Abstract
Like many other countries in the Middle East, Saudi Arabia has the access to the crucial natural resource – oil. Unlike some of its neighbors, it has been succeeding in making most of it – the country is not drawn into political troubles (Jones, N/A) and is relatively rich. Despite international criticism related to violation of human rights (the country is one of the world leaders in terms of enforcement of capital punishment), generally, Saudi Arabia is doing relatively well in both economic and political terms. The purpose of this paper is to provide a regression model that estimates how much of Saudi Arabia’s economic success depends on the oil industry – the relationship between the price of oil and GDP of Saudi Arabia from 1968 to 2011 is being studied.
Introduction
The average oil prices of a basket "OPEC" estimated at US$61.08 per barrel in 2006 compared to 2005 where the average price was US$50.04 per barrel, an annual increase of 20.6%. This was mainly as a result of the strong demand for energy in the world. The average crude oil prices of a basket (OPEC) stood at US$ 88.99 per barrel in November 2007. The average price of crude oil for the OPEC basket for the first 11 months of 2007 reached US$ 67.58 per barrel compared to the same period of the previous year where the price was US$61.34. The oil sector is booming because of oil prices which range from about $ 100 a barrel and US$ 120, a peak price level that was reached in 2008. Oil-based economies are expected to see other years of prosperity (Serletis, 2012). The Saudi government continues its economic reforms program that currently focuses on attracting private sector investment for domestic and foreign investment in several sectors including: oil and gas, petrochemical, power, telecommunications and real estate.
Saudi Arabia has launched a large - scale project that includes the creation of six economic cities in the Kingdom to achieve balanced development in the regions of the Kingdom, and promote economic diversification (Wilson, 2004). Through the project, the Kingdom of Saudi Arabia is expected to enjoy the best period of economic reform and liberalization, with a view to modernization, economic diversification and global competition (Looney et al. 2008). It is also expected to lead private sector economic activity, guided by the best international practices. It is expected that economic prosperity would continue after four years of extraordinary growth in oil revenue, thanks to external factors. It was further expected that domestic demand will become the main engine of growth after the 2007-2010 period, as rise in oil revenues would lead to an increase in spending on big projects. In addition, important measures have been taken to improve the business environment, and more additional reforms (Khatib, 2012). It is expected that with the high oil prices in the global market, the kingdom will achieve the strongest period of growth in non-oil since the seventies. The liberalization of the financial services sector and telecommunications sector has led to promotion of competition, higher levels of quality and low prices for these services. Such services are expected to initiate more economic momentum (Wilson, 2004). The Kingdom of Saudi Arabia has also shown fiscal discipline as effective as it continued to build liquidity through foreign reserves (Khatib, 2011). Reaching foreign assets of the Saudi Arabian Monetary Agency (SAMA) 842 billion riyals (3) by the end of 2006, and is expected to reach more than SAR trillion by the end of 2007, which represents close to 80% of GDP.
It is obvious that oil exports play important role in Saudi economy. But how big is the impact? How much is the country dependent on the fluctuations in oil prices? The supply side is definitely controlled by Saudi Arabia, but how bad can the demand shocks be for the Kingdom? The empirical data from past 43 years is called upon to answer this question. Apparently, there hardly can be a better single predictor of future growth in Saudi GDP (in dollars) than change in oil prices.
Methodology and data collection
Percentage change in Saudi output is a dependent variable in this study, while three others have been used as predicting variables: percentage change in price of barrel of oil, percentage change in population and change in the growth global product. While the reason for picking oil prices is obvious, as it is the main focus of the work, other picks might be more dubious. Generally, a higher population is associated with growth in total GDP (GDP is a measure of the value of goods and services in a country; it may be high in countries with larger populations), but the GDP might not adjust from year to year, as the newborns rarely contribute to productivity (Kohl, 1991). As a result, future studies may consider using more subtle demographic variables. There may also be a problem with causality, as the relation might be two-sided: not only might GDP grow because more people are working but also people may well decide to have more children if they are richer for some other reasons like the increased demand for crude oil.
At the same time, the gross global product was chosen as it may mirror the new technological developments that increase the productivity worldwide and, therefore, the GDP. This variable can create to intra-variable correlation, as the changes in worldwide productivity and oil prices are likely to have the same causes – demand shocks. In fact, the data revealed correlation coefficient of 0.25 for the variables “Change in oil price” (coded as “Oil prices gr”) and “Change in gross global product” (coded as “GWPgr”). Squaring this number says that changes in oil prices have been responsible for 6.25% of variability in changes of gross global product).
The data on Saudi GDP, gross global product and population of Saudi Arabia was taken from Index Mundi (2013), the data on oil prices – from Inflation Data (2012). The data covers years from 1968 to 2011, but since the growth is taken into account, it is between 1969 and 2011. Data analysis was carried out using SPSS (Statistical Package for the Social Sciences).The SPSS Statistics was used to conduct the regression analysis.
