Resources Policy 86 (2023) 104179

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Resources Policy
journal homepage: www.elsevier.com/locate/resourpol

Study of the impact of crude oil prices on economic output and inflation in
Saudi Arabia
Mounir Belloumi *, Ahmed Aljazea , Atef Alshehry
Department of Business Administration, College of Administrative Sciences, Najran University, Najran, Saudi Arabia

A R T I C L E I N F O A B S T R A C T

Keywords: Our work analyses the effects of oil price changes on economic output and inflation in Saudi Arabia by employing
Crude oil prices both linear and nonlinear autoregressive distributed lag models over the period 1980–2021. The results report
Economic output that crude oil price changes have only asymmetric impacts on economic output in Saudi Arabia. The increases in
Inflation
crude oil price result in higher output growth in the long run whereas their decreases do not have impact on
ARDL model
NARDL model
output growth in both the short and long run. Crude oil price variations (increases or decreases) have symmetric
Saudi Arabia impacts on inflation in both the short and long run in Saudi Arabia. The rises in crude oil prices induce higher
inflation whereas their decreases lead to lower inflation in both the short and long run. Appreciation of Saudi
currency can lead to higher inflation only in the short run. Thus, Saudi authorities should accompany the changes
in oil prices by some policies to combat inflationary pressures and their consequences.

1. Introduction
The importance of oil is observed worldwide in all fields of eco­
nomics, politics and military. The Russian-Ukrainian war has restruc­
tured world energy markets, forcing countries that depend on a single
energy source, diversifying their energy sources beyond their economic
and political considerations and even their geographical dimension.
With this war, the energy sector appeared as the main determinant in
relations between countries. The Middle East countries (including Saudi
Arabia) accounted for the largest share of discussions, contracts and
memoranda of understanding with the major developed countries in the
energy sector. Oil, as a crucial source of energy at the global level, is the
engine of the global economy. Oil remains the world’s largest energy
source, providing about 31% of the world’s primary energy consump­
tion in 2021 (British Petroleum Statistical Review of World Energy,
2022). It has a significant role in enhancing the effectiveness of eco­
nomic activities worldwide. Changes in oil prices affect most global
economic indicators. Particularly, the vulnerability of major oil im­
porters and major oil exporters to the high volatility of oil prices makes it
as a strategic determinant of economic conditions. Oil price variations
lead to uncertainty about its future, and thus affect the behaviors of
different economic agents (Hamilton, 1983). For illustration, the
elevation in the growth rate of exports of oil-producing countries due to
rising prices leads to higher revenues and increased government
spending. This will increase the level of development and the rise of
salaries and consequently the rise of the level of prices (Hooker, 2002).
The sharp rise in oil prices will contribute to higher inflation because
transport costs and production costs of different goods will rise, leading
to higher prices for many commodities. This will be cost-based inflation
and very different from inflation caused by higher aggregate demand.
This also indicates that the low export growth rate will reflect the
negative impact on the revenue level and some macroeconomic in­
dicators, when oil prices fall. The decline in oil prices will lead to sig­
nificant real income shifts from oil exporters to oil importers. The
disinflationary implications of falling oil prices may be mitigated by
sharp adjustments in currencies and effects of taxes, subsidies, and
regulations on prices. Regarding fiscal policy, the loss in oil revenues for
oil exporters will strain public finances. Lower oil prices also present a
window of opportunity to implement structural reforms such as reforms
of fuel subsidies (Baffes et al., 2015).
A brief overview of literature review on oil price changes shows that
oil price volatility is determined by a change in global oil supply and/or
oil demand, generated either by geopolitical pressures or by a change in
global output growth. The stability of the international oil market de­
pends on the interaction linking oil stock to oil demand and the balance
between them by drawing or in addition to the international oil stock.
Oil supply means available quantities of petroleum goods on the inter­
national market at a certain price and within a limited period. The

* Corresponding author.
E-mail addresses: mrbelloumi@nu.edu.sa, mounir.balloumi@gmail.com (M. Belloumi), amaljazea@nu.edu.sa (A. Aljazea), asalshehry@nu.edu.sa (A. Alshehry).

https://doi.org/10.1016/j.resourpol.2023.104179
Received 18 March 2023; Received in revised form 14 September 2023; Accepted 15 September 2023
Available online 28 September 2023
0301-4207/© 2023 Elsevier Ltd. All rights reserved.
M. Belloumi et al.
demand for oil resources is determined by the willingness and ability of
individuals and institutions to acquire this commodity. The oil demand
affects output growth and the degree of industrial progress in the oil-
exporting countries, because economic and industrial activities in­
crease the opening of new factories and increase the movement in
transportation, shipping and airfreight, thus increasing the level of
development (Selmi et al., 2023).
It is certainly that since the 1970s, oil price changes are usually a big
issue for all countries in the world; mainly the major oil exporter and
importer countries. This has led to a vast empirical literature on the
impacts of crude oil price changes on stock markets and global economic
indicators essentially output growth, inflation, government expendi­
tures, etc. Various studies have found that oil price changes might have
an important influence on output growth and inflation. Particularly, the
increases in crude oil prices have been generally linked to increases in
consumer price index, and thus to inflation. In addition, many studies
have reported that high crude oil prices have led to economic recessions
for the major oil importing countries. Changes in oil prices affect mac­
roeconomic indicators for several reasons. First, oil has long been the
main energy used as an input in global economic activities. For example,
an increase in oil prices leads to an increase in transport costs, which
induces a rise in the cost of total production. The total amount of this
increase in the price of production overtime causes an inflation trend
(Adekoya and Adebiyi, 2020). Secondly, the effect of changes in oil
prices is transferred to macroeconomic indicators through many mech­
anisms. It can vary over time and from country to country. The influence
of oil price change is not the same for oil importers and exporters. Third,
the effects of higher and lower oil prices can be different. For some
countries, significant fluctuations in oil prices can affect their security.
Therefore, understanding the nature of the relationships between mac­
roeconomic indicators and changes in oil prices provides an opportunity
for decision makers to take early precautionary measures to reduce the
negative impacts of crude oil price movements. Many previous re­
searchers have noted that the influence of changes in oil prices on a
country’s macroeconomic indicators depends primarily on its economic
structure, oil intensity and dependence on oil. In particular, the econo­
mies of countries that consume large quantities of oil may be more
affected by changes in oil prices, unlike countries that are not dependent
on oil consumption. Filis and Chatziantoniou (2014) argue that oil price
increases can cause economic recession among oil importers and eco­
nomic boom among oil exporters. In addition, the changes in crude oil
prices could affect inflation for major oil exporters, such as Saudi Arabia.
The inflationary impact of rising oil prices depends on a country’s
economy’s dependence on energy. In particular, oil-intensive sectors
may be more affected by changes in oil prices that affect their
production.
Recently, inflation has become a major problem globally especially
with the beginning of the Russian-Ukrainian war. Once the coronavirus
pandemic receded, Russian-Ukrainian war began, topping the scene as
an engine of inflation, prompting a rapid rise in food and fuel prices. As
central banks move to raise interest rates to curb inflation, tighter fiscal
conditions are slowing the global economy. If the sharp rise in inflation
in many countries can be in the short run, it is still likely to lead to long-
term development challenges, requiring policymakers to take short-term
and long-term measures. Less developed countries will be hardest hit,
particularly by rising food prices. If food insecurity in these countries
can lead to famine, a temporary increase in food prices, in middle-
income countries, can cause inevitable long-term damage. Policy­
makers should therefore establish temporary programs to protect
vulnerable families.
This work attempts to add to the continuous investigation of how oil
price changes influence economic output and inflation in the Kingdom of
Saudi Arabia to offer some policy recommendations towards the man­
agement of the economy during oil price crisis. Understanding the
impact of oil prices on price level is crucial for monetary authorities to
try to contain inflation. This research area has been opened for debate in
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Resources Policy 86 (2023) 104179
which extant empirical studies had conducted years back and their
contributions are enormous. However, more information is still ex­
pected as oil price changes and oil-economies relationship is still an
important interest to many practitioners mainly with the Russian-
Ukrainian war. In the attempt to add something new to the knowledge
concerning the impact of oil price changes on economic output and
inflation, this study focuses on Saudi Arabia that has an economy based
on oil. Its total oil proved reserves represent 17.2% of the world’s proven
reserves in 2020 (British Petroleum Statistical Review of World Energy,
2022). It is ranked second behind Venezuela (17.5%). The Kingdom of
Saudi Arabia is also the second greatest producer of oil after the USA. It
has an oil production that accounts for about 12.2% of the world’s
production in 2021. In addition, in 2021 it is the third greatest exporter
of oil behind Russia and the USA with a share of about 11.5% in
worldwide total oil trade movements (British Petroleum Statistical Re­
view of World Energy, 2022). Thus, the Kingdom is playing a leading
role in the oil pricing at the international scene. Even oil prices have
decreased since 2014, its oil sector accounts for roughly 30% of GDP,
and 70% of budget revenues in 2021 (SAMA, 2022). Thus, Saudi Arabia
has relied heavily on the oil commodity and its revenues as a key
commodity for financing its development programs, making its econ­
omy unsafe to shocks on crude oil prices and macroeconomic
performance.
The study’s problem is summarized in this question: How do the
changes in oil prices influence economic output and inflation in Saudi
Arabia? Thus, the objective of this work is to clarify the effect of oil price
fluctuations on output growth and inflation rate over the period
1980–2021 by employing symmetric and asymmetric autoregressive
distributed lag (ARDL) models. Our results could help policymakers take
the necessary precautions to limit the impact of oil price changes on
Saudi Arabia’s economic performance. The importance of this study lies
in its contribution and distinction from previous studies that did not
address the asymmetrical influence of crude oil prices on inflation in
Saudi Arabia in general, but dealt with the impact of changes in oil
prices on economic output, public spending, exports and the general
budget. In addition, this is the first study to explore at the same time the
symmetrical and asymmetrical effects of oil price changes on economic
output and inflation in Saudi Arabia as a single country for very recent
annual data. In fact, in looking at previous studies, we find that previous
literature analyzing the impact of changes in oil prices on economic
output or inflation in the case of Saudi Arabia is quite rare. Three studies
have already investigated the symmetrical influence of oil price changes
on economic growth and/or inflation in Saudi Arabia. In the first work,
Algahtani (2016) analyzed the symmetrical impact of oil price changes
on the growth of Saudi Arabian production using a linear procedure
based on the traditional Johansen multivariate cointegration method
and the Granger causality test. Al Rasasi and Banafea (2016), who
examined the effects of oil changes on output growth, inflation, and the
nominal exchange rate in the Kingdom of Saudi Arabia using impulse
response functions, undertake the second study. In the third study,
Foudeh (2017) employed an ARDL model to analyze the impact of oil
price on economic growth in Saudi Arabia. Other studies have examined
the effects of oil price changes on some aggregate indicators for Saudi
Arabia as a member of the Middle East and North Africa (MENA) region
or the Gulf Cooperation Council (GCC) or oil producing countries group
(e.g., Arouri and Rault, 2012; Moshiri, 2015; Brini et al., 2016; Maalel
and Mahmood, 2018; Nusair, 2016, 2019, etc.).
Saudi Arabia’s initial fiscal position at the beginning of 2014 was
very strong. Nevertheless, this situation has deteriorated following the
continued drop in oil prices at the end of 2014. In order to alleviate the
financial damage, particularly on the country’s budget, the Saudi au­
thorities have decided to introduce many reforms such as the intro­
duction of value-added tax (VAT) at a rate of 5% in January 2018 and
then adjusted to 15% in July 2020 and the decrease of the subsidies
granted to the citizens on the prices of water and petroleum products,
which have increased the domestic prices. Therefore, and given the
M. Belloumi et al.
important position that Saudi Arabia has in the energy sector worldwide
(Alshehry and Belloumi, 2014), this work seeks to add something new to
the existing literature. First, contrarily to previous studies that employed
directly a linear ARDL model or a nonlinear ARDL model, in this study
we use a symmetry test based on Wald and Fisher statistics to check
which model fits better for our data. This test would establish that the
impact of the increase in the oil price on economic growth and inflation
is different from the decrease in oil price or they are the same. We study
the influence of oil price changes on economic output and inflation for
Saudi Arabia, examining the symmetrical and asymmetrical links be­
tween oil price changes, economic output and inflation. In fact, we use
the non-linear ARDL model of Shin et al. (2014) to detect short- and
long-term relationships. This non-linear modelling provides a more ac­
curate analysis of the influence of oil price changes on aggregate in­
dicators. It distinguishes between increases in oil prices and decreases in
oil prices and in general, the impact of increases in oil prices is not the
same as the impact of decreases in oil prices. Previous works have shown
that positive oil price changes have a stronger impact on output growth
than negative oil price changes. This makes our work to be one of the
few studies to employ a more current and novel econometric approach
for the case of a major oil exporting country. Moreover, to our knowl­
edge it is the first study that investigates asymmetric impact of oil prices
on both economic growth and inflation in a major oil exporting country
like Saudi Arabia that needs more research. Historically, Saudi Arabia’s
inflation is mainly linked to higher oil prices (WDI, 2022). For example,
after the first oil shock, Saudi inflation reached a record level of 34.57%
in 1975. Inflation was also relatively high after the second oil shock
(4.16% in 1980). It also rose in 2008 to 9.87% due to higher oil prices
and the financial crisis. These levels are relatively high in comparison to
the standard inflation rate that varies from zero to 2%. Recently the
economies of many countries around the world, including developed
countries, have suffered sharp increases in inflation. Saudi Arabia’s
inflation rates maintain a reasonable level comparing to most countries
in the world. In 2020, Saudi Arabia’s inflation rate reached 3.44%, fell to
3.06% in 2021 and 2.47% in 2022 (WDI, 2022). However, the consumer
price index (CPI) (2010 = 100) still reflects an increase in VAT from 5%
to 15% in July 2020. The Saudi Arabia’s CPI shows a steady rise since
2010 at a rate between 2% and 3%. To help mitigate inflation, Saudi
Arabia has set a limit on domestic fuel prices from July 2021 and on
certain commodity prices. In addition, the Saudi government separates
public spending from oil price fluctuations. Second, our research is
among the few studies that consider a relatively long and very recent
period (1980–2021) covering various sub-periods of negative and pos­
itive changes in oil prices including the latest drop in oil prices caused by
the collapse of global oil demand due to the COVID-19 pandemic.
Thirdly, this study estimates the cumulative dynamic multipliers to
analyze the rate of transmission from the initial equilibrium to the new
steady state for economic growth and inflation after crude oil price
shocks.
This study is arranged in five sections. In section 2, we summarily
present a theoretical and empirical literature review about the effects of
oil price changes on output growth and inflation for the case of oil-
exporting countries. In section 3, the different techniques and data
employed are presented. Section 4 presents the different findings and
their analysis. Lastly, in section 5 we conclude the article by presenting
our main findings and providing a few number of recommendations that
can serve policy makers.
2. Previous studies
2.1. Theoretical literature review
Changes in crude oil prices can influence a country’s economy
through the mechanisms of product supply, product demand, and
monetary and fiscal policies (Kilian, 2009). In the case of supply, higher
oil prices could lead to higher production costs and lower profit margins
