The outbreak of COVID-19 pandemic in 2020 presented the Gulf Cooperation Council (GCC) countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) with two main challenges: a negative demand shock of oil caused by the global economic difficulties and the disturbance of global value chains (reduction of labor, travel restrictions, quarantine efforts, reduction in supply of materials, capital and intermediate inputs). In addition, the breakdown in negotiations between the Organization of the Petroleum Exporting Countries (OPEC) and its allies in the first week of March 2020 led to a collapse in oil prices. Consequently, the dual negative oil price supply-demand shock had hit GCC countries like other oil-exporting countries particularly hard at a time when the fossil fuel industry is facing risks of structural decline due to its impact on climate change.
According to the economic literature, oil shocks are not without impact on the fiscal balance, economic growth and inflation of oil-exporting countries (Alekhina and Yoshino, 2018; Hamilton, 2009; Kilian, 2009; Alsalman and Karaki, 2018; Herrera et al., 2019, Tazhibayeva et al., 2008).
The GCC countries being major players on the global oil market (22.8% of world oil production and 31.5% of world oil reserves in 2019), any oil supply fluctuations from the region can have significant impact on the world oil prices. On other hand, oil price fluctuations lead to volatility in GCC government revenues, GDP and inflation.
Our study examines empirically the asymmetric impact of demand-driven and supply driven oil price shocks on the economic performance of GCC countries.
Research Highlights
- Methodology
- Relationship between oil prices and economic performance of Gulf Cooperation Council (GCC) countries is examined.
- Analysis is conducted to explain the asymmetric effect of demand-driven and supply driven oil price shocks on GCC economies.
Main results
1. Real activity
- Real activity in GCC countries reacts positively to oil demand shocks and negatively to oil supply shocks.
2. Fiscal policy
- Tightening oil market should boost in a sustainable way the fiscal policy in GCC countries and generally in oil exporting countries.
- The policy implication suggests that the use of fiscal policy to reduce the impact of negative oil price shocks on economic activity in GCC countries should be appropriate to the source of the oil price shock.
3. Monetary Policy
- Following a supply-driven increase of oil prices, the real interest rate in GCC countries increase suggesting that monetary policy stance my become Hawkish.
- Following a demand-driven increase, the real interest rate decrease suggesting that the monetary policy stance my become accommodative or neutral.
For more details, download my co-authored full paper following the link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4263841
