The impact of oil revenues on the Iranian economy and the Gulf states

• Published date: 01 March 2016
• DOI: http://doi.org/10.1111/opec.12060
• Author: Teymur Rahmani,Christian Dreger
• Date: 01 March 2016

The impact of oil revenues on the Iranian

economy and the Gulf states

Christian Dreger* and Teymur Rahmani**

*Research Director International Economics, DIW Berlin, Mohrenstr.58, Berlin 10117, Germany. Email:

cdreger@diw.de

**Professor of Economics, University of Tehran,Tehran, Iran. Email: trahmani@ut.ac.ir

Abstract

Persistent streams of oil revenuescan have a long-lasting impact on GDP per capita in oil-exporting

countries. Higher revenuesmight finance government activities and GDP. Besides the direct impact,

an indirect effect mayoccur, as revenues may lead to higher investment that could raise capital accu-

mulation and the production frontier.In this paper, the relationship between poli revenues, GDP and

investmentis explored for Iran and the countries of the Gulf Cooperation Council (GCC). Toaccount

for nonstationarities of the variables involved, (panel) cointegration techniques are applied. Several

results are drawn from the analysis.Cointegration between oil revenues, GDP and investment can be

established for all countries. While the cointegration vector is found to be unique for Iran, long-run

equations for GDP and investment per capita are distinguished for the Gulf countries. While GDP

and investmentboth respond to deviations from the steady state, oil income can be treated as weakly

exogenous.The long-r un oil elasticities in tGCC states exceed their Iranian counterparts. While oil

revenues are closely related to investmentactivities in the GCC states, investment in Iran does not

react to oil revenues in the long run.

1. Introduction

The impact of oil prices on output is often examined from the perspective of industrial

countries, many of them being net oil importers.The shar p increase in oil prices during the

1970/80s caused by theArab oil embargo (1973/74) and the disruptions in the wake of the

Iranian revolution (1979) led to economic stagflation, i.e. high inflation and low GDP

growth (Kilian, 2008a, 2008b). In contrast, the subsequent oil price decrease in the 1980s

and persistent low prices before the turn of the century acted as a stimulus programme for

the economic development. During the economic boom in the period preceeding the

global financial crisis and the emergence of huge developing countries inAsia (China and

India), oil prices reached new record levels(Aastveit et al., 2012). In the subsequent reces-

sion, they fell again due to shrinking demand,b ut recovered temporarily for a short period

JEL Classification: F43, O53, Q30, C33

©2016 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

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