The impact of oil shocks on economic growth in oil-rich countries

Dissertation for Master's degree (M.A)

Field: Economics

Tension: Energy Economy

Fall 2013

Dissertation abstract (including summary, objectives, implementation methods and results obtained):

Natural resources, including oil, are considered one of the most important sources of national wealth in the world. The idea is that abundant income from natural resources will create wealth for a country and will lead to economic progress, acceleration of investment and reduction of poverty, but empirical observations have always shown that the destructive effect of governments' dependence on income from natural resources, including oil, has always existed, so that for many years, oil as one of the factors that can provide currency for countries The third world is known to be useful and productive, and it could act as a positive lever for economic growth and development for the countries that benefit from its exclusive and natural existence, but this has never happened. Accordingly, in this research, the effect of oil price shocks on economic growth in a number of MENA countries for the period of 1996-2012 has been investigated. The method used in this research is panel data method and the software used is Eviews7  has been The estimation results show that among the indicators of good governance, corruption control and the rule of law have a positive and significant effect on the GDP, and political instability and the right to comment and answer (due to the low degree of democracy in these countries) have a negative effect on the GDP. Trade freedom also has a positive and significant effect on GDP in these countries, but the size of the government does not have a significant effect on it. Oil price normally has a positive effect and population has a negative effect on economic growth. The effect of oil price shock has a negative effect on economic growth in these countries. Therefore, according to the results of the research, the hypothesis of this research is rejected and the effect of oil shocks on economic growth in these countries is not positive in this time period.

Key words: oil shocks, economic growth, MENA countries.

Chapter one:

General research

1-1 Introduction

Natural resources of oil are considered one of the most important national resources in the world. It can be imagined that a lot of income from natural resources creates wealth for a country and economic progress, it will accelerate investment and reduce poverty, but empirical observations have always shown that the destructive effect of governments' dependence on the income of natural resources, including oil, has always existed, so that for many years, oil as one of the factors that can provide currency for countries The Third World is known to be useful and productive, and it could have acted as a positive lever for economic growth and development for the countries that benefit from its exclusive and natural existence, but it has never been the case. The World Bank has considered the use of oil and gas revenues in a way that minimizes economic damage and maximizes economic development as the biggest challenge for developing countries that export crude oil.

Oil price fluctuations It is one of the main factors of many economic crises among oil importing and exporting countries. For this reason, it is necessary to investigate the effect of oil price shocks on the economy of oil-exporting countries, where the income from crude oil is known as the driving engine of the economy. For oil-exporting countries, revenues from oil sales are a very important source of financial and foreign exchange revenue for governments. The dependence of these incomes on the price of oil in the global oil market leads to imbalance and even crisis, unless correct policies are adopted by the governments to face these fluctuations. The first oil shock occurred in October 1973 following the attack of Syria and Egypt on Israel, which led to a shortage of oil supply and the growth of prices during a year from 4 to 12 dollars. The economy of industrialized countries, as oil importers, was severely affected, and the result of this impulse for them was nothing but stagnant inflation. This caused the politicians of these countries to start long-term and comprehensive planning to deal with these crises. Since most of the studies conducted in this field include oil importing countries, this study examines the effect of oil price shocks on the economic growth of selected MENA member countries (oil exporters).. Since most of the studies conducted in this field include oil importing countries, this study examines the effect of oil price shocks on the economic growth of selected MENA member countries (oil exporters). Following the disruptions of the world oil markets in the 1970s and the subsequent fluctuations in business cycles, theoretical explanations were given about the relationship between oil price changes and the resulting fluctuations in the general level of economic activities (Philips study 1978, Pearce and Engels 1974, Gordon 1975, Mork and Hall [1] 1980) (Mork et al.[2] 1989,) the first empirical study was also about this The subject was carried out by Darby [3] (1982). In his study, he did not find a significant relationship between oil price changes and the real income of developed countries. But Hamilton [4] (1983), considered the growth percentage of nominal oil prices as an index of oil price fluctuations and using it showed that changes in oil prices are the cause of changes in GDP and unemployment, and an increase in oil prices causes a sharp decrease in GDP in America. Following the drop in oil prices in 1986 and the lack of increase in economic activities in accordance with what previous studies stated, the asymmetric effect of positive (increased price growth) and negative (decrease price growth) price shocks shows that the increase in oil prices follows the results of Hamilton's study, but the decrease in oil prices has less effect on production compared to its increase. Pindike [5] (1991), during a research study on uncertainty and investment, showed that oil price volatility and uncertainty played a role in the recession of 1980 and 1982 in the American economy. Lee et al. [6] (1995) stated that the increase in oil prices depends on the scale of oil price fluctuations (price uncertainty), so it is necessary to consider oil price fluctuations even in the discussion of the asymmetric specification of shocks. Accordingly, Lee et al. proposed a new specification of negative and positive oil shocks based on real oil prices in a normalized form using a heterogeneous conditional variance model and then using a VAR model and Hadid's statements showed the asymmetric impact of normalized oil shocks on economic activities. Rotemberg and Woodfrod [8] (1996) also show during a study that oil price fluctuations, assuming a relatively low degree of imperfect competition, lead to a decrease in production and real wages in the American economy. So that a one percent increase (decrease) in the price of oil after 5 to 7 seasons leads to a 25 percent decrease (increase) in production, after 5 or 6 months it leads to a 1 percent decrease (increase) in wages. Federber [9] (1996), has used the monthly standard deviation of oil prices as an index of oil price fluctuations. In his study, he showed that the increase in the price of oil has always been accompanied by large fluctuations and turbulences, and the effect of these fluctuations on the economic activities of the United States is much stronger and larger than the effect of monetary variables and even the price of oil itself, so that oil price fluctuations more than any other variable explain the fluctuation of the production activities of the industrial sector. Finally, he showed that oil price fluctuations have a negative effect on the economic growth of the United States after one year. In the same year, Hooker (1996), in his study, comes to the conclusion that before the first oil shock (1973), a 10% increase in oil prices after 3 or 4 seasons in the United States has led to a 6% decrease in economic growth, but after the first oil shock (1973), oil prices are not the Grangerian cause of some variables such as unemployment, real GDP and employment, also due to the insignificant effect of price reduction. Oil in the 1980s compared to the significant effect of the oil price increase in the 1973s on the US macroeconomics, the effect of oil shocks on the economy is asymmetric. In response to Hooker (1996), Hamilton (1996) stated in his article; To know the impact of oil price shocks on consumption and investment, the current price of oil should be compared with the price of a year ago (last 4 seasons). In this study, he also showed the direct relationship between positive oil shocks and economic activities. Of course, both Hooker and Hamilton showed in their studies that oil price changes and fluctuations play a greater role in explaining macroeconomic variables than the oil price itself. Hamilton (2003) in his new study using the VAR model, which is the main cause of inflation in world trade, positive oil shocks and the price increase that occurs after a period of oil price stability has a greater effect on the economy than the increase that occurs after a period of oil price reduction.