effects model explores the relationship between the predictor and
outcome variables within an entity. This entity may be households, countries, firms. The model assumes all other time invariant variables
across entities that can influence the predictor variables to be constant (Torres-Reyna, 2007).
uit i t vit i= 1,,N t=1,,T

where i denotes the unobservable individual effect, t denotes the unobservable time effect, and

vit is the stochastic disturbance term.

t is individual-invariant and it accounts for any time-specific effect that is not included in the regression (Baltagi, 2005).
If the

and t are assumed to be fixed parameters to be estimated and

vit

IID (0, v ), then the above regression represents a two-

way fixed effects error component model (Baltagi, 2005).

Fixed effects model can be formulated as:
yit x 'it . i it

(3)

where i denotes all the observable effects and it is group-specific constant term in the regression model. i equals zi' . in the
regression (3). If zi is unobserved, but correlated with
2

xit , then the coefficient of

is biased and inconsistent under assumptions of

E (uit ) 0 ; E (u it ) all i; E (uit .u jt s ) 0 for s 0 and i j

yit 0 X it . i t it

(4)

Equation (4) can be formulated as a two-way fixed effects model controlling for unmeasured time-invariant differences between units and
unit-invariant differences between time periods. i denotes individual-specific effects and t denotes period-specific effects (Worrall and
Pratt, 2004).
The results obtained from the two-way fixed effects are shown in Table 5. According to Table 5, total petroleum consumption in one
previous period has statistically and economically significant and negative effect on current account balance in a following period as
expected from the literature.

Table 5. The Results for Two-way Fixed Effects ModelDependent Variable: D(CAB)
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
1.80E+08
3.05E+08
0.588683
0.5562
D(D(TOT_PET))
-30838477
6513771.
-4.734351*
0.0000
Note: D is first difference operator and *indicates the statistical significance at 1% level.

Table 6. The Results for Panel Least Squares Method Dependent Variable: TOT_PET
Variable
C
D(CAB)

Coefficient
391.2255
1.00E-08

Std. Error
30.17712
3.26E-09

t-Statistic
12.96431*
3.074047*

Prob.
0.0000
0.0022

Note: D is first difference operator and *indicates the statistical significance at 1% level.

Similarly, current account balance has significantly positive impact on total petroleum consumption as is seen from Table 6. According to
the empirical evidences, the countries the current account balance improved as the total petroleum consumption have been decreased. In
addition this finding, the total petroleum consumption have been increased as the countries current account balance improved.
Consequently, we can say that total petroleum consumption is important determinant in deteriorating the current account balance.

The Effect of Total Petroleum Consumption on Current Account Balance: An Application for Upper-Middle Countries

1001

Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(12) December 2013

4.

Conclusion

The linkage between petroleum consumption and current account balance has a special importance in designing discretionary
macroeconomic policies for stabilization purposes for all countries. Thus revealing and the magnitude the direction of this relationship
between the series give important signal in policy implementation process to economic agents and policy makers. This study has analyzed
the relationship between energy consumption and current account balance for a panel of 32 upper middle income countries covering the
period 1980-2011. For this purpose, the present paper has applied recently developed panel econometric techniques. According to the
findings, the countries the current account balance improved as the total petroleum consumption have been decreased. In addition this
finding, the total petroleum consumption have been increased as the countries current account balance improved.

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