Ural Federal University Research Reveals Impact of Sudden Oil Market Shocks on OPEC+ Countries’ Fiscal Policies
The Ural Federal University and King Abdulaziz University (UAE) specialists analyzed how oil price dynamics on world markets affect the fiscal policy of OPEC+ countries. They assessed how these countries adapt to unpredictable fluctuations and expected oil price dynamics. The researchers published their calculations, methodology descriptions, and conclusions in the Energy Journal.
“We conducted a study to determine how OPEC+ countries adapt fiscal policy to oil price fluctuations. Our analysis showed that some OPEC+ countries have improved their resilience to oil price fluctuations through tight fiscal consolidation. This resilience is crucial for maintaining economic stability amid the cyclical nature of oil markets”, explains Kazi Sohag, co-author of the study and Associate Professor at the UrFU Department of Economics.
Gabon, Iraq, Russia, Saudi Arabia, the UAE, Gabon, and Kazakhstan are well-positioned to benefit from cyclical oil price shocks. This strategic advantage can support fiscal strategies to maximize economic benefits. Additionally, these countries have strengthened their ability to absorb price shocks through strict fiscal consolidation, as noted by the researchers.
“Our study demonstrates that sudden fluctuations in oil prices have an immediate positive effect on the budget, although this effect diminishes over time. In contrast, gradual changes in oil prices have little impact on fiscal policy”, notes Irina Kalina, a Research Engineer at the Economic Policy and Natural Resources Laboratory of UrFU.
During periods of market crises, the fiscal performance of Saudi Arabia, Russia, and the United Arab Emirates is more sensitive to oil market volatility. These countries experienced budget deficits in the first quarter of 2015 and the second quarter of 2020, which were characterized by periods of sharply falling oil prices.
“Therefore, we believe that a planning strategy and a sound fiscal framework are necessary to adapt to unpredictable shocks and long-term market dynamics. It is also important to diversify revenue sources to reduce dependence on oil and develop non-oil sectors such as manufacturing, services, and agriculture. This will help reduce vulnerability to oil market fluctuations”, adds Kazi Sohag.
During times of negative oil price shocks, countries often cover their budget deficits by issuing domestic or external debt. Sovereign wealth funds also play a significant role in mitigating the impact of unexpected oil market shocks. For instance, the sovereign wealth funds of Saudi Arabia and the United Arab Emirates are investment giants that aim to generate income from investment activities abroad and diversify the economy by investing in various non-oil sectors.
They used Hodrick-Prescott and Hamilton filters with a panel vector autoregression (VAR) model within the GMM system. The economists analyzed data from the International Monetary Fund, official reports of the Ministries of Finance, and Central Banks for the years 2013-2022.