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Resources Policy 86 (2023) 104179
for non-oil companies, resulting in lower investment, higher unem­
ployment and higher consumer prices in oil-importing countries. The
second transmission channel for oil price fluctuations is demand. In this
side, higher crude oil prices can lead to lower real incomes for con­
sumers because they pay higher prices for the same amount of oil
consumed, and hence lead to reduce demand for oil. The same reasoning
applies to lower oil prices. The third route of transmission is through
monetary and fiscal policies. In fact, policy-makers can intervene by
taking certain measures to mitigate the effects of changes in oil prices.
They can take restrictive financial measures to counter and minimize
inflationary effects, while their monetary policies are expansionary in
the event of an economic recession to stimulate output growth (Lardic
and Mignon, 2008; Baffes et al., 2015; Anyars and Adabor, 2023).
In addition, changes in oil prices could influence inflation based on
different effects, such as direct, indirect and secondary effects (Sek,
2017). In particular, rising crude oil prices can have a direct impact on
the prices of refined petroleum products. Indirect influence is exerted by
the rise in producer prices on consumer prices due to excessive pro­
duction costs. Finally, the second-round effects induced by oil price in­
creases are mediated by higher wage demands due to higher inflation
caused by first-round impacts (direct and indirect) (Sek, 2017). How­
ever, the extent to which changes in oil prices affect a country’s econ­
omy depends on its dependence on oil. Filis and Chatziantoniou (2014)
discussed the transportation implications of oil price changes in oil
importing and exporting countries. For example, increases in the price of
crude oil may be considered adequate for oil exporters, but unfavorable
for oil importers. The reverse is true for oil price declines. In fact, in­
creases in oil prices lead to increases in real national income and local
currency values in oil-exporting countries for lower export revenues
(Korhonen and Juurikkala, 2007). In addition, higher oil prices could
increase the profitability of the energy sector. This provides more in­
vestment opportunities (Bjørnland, 2008; Selmi et al., 2023). However,
higher crude oil prices can lead to lower economic activity and higher
domestic prices for oil importers. In fact, the increase in the price of oil
would increase the cost of production for oil importers, which could
reduce economic activity. Moreover, higher oil prices would lead to
lower disposable income and consumption. When oil price increases are
considered permanent, investments will also decline and employment
will disappear. In addition, rising oil prices can affect international trade
and the exchange rate of an oil-importing country (Nandelenga and
Simpasa, 2020). Oil consumption cannot decrease in the short term for
an oil importing country, and then its energy expenditure increases. This
would lead to the depreciation of its currency, which would affect its
production growth. Overall, an oil exporting country may benefit from
higher oil prices through higher oil export revenues, while an oil
importing country’s economy may be affected by higher oil prices.
2.2. Empirical literature review
The impact of oil price changes on macroeconomic variables
including economic growth and inflation has been extensively investi­
gated by empirical studies using either linear models or nonlinear
models since the pioneer work of Hamilton (1983). Some early empirical
studies have reported that higher oil prices have caused economic
recession and high inflation.1 However, numerous studies have shown
that the association between output growth and oil price variations
weakened after the mid-1980s oil shock (Hamilton, 1983; Hooker,
1996). In addition, many other studies have shown a decline in the
impact of oil price changes on domestic product prices (Hooker, 2002;
De Gregorio et al., 2007; Chen and Wen, 2011). In the case of oil
importing economies, the influence of changes in oil prices on the rate of
inflation is well studied. However, in the case of oil-exporting econo­
mies, studies on the influence of changes in oil prices on inflation are
1
High inflation is called stagflation.
M. Belloumi et al.
insufficient. Moreover, the results of these studies are mixed. For this
reason, we focus our examination of the empirical literature on oil
exporting economies. To take the example of the Kingdom of Saudi
Arabia, Brown and Yücel (2000) reported that a drop in oil prices by one
US $ would result in a $2.5 billion reduction in annual revenues in Saudi
Arabia. Later, Aleisa and Dibooĝlu (2002) showed that Saudi oil policies
influence the global inflation rate, which in turn would lead to inflation
in Saudi Arabia through its imports. Cuñado and de Gracia (2003)
studied the effects of oil price developments on the industrial production
of a group of developed economies, including some oil-exporting
countries such as Denmark and the United Kingdom. Using the im­
pulse response functions, they found that changes in oil prices have a
negative impact on industrial production in Denmark, but a beneficial
impact on industrial production in the UK. However, Jiménez-Rodriguez
and Sánchez (2005) did not report the same findings for the United
Kingdom. Their main findings indicated that changes in oil prices
skeptically affected output growth in the UK, but positively affected
Norwegian economic activity. Ayadi (2005) studied the relationship
between oil price changes and industrial production for a single large
African country using annual data for the period 1980 to 2004 by
employing a vector autoregressive (VAR) model. Its main conclusion is
that higher oil prices would not lead to an expansion of industrial pro­
duction in Nigeria. Mehrara (2008) analyzed the non-linear relationship
between oil revenues and economic growth in 13 oil exporting econo­
mies using a non-linear dynamic panel model and annual data from
1965 to 2004. His findings showed that declines in oil prices have a
negative impact on output growth, but increases in oil prices have a
limited impact. The author also suggested that certain policies based on
balance and saving funds and the diversity of economic activities are
necessary to minimize the effects of oil price changes. Farzanegan and
Markwardt (2009) studied the dynamic relationship between oil price
changes and economic activity in Iran using a VAR model and quarterly
data from 1975: II to 2006: IV. They found that higher oil prices lead to
higher growth in industrial activity. Berument et al. (2010) examined
the influence of oil price changes on production growth in some MENA
countries. They showed that higher oil prices have a positive impact on
