Effect of Crude Oil Prices on GDP Growth and Selected Macroeconomic Variables in Kenya

Crude oil is one of the primary drivers of economic growth and a key ingredient to sustainable development. It is therefore vital that oil products be efficiently and competitively priced to accelerate economic growth. Realization of a 10% GDP growth in Kenya by the year 2030 requires a massive development in the energy sector. This study empirically explored the effect of crude oil on GDP growth and selected macroeconomic variables in Kenya; by investigating how crude oil prices affect GDP growth, Inflation and Real exchange rate. Literature has presented these three variables as the leading indicators of economic health and key variables affected by crude oil prices. Statistics from the World Development Indicator show that demand for oil in Kenya has been progressively increasing since the 1970s and this is expected to grow even further from the current consumption of 4.2 million Metric tons per year to 12 million Metric tons by the year 2030. The forecasted rise in demand has been attributed to the achievement and sustainability of the desired 10% economic growth, as envisioned in the national vision 2030 blueprint. The study used time series data covering the period 1970 to 2016, which to capture different oil shocks that have been shown through empirical and theoretical literature to have had an impact on the economy. The study estimated three Autoregressive Distributed Lag (ARDL) models to analyze the effect of crude oil on the selected variables in the study. The findings of the study revealed that Crude Oil Prices have a positive long-run impact on GDP growth, the study attributes this to the fact that Kenya imports oil and re-exports it to Uganda, Rwanda, and South Sudan. The findings also established that Crude Oil Prices have a positive effect on inflation in the long run, while in the short run its lag of one affect inflation, meaning that the Crude oil prices for the previous one year affect the current year's inflation rate. The relationship between crude oil prices and Real Exchange Rate was negative in the long run.