OPEC+ Countries' Fiscal Policies Are Affected by Sudden Shocks to the Oil Market

12:31, April 11, 2024

Economists have found that smooth changes in oil prices have little or no effect

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.

Reference

About 47 percent of the world's crude oil exports are accounted for by members of the Organization of the Petroleum Exporting Countries, and their combined oil reserves account for about 80 percent of the world's oil reserves. OPEC+ members coordinate their efforts to maintain stable oil prices, ensure sustainable oil trade, and stabilize the oil market. OPEC+ countries contribute over 12 percent of nominal GDP, equivalent to $8 trillion.

OPEC+ countries have significant differences in the share of oil products in their export basket and the share of oil revenues in total revenues due to political and economic factors. The degree of dependence of economies on oil is as follows: Angola - 45 percent, Equatorial Guinea - 81 percent, Gabon - 50 percent, Iraq - 85 percent, Russia - 45 percent, and Saudi Arabia - 67 percent. Economies such as Malaysia, Mexico, and the United Arab Emirates are more diversified.

Anna Marinovich

The news article was translated by UrFU International Marketing Office.
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