Energy market dynamics and the role of fiscal policy in oil‐exporting countries: a TVAR approach

• Published date: 01 September 2021
• Author: Rozina Shaheen
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/opec.12204

Energy market dynamics and the role of

f‌iscal policy in oil-exporting countries:

a TVAR approach

Rozina Shaheen

Assistant Professor, College of Business, Effat University, Jeddah, Saudi Arabia.

Email: roshaheen@effatuniversity.edu.sa

Abstract

While realising the macroeconomic signif‌icance of oil price f‌luctuations, this research examines the

role of f‌iscal policy under changing dynamics of energy market for selected oil-exporting countries.

We specify a non-linear threshold structural vector autoregression model which constitutes policy

variables such as general government expenditures and primary f‌iscal balance and macroeconomic

indicators such as real GDP growth and the inf‌lation rate. To capture the energy market dynamics,

this research selects Brent crude oil price as threshold variable and segregates the sample period

1991-2019 as ‘high’and ‘low’oil price regimes. While using non-linear generalised impulse

response functions, we f‌ind that under higher oil price regime, an increase in government

expenditures and reduction in f‌iscal def‌icit have larger multiplier effect to enhance output growth in

most of the sampled countries. In addition, this research identif‌ies larger inf‌lationary effects of an

increase in government expenditures and f‌iscal def‌icit under higher oil price regime for all countries

except Canada. However, under a higher oil price regime, a f‌iscal def‌icit induced output growth, and

under a lower oil price regime, a reduction in government expenditure brings inf‌lation in Saudi

Arabia. Furthermore, this research provides an alternative measure of threshold crude oil price for the

sampled countries to their accounting-based concept of f‌iscal break-even price.

1. Introduction

The COVID-19 pandemic led to the collapse of crude oil price in the early months of

2020. Consequently, oil-exporting countries have been severely impacted by the historic

contraction in oil demand. Some countries such as IR Iran, Iraq and Venezuela are facing

added threats of social unrest. North American countries such as the United States and

Canada are facing diff‌iculties to weather the storm, and in Africa, this oil price crash has

stagnated the growth story of Nigeria.

JEL classif‌ication: E62, Q41, C51.

©2021 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

277

The demand for crude oil withered due to the shutdown of global economies, and

major oil-importing countries dismissed the shipments due to storage constraints.

Subsequently, exporters had no choice other than paying to midstream logistic

companies for taking the commodity off their hands. The International Energy Agency

predicts lower demand for crude oil at least until the second half of 2020, and

consequently, the historic oil price collapse of 2020 has threatened the f‌inancial stability

and f‌iscal sustainability of many oil-producing countries. In this context, current research

accounts for the changing dynamics of energy markets and analyses the impact of f‌iscal

sustainability on the macroeconomic indicators under different oil price regimes in major

oil-producing countries. For this purpose, we specify a non-linear structural threshold

vector autoregression model while selecting Brent crude oil price as a threshold variable

to categorise the sample period as ‘high’and ‘low’oil price regimes. This research

considers Brent crude oil prices as around two-thirds of global crude contracts are related

to Brent crude oil, indicating as a major benchmark among its counterparts (Mensi,

2019).

We select a sample of four major oil-exporting countries considering the regional

heterogeneity for instance Canada from North America, Russia form Commonwealth of

Independent States (CIS), Saudi Arabia from the Middle East and Nigeria representing

the African region. Around 40 per cent of total crude oil exports are supplied by these

four countries in the sample (BP, 2019), and Saudi Arabia and Russia both hold the top

two positions, respectively, Canada being at f‌ifth and Nigeria at ninth position. All

countries in the sample represent diverse economic structures such as size of economy,

population size and GDP per capita (Table 1) but commonly share the attribute of their

economic and f‌iscal dependence on oil exports.

As these oil-exporting countries are from a heterogeneous group, aftermaths of oil

price collapse are felt differently by each country in the sample, depending upon their

economic structure and other macroeconomic characteristics. For instance, in Saudi

Table 1 Key characteristics of selected oil-exporting countries in 2019

Saudi ArabiaRussiaCanadaNigeria

Population (million)34.7145.937.7205.4

Population growth (% p.a.)2.520.091.42.6

Annual GDP growth rate2.432.251.891.94

GDP per capita (USD, PPP terms)23,33911,28846,2332028

Oil sector (percentage of GDP)43%30%11%9%

Oil revenues (percentage of total gov. rev.)87%36%50%65%

Oil exports (percentage of total exports)77%52%24%94%

Source: Author’s own calculations based on World Economic Outlook 2020.

OPEC Energy Review September 2021©2021 Organization of the Petroleum Exporting Countries

278 Rozina Shaheen