Oil Price Shocks Effect on Economic Growth - OPEC versus non-OPEC Economies

Abstract: Purpose: The purpose of this thesis is to analyse how oil price shocks affect the economic growth in net-oil exporting countries. The aim is to conclude whether the economic growth in the Organisation of Petroleum Exporting Countries (OPEC) is more sensitive to oil price shocks than the economic growth in other exporting countries. Method: The data used covers the years 1980 to 2008 and includes 19 (11 OPEC and 8 non- OPEC) countries’ yearly real gross domestic products and annualised world oil price deflated by the all urban consumer price index (USD). In order to reject the presence of unit roots in the data, the Augmented Dickey-Fuller test and the Im, Pasaran and Shin test were used. The included countries were divided into two groups, OPEC and non-OPEC exporting countries, from which two separate unrestricted bivariate vector autoregressive models (VARs) were constructed. The VARs investigated the response of each group’s combined economic growth to oil price shocks. The VARs were analysed through the use of impulse response functions, variance decompositions and Granger causality tests. The calculations were made using EViews. Results: The outcomes show that a 1% increase in the change of the oil price will increase the GDP growth rate the following year with 0.145% (OPEC) versus 0.141% (non-OPEC), consequently a positive relationship was found. Moreover, 2.82% of the variation in the OPEC countries’ growth rate is explained by oil price shocks, while the responding ratio for the non-OPEC countries is 2.81%. Conclusions: OPEC and non-OPEC oil exporting countries’ economic growth illustrated nearly identical responses to oil price shocks. Through the discussion it is thereby concluded that the price setters, OPEC, appear to be just as sensitive to oil price shocks as non-OPEC countries.