Descriptive Statistics
Which is important here, is that Saudi GDP has been growing by more than 15% on average annually, which is more than five times faster than the gross global product? With population having been growing by “merely” 4% each year, which is decent result on the global scale, it is obvious that Saudi population is generally richer than it had been in 1968. It is also apparent that Saudi GDP and Oil prices are much less stably growing variables than population growth and gross global product, as standard deviations suggest.
The table below presents correlations between all the variables and significance of these correlations:
Correlations
Where: GWPgr (change in Gross Domestic Product)
Oil prices gr (change in oil prices)
Population gr (change in population)
GWPgr (change in Gross Global Product)
The strongest correlation (.667) has been found between Saudi GDP and oil price - it already suggests that these are tightly connected. Correlation between GDP and population also appears decent and is significant on 95% confidence level, but the fact that correlation is almost twice weaker than that between GDP and oil prices suggests that Saudi economy is anything but labor-driven. It is obvious at this point that there exists no significant relationship between gross global product and Saudi GDP. The only noteworthy correlation between independent variables has already been mentioned – it is the correlation between oil prices and gross global product.
The coefficient of determination of the model is equal to .482, which means that the chosen variables explain almost half of variability in the annual growth of GDP, making the model statistically significant. Adjusted coefficient of determination is equal to .442 and is not much less that regular one, which suggests that there is one variable that is best suited, while the rest provide little improvement (the difference between R-squared and R bar squared tends to be bigger if there are many ‘useful’ explanatory variables).
Coefficientsa
The tables below present the key findings from the model. The first table demonstrates the coefficients for the model – unstandardized as well as standardized ones. The second table (the order of the variables has been maintained) presents t-values and sigma, which is necessary for determination of whether the relationships are statistically significant or not. The third table shows the intervals the coefficients are in with 95-percent certainty.
According to the results, if the percentage of oil prices growth increases by 1, the percentage of GDP growth increases by 0.87%, and this relationship is statistically significant: with 95% certainty the actual coefficient for oil prices is between .531 and 1.207. The coefficient for population is much higher, but the relationship is much weaker, with sigma suggesting that it is not strong enough even for 90% confidence level. Moreover, as it was mentioned, the direction of causal link is unclear. It looks more likely that increase in GDP leads to increase in population – not the other way around. The relationship between Saudi GDP and gross global product is totally insignificant and can be ignored. Saudi economy has little to do with the global economy – only with that part that is related to oil consumption.
Conclusion
This study presents an empirical confirmation of strong dependence of Saudi economy on global oil prices. Roughly speaking, half of Saudi GDP growth depends on the fluctuations in the oil market, and, for instance, 10% decline in oil prices is predicted to result in 8.7% decline in Saudi GDP. Being an oil dependent country, Saudi Arabia should diversify its market to include non-oil products since the fluctuating oil prices might result in either higher gains or losses for the economy. It is evident that the kingdom of Saudi Arabia’s economic success is mainly as a result of the thriving global oil market. The ever-rising oil price as a result of a higher demand has led to oil-producing economies to thrive more. Saudi Arabia being a stable country politically has greatly benefited from the oil trade over the years (Corneo, 2010).
References:
Al-Ghamri, Sami Salah Abdulla. (n.d.). Industrial development in Saudi Arabia. Aberystwyth University.
Jones, T. C. (n.d.). Saudi Arabia Versus the Arab Spring, Raritan 43–60.
Corneo, G. (2010). Stakeholding as a new development strategy for Saudi Arabia. Berlin: Freie Univ., Fachbereich Wirtschaftswiss.
Jacobson, L., Thurman, S., & Board of Governors of the Federal Reserve System (U.S.). (1981). Oil price indexing-versus large price shocks: Macroeconomic impacts. Washington, D.C: Board of Governors of the Federal Reserve System.
Khatib, A. M. (2012). Oil and Infrastructure Expenditures in Saudi Arabia. Journal of Business Quarterly. 4(2), 72–76.
Khatib, A. M. (2011). The Effect of the Increase in Oil Revenue on Government Expenditures on Education in Saudi Arabia, Journal of Business Quarterly. 3(2), 74–76.
Kohl, W. L. (1991). After the oil price collapse: OPEC, the United States, and the world oil market. Baltimore, Md: Johns Hopkins University Press.
Looney, R. E., & NAVAL POSTGRADUATE SCHOOL MONTEREY CA. (2008). The Relative Strength of Fiscal and Monetary Policy in Saudi Arabia. Ft. Belvoir: Defense Technical Information Center.
Serletis, A. (2012). Oil price uncertainty. Hackensack, NJ: World Scientific.
Wilson, R. (2004). Economic development in Saudi Arabia. London: RoutledgeCurzon.
AppendixData used for the study:
Saudi GDP changes over time:
