An empirical investigation of the impact of oil price changes in disparate systems : evidence from the UK and Libya
The impact of oil price changes on the demand for (and the supply of) the output of the oil and gas industry suggests that increased knowledge about the nature and effect of crude oil price movements is likely to be of interest to most institutions and organisations in the global economy. The importance of the energy sector is evident even in countries as widely divergent in industrial and financial structure as the UK and Libya. The two nations have fundamentally different economic structures: the UK operates a classical free-market, private capital-based system, whereas Libya has a more centrally-planned economy and has for many years been dominated by the productive activity of the oil and gas sector.Despite these differences, each country's financial strength appears to be vulnerable to fluctuations in oil prices; in countries such as the UK, this manifests itself most obviously in the potential impact on the values of shares in oil and gas firms. The sector is one of the largest on the London Stock Exchange, which, as a whole continues to dominate global non-domestic share trading and is critical to the health of the UK's financial services industry. In Libya, the nation's massive dependence on oil export revenues renders the economy especially prone to significant swings in oil prices. However, to date no study has attempted to compare directly the impact of price changes in such disparate environments, and this therefore: (i) investigates the relationship between various risk factors (including oil prices, exchange rates, and interest rates) and oil and gas share returns in the UK; (ii) replicates the same investigation for different sectors to allow the aboye results to be set in context: (iii) examines perceptions of how these risk factors affect the Libyan economy: and (iv)compares the characteristics and the influence of these factors in the UK and Libya at a macro-economic level.The results of parts (i) and (ii) of the empirical analysis suggest that oil price movements have a significant impact on UK-listed oil and gas firms, and that the finding is unique to that sector. This evidence, allied to that of previous studies in other parts of the world, suggests that the finding of a strong empirical link between oil prices and share values in the oil and gas sector is robust across time and national borders. The main finding from part (iii), reflecting a detailed interview survey in Libya, suggests that the state of the Libyan macro- and micro-economy is highly dependent on the oil price; the interviews also reveal a degree of concern about Libya's long-term ability to develop into a multi-industry economic system. The analysis of the impact of oil pricing volatility on macro-economic health indicates that, as predicted by the interviewees, the impact of price changes on the Libyan national economy is highly significant, whereas no significant relationship exists between oil price alterations and the state of the UK economy. Overall however, and despite the very different economic structures existing in the UK and Libya, oil price movements are is shown in the thesis to have impacts on the two countries that are fundamentally different in nature, but potentially highly significant in each case.