Assessing the Impact of the Oil Price Shocks on Economic Growth in
Oil-Exporting Arab Countries
MAYIS G. GÜLALIYEV
Mingachevir State University, Mingachevir, AZERBAIJAN
RAHIMA N. NURALIYEVA
Azerbaijan State University of Economics (UNEC), Baku, AZERBAIJAN
RUHIYYA A. HUSEYNOVA
Mingachevir State University, Mingachevir, AZERBAIJAN
FIRUDIN E. HATAMOV
Institute of Oriental Studies of Azerbaijan National Academy of Sciences, AZERBAIJAN
ALIKHANLI S. YEGANA
Azercell Telecom LLC, Azerbaijan Cooperation University, Baku, AZERBAIJAN
ELVIN S. ABDULLAYEV
Azercell Telecom LLC, Azerbaijan State University of Economics (UNEC), Baku, AZERBAIJAN
Key-Words: oil-reach countries; oil price shocks; oil rent; economic growth; VAR model; Dutch syndrome
Received: July 23, 2021. Revised: December 30, 2021. Accepted: January 18, 2022. Published: January 20, 2022.
1 Introduction
The role of oil and gas in the modern economy is
undeniable. Ensuring energy security in the world
currently depends on three natural resources - oil,
gas, and coal. Over the last hundred years, the
extensive use of these resources has led to the rapid
depletion of all three types of natural resources. The
study of alternative energy sources and the increase
in a technical capacity in recent decades do not yet
give hope that this type of energy can completely
replace hydrocarbon energy in the near future. The
expansion of globalization, population growth and
the gradual rise in living standards around the world
are increasing the demand for energy. The unequal
distribution of hydrocarbon energy on Earth also
exacerbates international conflicts. Oil-rich
countries tend to take advantage of this absolute
wealth and sell it at a higher price. Countries with
small oil and gas reserves but large economic and
military power are trying to use their power to
dominate the world by keeping the production and
transportation of hydrocarbon resources in their
hands.
Since we have studied the role of oil and gas in the
modern economy in detail in the previous
paragraph, we will only note here that oil and gas as
a commodity benefit both producers and consumers.
Our research examines the benefits it can bring to
the manufacturer. The unequal distribution of
natural resources in all geographical areas and
serious inequality have created absolute advantages
for countries with these resources. Oil and gas-
producing countries earn money by exporting it to
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Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
Ruhiyya A. Huseynova, Firudin E. Hatamov,
Alikhanli S. Yegana, Elvin S. Abdullayev
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Abstract: The role of oil and gas in the modern economy is undeniable. That is why oil-exported countries have
a good chance to wealth. But if the economy doesn't have diversification or there is no political stability this
revenue cannot become welfare for the long run. As well as the changing of oil prices doe in the world market
can impact the revenues of oil-exported countries. The purpose of the research is to assessthe impact of the oil
price shocks on economic growth in oil-exporting Arab countries. As a methodology, there were chosen VAR
models and Granger causality tests. The practical importance of the research is to predict economic growth in
other oil-exporting countries. The authors came to the conclusion that oil-price change has positive impacts on
GDP growth in oil-rich Arab countries and there is the strong dependency from oil prices. The originality and
scientific novelty of the research connected with this argue that oil revenues have impacts on economic growth
only in economic and political stability.
other countries. In most cases, such revenues are
high and long-term. So do not include the strongest
oil producers in the world for the last 50 years. The
Middle East, Russia, Venezuela, Colombia, Nigeria,
Norway, and other countries have maintained their
positions in the world market as major exporters.
The United States, a major oil producer, remains the
world's largest consumer. Azerbaijan is one of the
main oil reserves in the twentieth century. After
gaining independence in the Soviet Union, the
country was able to conclude direct contracts for oil
production. These oil-producing countries, with the
exception of Norway, are not highly developed.
However, for most of these countries, oil export
revenues provided favorable financial opportunities
for economic and socio-economic development.
2 Problem Formulation
The main source of controversy about the impact of
the oil economy on the economy is the inefficient
use of revenues. In fact, the availability of any
natural resources, such as water, quality soil, gold,
or any precious metal, as well as oil and gas sources,
is a great blessing that nature has given to people
and the country. Proper use of this blessing should
only bring happiness and prosperity to people. The
inflow of oil and gas revenues into the country can
serve to solve other problems, especially social
problems. Using these revenues, the country can
develop economic and social infrastructure, develop
science and technology by attracting highly
qualified personnel to the country, and so on. In all
cases, the additional income of natural resources
creates new economic opportunities.
Unfortunately, in reality, very few countries use this
opportunity effectively. For some countries, oil and
gas reserves have played an important role in
eradicating poverty (for example, the United Arab
Emirates, Qatar, Kuwait), and in a short period of
time the quality of life in these countries has
improved. However, in some countries (for
example, Iraq, Libya), these revenues have
exacerbated the conflict in the country and even led
to civil war. A comparative analysis of the level of
development of oil-exporting countries with
countries without oil and gas reserves suggests that
the existence of oil revenues is not sufficient for
sustainable socio-economic development. The
dependence of the country's economy on oil and gas
revenues creates serious problems for the
independent development of other sectors of the
economy. Even in some countries, the negative
impact of high oil and gas revenues on the
development of other sectors has attracted the
attention of economists. This phenomenon, known
as the "Dutch syndrome" in the economic literature,
has been studied in various countries.
Purpose: Assessing the ımpact of multiple changes
in world oil prices on economic growth in some oil-
rich developing countries
2.1 Impacts of Oil Price Shocks on Economic
Growth (Literature Review)
The essence of the "Dutch syndrome" is that the
rapid development of any sector of the economy has
a negative impact on the development of other
sectors (Corden and Neary, 1982) [1]. It envisages
the weakening of agriculture and the processing
industry as a result of the rapid development of the
natural resources sector, such as oil or gas
production or gold production, and so on. This
problem was studied in 1982 by Max Corden and
Peter Neary as a classical economic model.
According to this model, the "Dutch syndrome" is
distinguished by three main features: 1) The rapid
development of one sector in the country compared
to other sectors creates an advantage for this sector
in exports; 2) The price of the national currency is
rising; 3) Other sectors lose their competitiveness
compared to the fast-growing sector (Corden and
Neary, 1982) [1].
The mechanism of the impact of oil and gas
production on the economy is realized through the
revenues coming to the country. Such revenues
mainly depend on both the volume of production
and world market prices. That is why, in most cases,
oil-exporting countries use their monopolistic
positions to try to reach an agreement not to
increase production in order to keep prices from
falling. Given the dependence of revenues on
production and prices, economic research has
focused more on the dependence of macroeconomic
indicators on prices. Because price, as a more
flexible indicator, affects both the volume of
production and demand.
There are many studies in the economic literature on
the effects of oil prices on the economy. The vast
majority of these studies have focused on the effects
of oil prices on the economies of oil-importing
countries, especially developed countries. Changes
in oil prices affect the production process by
changing the volume of students in those countries.
As we are interested in the impact of oil price
fluctuations on world markets and possible impacts
on oil-exporting countries through changes in world
oil prices, we will focus on the amount of currency
entering the country as channels for the impact of
oil prices on such economies. These revenues affect
the economic policy of the country through various
mechanisms. For example, transferring to the budget
increases public spending. As the supply of foreign
currency increases, so does the demand for the
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Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
Ruhiyya A. Huseynova, Firudin E. Hatamov,
Alikhanli S. Yegana, Elvin S. Abdullayev
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national currency, and so on. These problems have
been extensively studied by different researchers in
different countries.
In a study conducted by Alekhina, V. and N.
Yoshino (2018), the effects of oil prices on the
macroeconomic indicators of the exporting country
were studied by the vector autoregression (VAR)
method. The study included non-OPEC oil
exporters. Revenues from oil exports in these
countries have a significant share in the country's
total exports and total revenues. The study shows
that changes in oil prices have a significant impact
on the country's GDP, consumer price index,
interest rates, and exchange rates. In this study,
price fluctuations were conducted for the period
1993-2016. The novelty of the model used in the
study is that this model also includes a monetary
indicator. According to the authors, this is due to the
fact that the impact of oil revenues on the economy
of exporting countries is also through monetary
channels. An increase in the country's oil revenues
as net prices rise can also reduce interest rates and
inflation, and strengthen the national currency
against the dollar. However, the decline in the world
price of the net may accelerate the opposite process.
The relationship between oil production and exports
and macroeconomic indicators in the case of Algeria
was studied by Heidarian and Green (1989) [2].
Given the fact that oil production and exports are
under state control, researchers view oil exports as a
potential for economic development.
Methodologically, the study used 12 equations
according to the Keynesian econometric model.
These equations used the least-squares method, high
R-squares, significant t-statistics, and the Durbin-
Watson test to ensure reliability. The results of the
study show that both before and after
nationalization, various economic sectors are highly
dependent on oil revenues. Unless other conditions
change, the increase in oil exports increases the
volume of imports of luxury goods and domestic
consumption. The elasticity of import volumes and
domestic consumption is high. Inelastic growth is
typical of domestic investment. Researchers
attribute the increase in oil exports to the country's
current policy of failing to achieve the goal of
diversification, modernization, and industrialization.
The methodology used by Alekhina, V. and N.
Yoshino, (2018) takes into account GDP growth
rate, consumer price inflation (CPI), the exchange
rate of the national currency against the US dollar,
and interest rates in the country, such as the price of
branded oil and macroeconomic indicators. Using
the structural VAR model, the interrelationships and
cause-and-effect relationships between the
indicators were investigated. To determine the
relationship between world oil prices and
macroeconomic indicators, Alekhina, V. and N.
Yoshino, (2018) used the following VAR model:
(1)
Here = ( , … ) is a vector of
endogenous variables of size n x 1. β = (β1, β2…
βn) is a vector coefficient of size n × 1. Bi n × n is
a coefficient matrix. Xt−i is the lag operator. j is the
size of the lags. And ut = (u1t, u2t … unt) n × 1 is a
non-correlated structural innovation of size n × 1.
[3]
This problem was studied by Al-Moneef (2006) on
the example of oil-exporting Arab countries. This
study takes into account the direct effects of the oil
sector on the economy, as well as indirect effects.
One of such indirect effects is the export effects of
the oil sector on the non-oil sector. The study
identified five links between the oil sector in the
Arab world and other economic sectors, and four
links between the oil sector and the non-oil export
group. The author claims that the relationship
between the oil sector and other sectors of the
economy varies from country to country, depending
on the economic situation in the country.
Al-Moneef (2006) [4] distinguishes between the
change in oil prices at the beginning of the 21st
century and the nature of price changes in the last
century and believes that the price changes in 1974
and 1980 were leaps and gradual changes in the
early 21st century. He claims that the presence of
large oil and gas reserves in the region and large oil
exports over the past 30 years compared to other
regions have had a serious impact on the economy
and social life of Arab countries. As the economic
impact in these countries is mainly through fiscal
channels, public spending has increased and the
non-oil sector has lost its competitiveness. In these
countries, government intervention in the economy
is high because the main costs and investments are
made by the state. Al-Moneef (2006) argues that the
large revenues of oil-exporting Arab countries also
affect the economies of neighboring countries that
do not export oil. Thus, the high living conditions of
the country's population increase the flow of tourism
from the country, the arrival of migrant workers in
the country increases remittances from the country,
and so on.
The impact of oil and gas revenues on the Iranian
economy is reflected in a study by Dreger and
Rahmani (2014) [5]. The study examines the impact
of oil and gas revenues on the economy using panel
analysis of Iran and other Gulf countries. For these
countries, there is a co-integration between oil
revenues, GDP and investment. However, research
shows that the co-integration between GDP and
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Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
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investment and oil revenues in Iran is different than
in other Gulf countries. The indicator that
characterizes oil revenues in this country behaves as
a weak exogenous variable. However, both
indicators react to the imbalance of the country's
economy. The elasticity of oil revenues for the Gulf
countries is higher than in Iran. On the other hand,
investments in Iran do not react to changes in oil
revenues in the long run. According to the
neoclassical theory, oil revenues should have a
positive effect on GDP growth per capita, as they
increase investment activity. As in other oil-
exporting countries, oil and gas revenues in Iran
have an exceptional role in the development of the
country's economy and the solution of socio-
economic problems.
Khalid and Azrai (2014) [6] studied this problem in
the example of the Sudanese economy. The study
examines the dependence of the Sudanese economy
on oil revenues between 2000 and 2012. The
regression analysis examines the cause-and-effect
relationship between oil revenues and value-added
in the service sector. The results show that there is a
positive relationship between oil revenues and
value-added in the service sector. In the Sudanese
economy for the period 2000-2012, 78.8% of GDP
is provided by oil revenues. Analyzes show that a
1% change in oil revenues changes the value-added
in the service sector by 0.0246%. The research used
the simple linear regression method (SLRM) and the
smallest squares method (OLS) as the
methodological basis. An extended Dickey-Fuller
(ADF) test and the Phillips-Perron single root
method were used to test the time series of both oil
revenues and GDP generated from the service
sector. It turned out that both of these indicators are
non-stationary time series. Only in the second-order
change was it determined that the time series were
stationary, ie, I (1) degree cointegration. In order to
determine the cause-and-effect relationship between
these indicators, Johansen's cointegration test was
used and it was determined that there is a cause-and-
effect relationship between these two indicators.
Olayungbo and Adediran (2017) [7] studied the
effects of oil revenues and institutional quality on
economic growth between 1984 and 2014 in the
case of Nigeria. The study used the ARDL method
to determine the balance between long-term oil
revenues, institutional quality and economic growth.
The corruption index was used as a quantitative
indicator of institutional quality. The analysis shows
that institutional quality has a positive effect on
economic growth in the short term, but there is a
negative relationship between these indicators in the
long term. The study also shows that oil revenues
have a positive impact on economic growth in the
short term and a negative impact in the long run.
This result proves that oil revenues in Nigeria have
created the "Dutch syndrome". Impulse response
analyzes based on the data obtained also confirm the
results obtained by the ARDL method. Based on the
results of the study, the authors believe that
institutional quality plays an important role in the
relationship between oil revenues and economic
growth, and conclude that if anti-corruption
measures are taken, the positive impact of oil
revenues on economic growth can be ensured in the
long run.
The impact of the Nigerian oil sector on the
economy has also been studied by Idowu (2016) [8].
The study, which covers 1981-2015, provides a
comparative analysis of the impact of oil and non-
oil exports on the Nigerian economy. The main
evaluation methods used in this study were the
extended Dickey-Fuller test, the Johansen
cointegration test, the Granger causality test, the
impulse response function, and the variance
decomposition method. The cointegration test
confirms that GDP, oil, and non-oil exports
cointegrate. The Granger test confirms that in the
short run, there is a one-way causal relationship
between oil exports and GDP, ie from exports to
GDP. In the long run, the causal relationship
between these indicators is twofold. However, in the
long run, there is a one-way causal relationship
between non-oil exports and GDP. The main result
of the study is that the relationship between oil
exports and economic growth in Nigeria is negative,
but the relationship between the non-oil sector and
economic growth is positive.
Humbatova and Hajiyev (2019) [9] studied the role
of oil revenues in the Azerbaijani economy in
comparison with its role in the world economy. The
study used an error correction model (ECM) and
reliability was assessed using fully modified Fully
Modified OLS, Dynamic Minimum Squares
(DOLS), and Conical Cointegration Regression
(CCR) methods. The co-integration relationship
between the variables was tested by Engel-Granger
and Phillips-Ouliaris co-integration tests. The
uniformity of time series has been tested by
Augmented Dickey-Fuller (ADF), Phillips-Perron
(PP), and Kwiatkowski-Phillips-Schmidt-Shin
(KPSS) methods. The result is that daily oil
production and consumption. On the other hand, the
impact of world GDP and industrial production is
much greater. In general, the impact of daily oil
consumption and production, as well as world GDP
and industrial production on the world oil market is
declining. process, ie oil production and prices have
a significant impact on macroeconomic indicators.
As these countries export oil, their national
currency, GDP, is strongly dependent on the oil
factor.
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Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
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Humbatova and others (2019) [10] studied the
dependence of GDP, national income, consumer
price index, fixed assets, as well as investment on
oil production and oil prices on world markets in
Azerbaijan. The study identified the main factors
affecting oil production, as well as the main factors
that depend on oil prices by econometric methods.
Regression equations covering some
macroeconomic indicators related to factors
affecting oil production and oil prices allow
determining the dependence of the manat on the
dollar and the consumer price index. The results of
the study were compared with previous years and
the base (2000 = 100).
In Chad, Gadom and others (2018) [11] studied the
socio-economic impacts of oil production by
conducting a household survey. The main purpose
of the study was to study the impact of oil revenues
on welfare. The study used a multidimensional
wellbeing index for households and a differentiated
approach) [12]. The main result of the study is that
in Chad, the regions that receive oil transfers have
the highest multidimensional welfare index.
Therefore, in order to ensure economic inclusion,
the state should reconsider the policy of distribution
of oil revenues and take into account the needs of
those regions. This study also argues that the impact
of oil revenues on the social sphere depends on the
current institutional situation.
The study of the socio-economic effects of oil
revenues is especially relevant. Because the main
goal of any state is to protect the security of its
citizens in all areas, including socio-economic
security. Although the inflow of oil revenues into
the country creates new opportunities for solving
social problems, it has a serious impact on the
emergence of intersectoral unemployment and
income inequality in most oil-exporting countries.
At first glance, the inflow of foreign currency into
the country through the export of oil is formally
similar to the inflow of currency into the country
from the export of other commodities. However, the
socio-economic effects of the former differ sharply
from those of the latter. The main reason for this is
most likely due to the fact that oil revenues are
mainly controlled by the state and enter the real
economy mainly through fiscal mechanisms. In the
case of redistribution of oil revenues through fiscal
mechanisms, not all social groups and households
can benefit equally from oil revenues. In the case of
export diversification, more groups of the
population will be able to benefit from export
revenues. On the other hand, such revenues are
more quickly and efficiently distributed in the
market because they are not managed by the state.
That is why in the case of export diversification, the
"Dutch syndrome" almost does not occur. The
inflow of more foreign currency into the economy in
a short period of time from oil and gas revenues
causes the "Dutch syndrome".
According to a study by Ismail (2010) [13], a sharp
increase in exports in the resource sector reduces the
conversion capacity of the non-resource sector, and
the economy becomes more specialized on one
resource. In this case, the economy depends on this
resource. Negative effects of Dutch syndrome on
economic growth, in the long run, Arezki and van
der Ploeg (2010) [14]; Baggio and Papyrakis (2010)
[15]; Extensively studied in Mursheb and Serino
(2011) [16] and other studies.
Studies on the socio-economic effects of natural
resource exports show more clearly that poor
revenue management can have a negative impact on
well-being and the Human Development Index. In
developing oil-exporting countries, poor governance
and corruption are just some of the causes. A study
by Daniele (2011) [17] shows that the dependence
of mineral resources on export earnings has a
negative impact on the Human Development Index.
The inflow of oil revenues into the country also
affects income inequality in the country. Although
research on this issue has attracted relatively little
attention to other issues, in the particular, economic
growth of oil revenues, investment activity, etc., it is
increasingly attracting the attention of researchers.
In fact, revenues from the export of natural
resources allow the state to achieve a more equitable
redistribution of income through fiscal policy.
However, in reality, very few developing countries
are rich in natural resources. Because the oil and gas
sector, which initially requires large investments,
attracts the bulk of the budget and hinders the
development of other sectors. At the same time, the
government is still not interested in investing in the
development of the non-oil sector. Thus, there are
significant differences between employment-related
and, as a result, employment income, directly and
indirectly, related to these sectors. This problem has
been studied by Fum və Hodler (2010) [18], Parcero
və Papyrakis, (2016) [19], Dizaji S.F., (2016) [20],
Farzanegan və Krieger (2017) [21], and others.
Farzanegan and Krieger (2017) examine how the
level of inequality in Iran reacts to the positive
shocks of oil rents in the post-sanctions period for
the period 1973-2012, concluding that a 10%
increase in oil rents per capita increases long-term
inequality. Increases by 1.1%. The study used a
vector autoregression method based on the impulse
response function. Changes in inequality over a
period of up to 4 years (lag=[1;4]) after a positive
shock of oil rents were analyzed by the ARDL
method.
The most controversial point about the economic
and socio-economic effects of oil revenues is the
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Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
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long-term impact of these revenues on welfare.
Because in the short term, oil revenues can directly
or indirectly have a positive impact on people's
living conditions. The country receives investments
to expand oil production, and the impact of these
investments is not only directly reflected in the oil
and gas industry but also indirectly in the service
sector or oil-related industries. There is an increase
in household incomes associated with these sectors.
Spending a portion of oil revenues from oil and gas
exports on social benefits, education, health
services, cultural and sports activities, defense,
infrastructure, etc. can have a positive impact on the
living conditions of the general population.
However, as such effects paralyze other sectors of
the economy, the economy becomes dependent on
oil revenues. The negative shock of prices in the
world market is immediately reflected in the quality
of life of people.
A study by Al-Sheikh, Hend and Erbas, Nuri S.
(2012) [22] found that oil revenues have the
potential to create public sector employment and
higher wages in Saudi Arabia. In Saudi Arabia and
the Persian Gulf countries, the increase in oil
revenues since the 1970s, directed to infrastructure,
human capital, and other social services, has
enabled unprecedented economic and social
development in the region. These processes have
expanded trade and mutual cooperation in the region
and have had a positive impact on human
development. However, oil reserves have had a
negative impact on the economic development of
some countries in the region. The inflow of large
amounts of oil revenues into the country through a
single channel - the export of oil products - creates a
disproportion between the growth of the country's
budget and the development of the private sector.
High salaries in the public and oil sectors create
conditions for the influx of qualified personnel from
the non-oil sector and the entry of cheap labor into
the country. In this case, the unemployment rate is
rising.
One of the oil-rich regions in the Middle East. Saudi
Arabia, Iraq, Iran, Kuwait, Bahrain, Oman, and the
United Arab Emirates, which are located in the
region, have the bulk of the world's gas and oil
reserves. These countries have more than 45% of
the world's proven oil reserves [23]. The Khawar
field in Saudi Arabia alone and the Greater Burgan
field in Kuwait have more than 25% of the world's
oil reserves.
3 Problem Solution
Oil was discovered in the Arab world in the middle
of the last century. Until the discovery of oil fields,
the Arab countries were very poor. Oil production
began first in Egypt, Iraq, Saudi Arabia, and
Bahrain, and then in other Arab countries. Arab
countries are divided into three groups based on oil
and gas production. Countries that produce and
export large amounts of oil. This group includes
Saudi Arabia, Kuwait, the UAE, Iraq, Algeria,
Libya, Qatar, Oman, and Tunisia. Algeria has
significantly depleted oil reserves and its exports
have declined in recent years. The second group of
Arab countries is oil importers. This group includes
Morocco, Mauritania, Sudan, Lebanon, Jordan, the
Yemeni Arab Republic, and the People's
Democratic Republic of Yemen. Some Arab
countries, on the other hand, are only able to meet
their own oil needs, and they do not export oil or
export it in negligible quantities. This group of
countries includes Syria and Egypt. These countries
are also running out of oil reserves, and in the near
future, these countries will have to pay for their
domestic consumption through imports. Thus, only
eight of the 23 Arab countries are rich in oil and can
be considered oil exporters. Absolute monarchy
reigns in six of the nine oil and gas-rich Arab
countries. The ongoing civil war in Iraq and Libya
in recent years does not allow them to recover not
only their economy but also their political system.
But formally, it is a parliamentary republic in these
countries. Algeria also has a parliamentary republic
as a form of government.
Table 1. Approved oil reserves in Arab countries (billion barrels)
1998
2008
2017
2018
Saudi Arabia
261.5
264.1
296.0
297.7
UAE
97.8
97.8
97.8
97.8
Iraq
112.5
115
147.2
147.2
Kuwait
96.5
101.5
101.5
101.5
Oman
5.4
5.6
5.4
5.4
Libya
29.5
44.3
48.4
48.4
Qatar
13.5
26.8
25.2
25.2
Note: Based on BP (2020)
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The richest country in oil in the Arab world is Saudi
Arabia. According to 2018 data, the country's
proven oil reserves exceed 297.7 billion barrels. The
annual production in this country is higher than in
other Arab countries, even in the region. Saudi
Arabia has produced more than 500 million tons of
oil annually over the past 10 years. According to
2018 data, Saudi Arabia's daily oil production has
already exceeded 11 million barrels. This is 13% of
the world's total oil production. That is why the
other Saudi Arabia has the ability to influence oil
prices on world markets by managing its own
production. Given the volume of production of other
OPEC countries, OPEC is able to fully control oil
prices. For comparison, in 2018, Azerbaijan's oil
production amounted to 795,000 barrels per day.
This means only 0.8% of world oil production.
