Oil Price Shocks and the Net-Exporting Oil Economy: The Case of Saudi Arabia

This dissertation contributes to the available literature on Saudi Arabia by gathering scattered data from primary and secondary sources into a single database. Additionally, it expands on the economic analysis by adding a historical narrative dimension as it evaluates government policies alongside empirical research. Utilizing the qualitative and quantitative dimensions, the research investigates the relationship between oil prices, government expenditures and revenues, equity markets, and macroeconomic factors of Saudi Arabia. The variables are segmented into two groups and transformed into real logs. The first group evaluates the relationship between oil prices, oil revenues and government expenditures in both itemized and aggregate specifications using annual data from 1963 to 2013; while the second group investigates the relationship between the national equity index Tadawul All Shares Index (TAS), oil prices, money supply (M1), Real Effective Exchange Rate (REER), Saudi Arabian Interbank Offer Rate (SAIBOR), and the S&P 500 using monthly data from December 1992 to February of 2014. Using unrestricted Vector Autoregressive (VAR) models, and Vector Error Correction Models (VECM), the results indicate that oil revenues impact total expenditures, while total expenditures and oil prices show a bi-directional relationship in affecting each other. In addition, sectoral analysis reveals that education and economic development are least sensitive to oil prices shocks. For the second group, the results indicate that the TASI is negatively related to the SAIBOR and REER, while positively related to oil prices and M1. There is bi-directional impact between the TASI and SAIBOR, while the direction of influence flows from M1 and REER to the TASI. The VAR model provides a better fit for both groups of data based on the post-estimation results, and is superior to the VECM specification.