the economic products of oil-exporting economies, mainly for the United
Arab Emirates, Algeria, Qatar, Kuwait, Iran, Libya, Iraq and Oman.
Similarly, Mendoza and Vera (2010) analyzed the impact of crude oil
price changes on economic output for Venezuela using monthly data for
the period 1984:1 to 2008:3. Their results showed that economic output
in Venezuela is more sensitive to oil price rises than to declines. Mordi
and Adebiyi (2010) did not find the same results for Nigeria. In fact, they
studied the asymmetric effect of oil price changes on economic activity
and prices in Nigeria using a VAR model for monthly data from 1999:01
to 2008:12. They pointed out that lower oil prices would affect economic
output and inflation more than higher oil prices.
Arouri and Rault (2012) studied the relationship between oil prices
and stock markets in the Gulf Cooperation Council region using boot­
strap panel cointegration methods for monthly data from 1996:1 to
2007:12. They noted the presence of a long-term association linking oil
prices to stock markets in the group of countries studied, while their
findings indicated that higher oil prices lead to higher stock prices for
each country in the group, with the exception of Saudi Arabia. El
Anshasy and Bradley (2012) analyzed the role that crude oil prices can
play in determining the tax policies of oil exporting countries. They
found that in the long run, higher oil prices lead to higher output growth
and higher government spending in oil-exporting economies. Ibrahim
and Said (2012) analyzed the effects of oil price changes on inflation in
the case of Malaysia. They found a long-term association between oil
prices and inflation when taking into account the world consumer price
index and food prices. Their results also showed that the transfer effect
was lower in the world consumer price index than in the food price
index. Not later, Ibrahim (2015) analyzed the relationship between food
prices and oil prices for the same country using a nonlinear autore­
gressive distributed lag (NARDL) framework. His results showed an
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Resources Policy 86 (2023) 104179
asymmetrical relationship linking changes in oil prices to food price
inflation in Malaysia. In addition, higher oil prices would lead to higher
food prices, while lower oil prices would not lead to lower food prices
either in the long term or in the short term. Moshiri (2015) analyzed the
asymmetrical influence of oil price changes in nine oil-exporting econ­
omies, including Saudi Arabia, over the period 1970–2010, using a VAR
framework, which takes into account various variables, including
changes in oil prices, production growth and inflation. He found that
lower oil prices would lead to lower oil revenues and stagnation, while
higher oil prices would lead to higher revenues but without sustained
economic growth in oil-exporting developing countries including Saudi
Arabia. Sek et al. (2015) studied the impact of changes in oil prices on
inflation in low-oil dependent economies and high-oil dependent
countries by estimating an autoregressive lag distributed (ARDL) model.
Their results showed that the variation in oil prices directly affects
inflation in the first group of countries while it indirectly influences
inflation in countries with high oil dependence. Nusair (2016) studied
the influence of oil price changes on production growth in the GCC re­
gion using the NARDL model. His findings indicate that higher oil prices
lead to higher production growth for the six countries studied, while
lower oil prices lead to lower production growth for Qatar and Kuwait
alone. Brini et al. (2016) analyzed the symmetric effects of oil price
changes on inflation and real exchange rates in six MENA countries,
including Saudi Arabia, using annual data from 2000 to 2015 and a VAR
structural framework. Their results have shown that the influence of oil
price changes on inflation is limited due to the subsidization of price
products. Similarly, Sek (2017) analyzed these implications for domestic
price indicators in Malaysia. His results indicate that changes in oil
prices have had a positive impact on output growth, but their direct
impact on domestic prices is limited. Sadeghi (2017) analyzed how the
size of government can influence the symmetric effect of oil price
changes on non-oil GDP and government spending in 28 oil-exporting
economies including Saudi Arabia using annual data from 1990 to
2016 using a VAR framework. His findings showed that when govern­
ment expenditure is larger, the effects of higher fuel prices could have a
significant impact on non-oil production. Using an ARDL model, Foudeh
(2017) found that oil price has a positive impact on economic growth in
the long run in Saudi Arabia over the period 1995:4–2015:4.
For an OPEC member country such as Algeria, Lacheheb and Sirag
(2018) studied the relationship between changes in oil prices and
inflation over the period 1970–2014 using a NARDL model. Their results
showed a non-linear relationship between the two variables. There was
an important link between rising fuel prices and inflation, but there was
no link between falling fuel prices and the rate of inflation. Rising oil
prices have led to a rise in the inflation rate in Algeria. Similarly, in the
case of two other African oil-exporting countries, Angola and Nigeria,
Adedeji et al. (2018) studied the impacts of oil price changes on pro­
duction growth over the period 1980–2015 using the NARDL model.
Their results showed the presence of asymmetrical long-term and
short-term relationships between oil prices and production growth for
both countries. Changes in fuel prices have had positive and negative
effects on production growth in Nigeria, while only Angola has had a
negative impact. Similarly, Bala and Chin (2018) analyzed the asym­
metric effects of oil price changes on inflation in four major African
oil-producing countries over the period 1995–2004 using a dynamic
panel ARDL model. They found that increases and decreases in oil prices
have a positive impact on inflation. However, the impact was greater
when oil prices fell. Maalel and Mahmood (2018) studied the asym­
metric impact of oil revenues on GCC countries’ economic growth dur­
ing 1980–2016 using the NARDL model. They found that higher oil
revenues stimulate economic growth and lower oil revenues have a
negative impact on economic growth in most GCC countries. No later,
Nusair (2019) studied the cointegration relationship linking oil prices to
inflation in the GCC region by employing linear and non-linear ARDL
models. They indicated that increases in oil prices positively affect
inflation, while decreases in oil prices negatively influence inflation in
M. Belloumi et al. Resources Policy 86 (2023) 104179

the group of countries studied. In the same line, Bass (2019) studied the 3. Data and methods
causal relationship between world oil price, exchange rate and inflation
in Russia using the Johansen multivariate cointegration approach over 3.1. Data
the period 2010–2017. Their findings indicated that oil price shocks
might induce a rise in inflation. In the same line, Mukhtarov et al. (2020) We focus our investigation on the four variables of real gross do­
analyzed the impact of oil prices on some macroeconomic variables mestic product (in constant 2015 US dollars) (GDP), consumer price
including inflation and economic growth in the small oil exporting index (2010 = 100) (CPI), real effective exchange rate index (2010 =
country of Azerbaijan using the Johansen cointegration approach by 100) (RECR) and crude oil price (COILP) (expressed in US dollars per
employing monthly data over the period 2005:1–2019:1. Their results 2021 barrel). The period of the empirical study covers annual data from
revealed that oil prices have positive effects on economic growth and 1980 to 2021.2 The variable real GDP is used to represent economic
inflation. Moreover, Zulfigarov and Neuenkirch (2020) investigated the output. The CPI refers to the average price at the consumer level. The
relationship between oil price fluctuations, economic growth and variable CPI approximates the rate of inflation. RECR measures the
inflation in Azerbaijan using quarterly data during the period of 2002:1 value of the Saudi currency against a weighted average of several foreign
to 2018:4 by employing the Johansen multivariate cointegration currencies divided by the price deflator. Data on GDP, RECR and CPI
approach. They found that oil price innovations might cause decrease in come from the online World Bank’s world development indicators (WDI,
economic growth and increase in inflation in Azerbaijan. However, 2022). COILP data is extracted from the BP Statistical Review of World
Abdelsalam (2020) examined the effects of crude oil price variations and British Petroleum Statistical Review of World Energy (2022). We
its volatility on the economic growth for both oil-exporting countries transform all variables into log form and denote them by LGDP, LRECR,
and oil-importing countries from MENA region by employing different LCPI and LCOILP, respectively. Their first differences are given by
panel data techniques such as quantile regression. Their main results DLGDP, DLRECR, DLCPI, and DLCOILP, respectively. Some statistical
reported that changes in oil prices have positive effect on economic indicators for the different variables at their levels are presented in
growth in oil exporting countries whereas they affect negatively eco­ Table 1. It reports descriptive statistics (mean, median, minimum,
nomic growth in oil importing countries. maximum, standard deviation, coefficient of variation, skewness, and
Recently, Husaini and Lean (2021) studied the asymmetric effects of kurtosis) of the variables at their levels. It is shown that consumer price
exchange rate and oil price on the on the disaggregation price inflation index has the lowest coefficient of variation and thus the lowest varia­
in a group composed of net oil-exporting countries (Malaysia, Indonesia, tion from its actual mean while the crude oil price has the highest co­
and Thailand) by employing the NARDL model. They found that a rise in efficient of variation and thus it has the largest variation from its mean.
oil price might lead to an increase in both the producer price index and These results showed the fluctuations of oil price during the studied
the consumer price index in the three countries while a fall in the oil period. Moreover, all series are positively skewed. Finally, the real GDP
price may lead to a reduction in both indexes in only Thailand. In the is the least dispersed while is the real effective exchange rate the most
same line, Osei (2022) analyzed the asymmetric pass-through effects of dispersed.
oil price on inflation in Brazil over the period 2000:1 to 2021:4 by Fig. 1 reports the graphs of log first difference for different variables.
employing the NARDL model. They found that changes in oil prices It indicates the percentage change of the various variables during the
affect inflation in both the short- and long runs. More recently, Aliyev period 1980–2021. Overall, looking at Fig. 1, we note that there is co-
et al. (2023) investigated the interaction of oil prices and money supply movement of all variables together. It is shown that the percentage
in explaining the inflation in Azerbaijan by employing different econo­ change in the price of oil is greater than the changes in the other three
metric cointegration techniques for annual data during the period of variables. It is observed also that inflation has the lowest variation. It is
1997–2021. Their main finding reported the existence of an interaction indicated in the figure the different sub-periods of variations of oil price.
relationship between the oil price and the money supply, which in­ The first sub-period of 1980–1986 was characterized by a decline in oil
fluences the level of prices in both the short- and long-run. prices caused mainly by the decrease in US production. The second sub-
The summary of the above literature provides a good overview of period from 1986 to 2002 was marked by an increase in the price of oil
information from ongoing discussions on how oil prices affect economic and by stabilizing at a higher level due to OPEC’s weak control over oil
growth and inflation. However, it is clear from the literature review that prices. The third sub-period between 2003 and 2014 includes the global
the results of empirical studies on the impact of oil price changes on financial crisis and record oil prices of around USD 150/bbl. This period
macroeconomic variables including economic growth and inflation are was marked by a rapid increase in demand from emerging countries
inconclusive and controversial. The findings differ across countries, the such as China and India. The last sub-period (2015–2021) began with
local economy, the region studied, the period of study, type of data used, lower prices in 2014, following the increase in tight oil production in the
econometric techniques employed and the control variables considered. United States and OPEC member countries exceeded their production
In this study, we have two unique additions to the literature. Firstly,
some few studies on Saudi Arabia investigated the impact of changes in
Table 1
oil prices on macroeconomic variables using various approaches, but
Descriptive statistics.
they neglected to test whether the impact is symmetric or asymmetric.
COILP GDP CPI RECR
This study tries to fill this gap. Thus, our first step consists on the choice
between the symmetric ARDL model and the asymmetric NARDL model Mean 43.943 4.22E+11 86.92 134.32
using Wald and Fisher statistics. Secondly, this study investigates a dy­ Median 31.260 3.60E+11 77.40 118.25
Maximum 111.67 6.79E+11 126.23 247.12
namic structure analysis that can be illustrated by cumulative dynamic
Minimum 12.720 2.00E+11 67.04 94.307
multipliers. This allows us to track changes in economic growth and Std. Dev. 29.640 1.52E+11 19.28 45.95
inflation after crude oil price shocks. This means that cumulative dy­ Coefficient of variation (%) 67.4 36.0 22.1 34.2
namic multipliers permits a description of how the system moves to a Skewness 0.991 0.436 0.869 1.684
Kurtosis 2.837 1.902 2.111 4.371
new state after a shock on oil price. Finally, the shortage of single studies
Observations 42 42 42 42
on oil-exporting countries like Saudi Arabia regarding the asymmetric
impact of oil price on their macroeconomic indicators makes the present
study valuable.

2
The data on real effective exchange rate index are only available from 1980.

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M. Belloumi et al. Resources Policy 86 (2023) 104179

effects of oil price changes on economic output and inflation, eqs. (1)
and (2) are written as follows:

LGDP = f (LCOILP+ , LCOILP− ) (3)

LCPI = f (LGDP, LRECR, LCOILP+ , LCOILP− ) (4)

In the case of NARDL model, the variable COILP is replaced by the

partial sum of positive (COILP+) and negative (COILP− ) variations in
crude oil prices. The increases and decreases in oil price components are
defined by:
∑
t ∑
t
LCOILP+
t = ΔLCOILP+
i = max(ΔLCOILPi , 0) (5)
i=1 i=1

∑
t ∑
t
LCOILP−t = ΔLCOILP−i = min(ΔLCOILPi , 0) (6)
i=1 i=1
Fig. 1. The plots of log first difference for different variables.
Then, the linear ARDL models for economic output and inflation can
be written as follows:
quotas, resulting in a collapse in oil prices. Since the beginning of 2016, Model 1: Economic output
the price of oil has started to rise again, rising to 70 USD/bbl in 2018
then fell in 2020 following the COVID-19 pandemic (Van Eyden et al., ΔLGDPt = β (LGDPt− 1 − ρLCOILPt )
2019). These results confirm those of descriptive statistics. In addition, it p− 1
∑ q− 1
∑
can be inferred that there is a possible relationship between changes in + μi ΔLGDPt− i + ∅j ΔLCOILPt− j + εt (7)
oil prices, inflation and economic growth. i=1 j=0

Model 2: Inflation
3.2. Methods ΔLCPIt = β (CPIt− 1 − ρ1 LCOILPt − ρ2 LGDPt
p− 1
∑ q− 1
∑ q− 1
∑
In our work, we undertake linear and non-linear ARDL models. These − ρ3 LRECRt ) + μi ΔCPIt− i + ∅1j ΔLCOILPt− j + ∅2j ΔLGDPt− j

models detect the short- and long-term effects of changes in oil prices on i=1
q− 1
j=0 j=0
∑
output growth and inflation. The ARDL linear model was initially + ∅3j ΔLRECRt− j + εt
developed by Pesaran et al. (2001). This conventional approach may j=0
have some advantages over other co-integration methods, mainly those (8)
developed by Engle and Granger (1987) and Johansen (1988). First, it
On the other hand, the NARDL framework is the extension of the
works satisfactorily when investigating the cointegration relationship
linear one and it is developed by Shin et al. (2014). Following the
between variables with limited data. Second, the ARDL linear model can
approach of Shin et al. (2014), the NARDL models for economic output
be estimated for a combination of variables I (0) and I (1). However, it
and inflation are written as follows:
cannot be applied in the case of two-order integrated series. The use of
Model 3: Economic output
ARDL model makes it possible to detect the symmetrical and asym­
( )
metrical impacts of increases and decreases in oil prices on economic ΔLGDPt = β LGDPt− 1 − ρ1 LCOILP+ −
t − ρ2 LCOILPt
output and the consumer price index in Saudi Arabia. p− 1 q− 1 q− 1
∑ ∑ ∑
The application of ARDL techniques takes several steps. First, we + μi ΔLGDPt− i + ∅+ +
j ΔLCOILPt− j + ∅−j ΔLCOILP−t− j + εt (9)
check for the stationarity of the different series by considering a battery i=1 j=0 j=0

of conventional unit root tests and a breakpoint unit root test. In the
Model 4: Inflation
second step, we discover the optimal lag lengths of our estimated models
(
using the Akaike Information Criterion (AIC). In the third step, we ΔCPIt = β LCPIt− 1 − ρ1 LCOILP+ t
employ the symmetry tests to check for the existence of the asymmetric ) p− 1
∑
relation between economic output and crude oil price from one side and − ρ2 LCOILP−t − ρ3 LGDPt − ρ4 LRECRt + μi ΔLCPIt− i (10)
between inflation and crude oil price from a second side using an F-test
i=1
q− 1
∑
of parameter equality. The fourth step consists in testing the presence of + ∅+ +
1j ΔLCOILPt− j
cointegration relations linking the different series using the bounds j=0

tests. In the fifth step, we perform numerous diagnostic tests to verify the
q− 1
∑ q− 1
∑
+ ∅−1j ΔLCOILP−t− j + ∅2j ΔLGDPt−
validity of the estimated models. Finally, we measure the marginal
j
j=0 j=0
contribution of crude oil prices to economic output and inflation using q− 1
∑
the cumulative dynamic multipliers. + ∅3j ΔLRECRt− j + εt
In our study, we analyze the effects of oil price changes on economic j=0

output and inflation in the case of the Kingdom of Saudi Arabia. Thus,
we estimate the following two relationships in the linear case:
LGDP = f (LCOILP)
LCPI = f (LGDP, LRECR, LCOILP)
LGDP and LRECR are included in the model of inflation (eq. (2)) as
control variables. Their inclusion is motivated by the role that can play
the monetary policies in improving the economy during oil price
changes (Bala and Chin, 2018). When considering the asymmetric
-
Where μ, Ø, Ø+ 1 , Ø1, Ø1, Ø2, and Ø3 are the short-run parameters while ρ,
ρ1, ρ2 and ρ3 are the long-run parameters; β represents the impact of the
(1) error correction term (ECT).
The estimated ECT coefficient measures the convergence rate of the
(2) explained variable (economic output or inflation) returning to equilib­
rium when explanatory variables (crude oil prices, real GDP, real
effective exchange rate) change. This coefficient has always a negative
sign when the variables are cointegrated. We include interception and/
or trend in the different models when they are significant.