However, maintaining oil production at this level in
the coming years indicates that Saudi oil will be
rapidly depleted. Thus, if the daily oil production
was 11 million barrels, Saudi Arabia would have
fully used its reserves in 70 years at best. In other
Arab countries, depletion of resources is possible
more quickly.
Table 2. Dynamics of oil production in Arab countries (million tons)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
510.0
459.0
463.3
522.7
549.2
538.4
543.8
568.0
586.7
559.3
578.3
145.2
129.3
135.2
150.6
156.9
163.3
163.4
176.1
182.4
176.2
177.7
119.3
119.7
120.8
135.8
151.3
152.0
158.8
195.6
217.6
222.2
226.1
136.0
120.9
123.2
140.7
153.8
151.2
150.0
148.1
152.5
144.8
146.8
37.1
39.7
42.2
43.2
45.0
46.1
46.2
48.0
49.3
47.6
47.8
88.2
81.7
84.6
24.3
72.6
49.4
24.4
20.5
19.3
43.8
47.5
64.5
62.4
70.9
77.7
82.2
84.2
83.5
81.2
81.6
78.5
78.5
34.7
35.3
35.0
34.6
34.7
34.4
35.1
35.4
33.8
32.2
32.7
Note: Based on BP (2020)
The Arab countries have a significant share in the
world not only in terms of oil reserves, but also in
terms of gas reserves. According to BP, Qatar and
Iran have the richest gas fields in the Middle East.
According to BP in 2018, Qatar's gas reserves
exceed 24.7 trillion cubic meters. This is 12.5% of
the world's gas reserves. The presence of such a
large amount of gas in the country, which has a
population of only 0.037% of the world's
population, has affected all sectors of its economy.
The country has been producing oil since the 1940s.
However, at that time, Qatar, like other Arab
countries, was ruled by the United Kingdom as a
poor country. In the second half of the last century,
the discovery and production of large gas fields in
the country, as well as the effective investment of
oil and gas revenues in economic development, led
to the rapid development of Qatar.
Table 3. Proven gas reserves in Arab countries (trillion cubic meters)
1998
2008
2017
2018
Saudi Arabia
5.8
7.1
5.7
5.9
UAE
5.8
5.9
5.9
5.9
Iraq
3.0
3.0
3.6
3.6
Kuwait
1.4
1.7
1.7
1.7
Oman
0.5
0.9
0.7
0.7
Libya
1.2
1.5
1.4
1.4
Qatar
11.3
26.3
24.7
24.7
Bahrain
0.3
0.2
0.2
0.2
Note: Based on BP (2020)
In recent years, Qatar has had the highest GDP per
capita in the world. According to the World Bank
(WB, 2020) [24], Qatar's GDP per capita has
increased steadily since 1970, from $ 2,756 to $
68,800 in 2018. The level of welfare of the
population in the country is high compared to other
Arab countries and countries in the region, and even
some developed countries. However, while Qatar's
large gas reserves provide it with financial
resources, declining revenues from the sale of
natural resources could have serious consequences
in the future. The train produced 175.5 billion cubic
meters of gas in 2018. If this volume is maintained
and no new reserves are discovered, then the
reserves can be used for 140 years. However, it
should be borne in mind that if world gas
consumption is maintained at current levels and no
new reserves are discovered, then these reserves
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2022.19.42
Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
Ruhiyya A. Huseynova, Firudin E. Hatamov,
Alikhanli S. Yegana, Elvin S. Abdullayev
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Volume 19, 2022
may be depleted in a relatively short time, i.e. only
50 years. The unequal distribution of gas resources
around the world and the inability of alternative
energy sources to completely replace traditional
energy sources may lead to future inter-country and
inter-regional conflicts.
Table 4. Dynamics of gas production in Arab countries (billion cubic meters)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
76.4
74.5
83.3
87.6
94.4
95.0
97.3
99.2
105.3
109.3
112.1
49.0
47.6
50.0
51.0
52.9
53.2
52.9
58.7
60.3
62.0
64.7
6.5
6.9
7.1
6.3
6.3
7.1
7.5
7.3
9.9
10.1
13.0
12.1
10.9
11.1
12.9
14.7
15.5
14.3
16.1
16.4
16.2
17.5
24.1
23.9
25.7
27.1
28.3
30.8
29.3
30.7
31.5
32.3
36.0
15.1
15.1
16.0
7.5
11.6
12.2
11.8
11.0
9.4
9.6
9.8
79.7
92.4
123.1
150.4
162.5
168.2
169.6
175.0
173.8
172.4
175.5
56.8
60.3
59.0
59.1
58.6
54.0
47.0
42.6
40.3
48.8
58.6
Note: Based on BP (2020)
Although the richness of some Arab countries in oil
and gas creates opportunities for their economic
development, it makes their economies dependent
on oil and gas revenues. According to the World
Bank's estimates for 2017, Iraq (37.8%), Libya
(37.3%), Kuwait (36.6%), Saudi Arabia (23.1%),
and Oman (21.8%) ranked first in terms of the share
of oil rents in GDP. are in the top six. For
comparison, Azerbaijan is in the top ten with 17.9%.
Oil rents in Arab countries average 16.4% of GDP.
Among the oil-rich Arab countries, Iraq, Libya,
Kuwait, Saudi Arabia, and Oman have almost
maintained their balance over the past 20 years.
Despite the decline in oil rents in these countries in
2008-2009, it rose again in subsequent years. The
share of oil rents in GDP in Bahrain is not so high.
At the same time, the ratio of rent to GDP in this
country has not changed sharply from year to year.
The sharp change in this indicator from year to year
is more likely to depend on changes in oil prices on
world markets. It should be noted that in these
countries, both rent and GDP depend on oil prices.
Fig. 1: Share of oil rent in GDP in some oil countries (%)
As a result of the dependence of both rents and GDP
on oil prices, per capita GDP in oil-rich Arab
countries is not a function of continuous growth
(Figure 2). Almost all oil-rich Arab countries have a
sharp rise and fall in GDP per capita.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2022.19.42
Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
Ruhiyya A. Huseynova, Firudin E. Hatamov,
Alikhanli S. Yegana, Elvin S. Abdullayev
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Fig. 2: GDP per capita in some oil-rich countries
3.1 Methodology
In the study of the macroeconomic effects of oil
shocks, the impulse response function is used more
with the analysis of two-time series based on the
two-variable VAR model. We will also use this
method to study the effects of the oil price shocks
on economic growth in some oil-rich countries:
(2)
Both GDP and oil price shocks are possible here.
Therefore, there is a need to compile a four-pulse
response function. Four impulse response functions
characterizing the effect of the shock on economic
growth at the points of change of time series
and and the effect of oil prices at the points of
change of time series and will be
compiled. For simplicity, we will assume that there
is no identification problem for connections (2). In
this particular case, we will accept that economic
growth depends only on itself and the lag of oil
prices. This means that economic growth and oil
prices are not synchronous, but dynamic. Any t-time
change in oil prices is not reflected in a t-time
change in economic growth. Also, the change in t-
time economic growth is not felt in the t-time
change in oil prices. On the other hand, we will
assume that və and are independent and not
indicators that correlate with each other at the same
time. We will also assume that ~N(0; və
~ N(0;
To apply the (2) VAR models, we need to check the
stationary I (0) of the time series t and . If
the time series are not stationary, then the stationary
I(0) of the time series and will be
checked. and If the time series I(0) or I(1)
are stationary, we will apply the VEC model and use
OLS in the dependencies (2).
and You can use the Dickey-Fuller (DF)
test or the Extended Dickey-Fuller (ADF) test to
check the stationarity of the time series.
In the initial approach, we assume that if
, or , | |
then is a stationary time series. This first-degree
autoregression will be considered AR (1).
In the next approximation, we will use the Dickey-
Fuller test (α stable but not trending) to increase the
accuracy of the regression relationship. That is, we
will assume that
Depending on
If : : , the time series is not
stationary.
However, if : : and , then
the time series is stationary
Here are critical values for tau statistics, is the
indicator under study. The estimates proposed by R.
Davidson and J.G. MacKinnon (1993) [25] and
given in Table 5 will be taken as the critical values
of the tau statistics during the calculations.
Table 5. Critical scores for the Dickey-Fuller test (
1%
5%
10%
-2.56
-1.94
-1.62
-3.43
-2.86
-2.57
-3.96
-3.41
-3.13
Standard critical prices
-2.33
-1.65
-1.28
Source: R.Davidson and J.G.MacKinnon (1993)
For the study, the indicators for GDP and its growth
for the period 2000-2018 were obtained from the
World Bank (WB, 2019) database, and the monthly
data on oil prices were calculated from the website
https://www.macrotrends.net and the average
monthly prices were calculated.
Six oil-rich countries were taken for research. They
are located in the Middle East.
4 Empirical Calculations
Relationship between economic growth ( ),
economic growth rate ( ) in major oil-
exporting countries and world oil prices ( and
price changes (Δ )
Carrying out unit root test and stationary of oil
prices’ time series
First of all, let's check the stationarity of the time
series on the basis of the average annual
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DOI: 10.37394/23207.2022.19.42
Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
Ruhiyya A. Huseynova, Firudin E. Hatamov,
Alikhanli S. Yegana, Elvin S. Abdullayev
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Volume 19, 2022
prices of oil on the world market. Figures 3 and 4
show the dynamics of annual changes in oil prices
in the last 2000-2018.
Fig. 3: Oil price dynamics -time series)
Fig. 4: Dynamics of annual changes in oil prices
time series)
Calculations show that the time sequence is
not stationary. However is stationary in the
case of "none" and "intercept" and "intercept and
trend", respectively. In the case of "free coefficient",
ie according to the formula Dickey-Fuller according
to the formula , the P-
significance is smaller than other variants, and the t-
statistic is much lower than the critical value at -3.8
(Table 6).
Table 6. Oil prices and the stationarity of the time series of its annual changes (2000-2018)
t-statistics
P-value
intercept
none
Trend and intercept
t-statistics
P-value
t-statistics
P-value
t-statistics
P-value
-0.1383
0.6213
-3.7631
0.0135
-3.8254
0.0008
-3.9676
0.0336
Note: Calculated by the authors
Check the stationarity of the time series of GDP
and economic growth ( )
At the same time, it is possible to check the degree
to which the time series of GDP and economic
growth ( ), for oil-rich countries, are
stationary. Calculations show that for all countries
involved in the study, the time series is not
stationary the rom degree I(0) (Table 7), but is
stationary under some conditions from degree I(1).
For example, of Saudi Arabia, the UAE,
Bahrain, and Oman, is stationary from grade I(0)
when there is “none” (there are not intercept and
trend), as well as there are intercept and trend. For
all countries, involved in the study, has I(0)
degree of stationarity, when there are not intercept
and trend.
Table 7. GDP and Economic Growth ( ) time series in some countries (2000-2018)
(max Lag=2)
t-statistics
P-value
intercept
none
Trend and intercept
t-statistics
P-value
t-statistics
P-value
t-statistics
P-value
Saudi
Arabia
-0.8780
0.7695
-3.3941
0.0272
-2.6659
0.0112
-3.3229
0.0980
UAE
-1.1157
0.6841
-3.8339
0.0118
-2.9641
0.0057
-3.8654
0.0400
Iraq
-1.5595
0.4736
-2.4809
0.1431
-2.1968
0.0323
-2.4556
0.3390
Kuwait
-1.7411
0.3945
-3.1343
0.0441
-3.0312
0.0049
-3.2021
0.1188
Bahrain
2.9808
0.9981
-3.8579
0.0113
-2.2541
0.0275
-3.8433
0.0415
Oman
1.2760
0.9417
-4.2807
0.0050
-3.5541
0.0015
-4.2588
0.0203
Note: Calculated by the authors
Calculation of regression dependence of of
the Arab countries on by (2)
(3)
show that, dependence of on is
strong (Table 8).
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DOI: 10.37394/23207.2022.19.42
Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
Ruhiyya A. Huseynova, Firudin E. Hatamov,
Alikhanli S. Yegana, Elvin S. Abdullayev
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Table 8. Regression dependence of on in oil-rich countries
Saudi Arabia
UAE
Iraq
Kuwait
Bahrain
Oman
2.66E+10
1.38E+10
1.13E+11
3.32E+09
1.4E+09
2.54E+09
3.42E+09
1.74E+09
1.28E+10
1.24E+09
1.02E+08
4.03E+08
SE(
6.03E+09
2.47E+09
3.20E10
1.86E+09
1.48E+08
7.66E+08
SE(
3.65E+08
1.5E+08
1.73E9
1.13E+08
8921056
46320209
t-stat(
4.4029
5.596816
3.5345
1.7796
9.4682
3.3156
t-stat(
9.3860
11.6508
7.4001
11.0238
11.3799
8.7102
Probability (
0.0004
0.0000
0.0041
0.0941
0.0000
0.0044
Probability ( )
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.8463
0.8945
0.8202
0.8836
0.8900
0.8258
F-significancy
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
Note: Calculated by the authors
It should be noted that oil-rich countries are
members of OPEC and these countries have the
ability to influence world oil prices. Therefore, it
can be considered that in addition to the impact of
oil prices on GDP in these countries, there is also
the opposite effect, i.e. the cause-and-effect
(Granger causality) of GDP on oil prices. However,
the calculations show that in the example of the
countries involved in the study, the indicators
and do not have a Granger causality
on each other, and the hypothesis are provided in
both directions (Table 9). The lags during the
assessments based on the VAR model, have been
selected by the Akaike criterion, Schwarz
information criterion and Hannan-Quinn
information criterion, and lag = 0.
Table 8. Regression dependence of on
in oil-rich countries
Saudi Arabia
UAE
Iraq
Kuwait
Bahrain
Oman
Note: Calculated by the authors
6 Conclusion
Thus, the assessments of the dependence of GDP
changing of the six 6 oil-rich Arab countries on
world oil prices' changing by VAR models and
Granger causality tests allow drawing interesting
conclusions. Thus, the change in world oil prices
can not be considered a cause of change in GDP in
any of these countries in the sense of Granger
causality. As well as there is no reverse causal
relationship between these variables. That is,
although these countries are OPEC countries,
changes in the GDP of these countries can not be
considered a cause for changes in world oil prices.
However, for each of these countries, it can be
argued that rising oil prices have a positive impact
on their GDP growth. However, these effects are not
Granger cause and effects.
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Alikhanli S. Yegana, Elvin S. Abdullayev
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Volume 19, 2022
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
data curation and resources Firudin Hatamov;
formal analysis, Rahima Nuraliyeva; investigation,
Mayis Gulaliyev; methodology, Ruhiyya
Huseynova; literature review Alikhanli Yegana and
Elvin Abdullayev
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself This
investigation was investigated by the Science
Development Foundation under the Prezident of the
Republic of Azerbaijan. Grant № EIF-ETL-2020-
2(36)-16/08/1-M-08
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
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WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2022.19.42
Mayis G. Gülaliyev, Rahima N. Nuraliyeva,
Ruhiyya A. Huseynova, Firudin E. Hatamov,
Alikhanli S. Yegana, Elvin S. Abdullayev
E-ISSN: 2224-2899
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Volume 19, 2022