The Effect of Oil Price Shocks on the Saudi Manufacturing Sector

Abstract

This paper aims to examine the effects of oil price shocks on the manufacturing sector in Saudi Arabia during the period 2002-2014, using quarterly data. The paper has conducted a unit root test. The data are shown to be non-stationary in the level, and they became stationary in the first difference for all variables. The co-integration model was applied, and the results indicated that no co-integrating equation exists, which means that there is no long run effect of oil price shocks on the manufacturing sector. Therefore, the paper estimated a VAR model, the results of which implied that oil price shocks do not affect the manufacturing sector in the short run, and it may have an effect on the manufacturing sector after 10 quarters according to the Impulse Response Function. The recent fall of oil prices since June 2014 is just one round of a series of fluctuations, in the form of shocks, in oil prices. Nevertheless, a debate has arisen about the effect of this price falls on the world economy in general and on oil exporting countries in particular. The economy of Saudi Arabia, the major oil exporting country, is not an exception in this matter of course. The main objective of this paper is to estimate quantitatively, in the economy of Saudi Arabia, whether there exists an impact of oil price shockson the output of the manufacturing sector, and whether it is a positive (direct) or a negative (inverse) relationship. The focus on the manufacturing sector here is for two reasons. First, the Saudi economic planning and policy have long targeted to diversify the sources of generating GDP. The manufacturing sector is, no doubt, a very important element in this diversification process.Second, the increase in manufacturing sector (as a percentage of GDP) is one of the important measures and/or indicators of economic development. For both reasons, the researchers have chosen to study "the effect of oil price shocks on the Saudi manufacturing sector" in this paper.

Corporate Financial Performance and the Intervening Role of Energy Operating Costs: The Case of Jordanian Electricity Sector

“…In many countries and in light of the inability of these companies to reflect this rise in electricity prices for consumers they endure a large portion of this surge as nonrefundable costs that consequently negatively impact financial performance (Thinagar et al, 2019;Gao et al, 2018;Wiryono et al, 2020;Aye et al, 2014;Guidi, 2009). Furthermore, this rise in oil or gas prices obligates companies to give up a larger part of their revenues to cover the purchase costs and hence negatively effects the level of profitability, liquidity and in some situations pushes these companies to cover these additional costs through borrowing in high interest rates (Mahboub and Ahmed, 2017;Nasir et al, 2018).…”