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M. Belloumi et al. Resources Policy 86 (2023) 104179

In estimating the non-linear ARDL model, we consider the same Table 3

analytical procedures that are undertaken in the case of the linear ARDL Breakpoint Unit-root test results.
model: application of unit-root tests, determination of the optimal lag Variable Test stat. Order of integ.
length of the model, use of bounds tests for cointegration, and diagnostic
Level First diff.
tests. After checking the stationarity of the different series, models 1 to 4
are estimated by searching for up to five lags using the AIC criterion. LGDP − 2.06 − 9.27*** I (1)
LCPI 4.27* 5.26*** I (0) or I (1)
Next, we verify the presence of cointegration association between the
− −
LRECR − 6.73*** − 5.51*** I (0)
different series studied using the F-test statistics of Pesaran et al. (2001) LCOILP − 3.82 − 6.69*** I (1)
and Shin et al. (2014) by testing the following null hypotheses for the
Note: ***, **, and * designate significance at 1%, 5% and 10%, respectively.
different models examined in this study:

Model 1: H0: ρ = 0 (11)

Table 4
Model 2: H0: ρ1 = ρ2 = ρ3 = 0 (12) Results of symmetry test.
Model Test Stat Probability
Model 3: H0: ρ1 = ρ2 = 0 (13)
statistic value

Model 4: H0: ρ1 = ρ2 = ρ3 = ρ4 = 0. (14) Model 1: output model NARDL (4,3) Long-run

F-statistic 7.84 0.009
When the values of the F statics are superior to the critical upper bound Chi-square 7.84 0.005
values, the null hypotheses are rejected; and thus there are existence of Short-run
cointegration relationships between the series in the symmetric ARDL F-statistic 1.09 0.30
Chi-square 1.09 0.29
models (eqs. (7) and (8)) and asymmetric ARDL models (eqs. (9) and Joint (long-run and short-run)
(10)). However, before testing for the presence of cointegration rela­ F-statistic 4.23 0.02
tionship, we use the symmetry test to choose between the ARDL model Chi-square 8.46 0.01
and the NARDL model for both economic output and inflation as Model 2: inflation model NARDL Long-run
(3,2,5,5) F-statistic 0.03 0.85
dependent variables.
Chi-square 0.03 0.85
Short-run
4. Empirical results and analysis F-statistic 0.03 0.84
Chi-square 0.03 0.84
Joint (long-run and short-run)
4.1. Results of unit root tests F-statistic 0.28 0.76
Chi-square 0.56 0.75
In the first stage of analysis, the non-stationary time series tests such
Note: Null hypothesis assumes that the coefficients of positive changes are equal
as the augmented Dickey-Fuller (ADF), the Phillips-Perron (PP), the
to those of negative changes.
Kwiatkowski-Phillips-Schmidt-Shin (KPSS) and the Breakpoint unit root
test tests are undertaken toward determining if the various time series
are stationary at their levels or at their first differences. Tables 2 and 3 Table 5
report the results for the three conventional unit root tests and the Results of estimation of NARDL economic output model.
Breakpoint unit root test. All unit root tests indicate that series are either
Variable Coefficient Std. error Prob.
I (0) or I (1).
Short run
DLCOIL+ 0.04 0.07 0.51
DLCOILP- − 0.04 0.05 0.35
4.2. Results of estimated models and discussion
DLCOIL+(-1) − 0.0001 0.06 0.99
DLOILP− (-1) 0.09* 0.05 0.09
As all the series are either stationary at their levels or at their first DLOIL+ (− 2) − 0.16** 0.07 0.04
differences, the ARDL and NARDL models can be estimated without DLOILP− (-2) 0.05 0.06 0.36
doubt. The AIC is employed to select their associated lag length for a C 11.81*** 3.38 0.00
Long run
maximum of length equal to 5. The symmetry test is employed to select
ECT − 0.44*** 0.10 0.00
between the ARDL model and the NARDL model.3 The results of this test LCOILP+ 0.08*** 0.02 0.00
are reported for both models of economic output and inflation in LCOILP- − 0.03 0.03 0.33
Table 4. It is shown that crude oil prices could have asymmetric effects Diagnostic tests
on economic output whereas we accept the symmetric effects of crude R squared 0.62 – –
Jarque-Bera 0.116 – 0.94
oil prices on inflation. Specifically, the effects of positive changes and stat
Breusch- 1.32 – 0.28
Table 2 Godfrey
Unit-root test results. LM(2)
Breusch- 1.31 – 0.27
Variable ADF test PP test KPSS test Pagan-
Godfrey
Level First diff. Level First diff. Level First diff.
LM
LGDP 4.11 − 3.78*** 1.10 − 5.0*** 0.72** 0.20 ARCH(4) 0.77 – 0.55
LCPI 1.19 − 1.73* 2.15 − 2.6*** 0.69** 0.27 Bounds test
LRECR − 2.07** − 3.4*** − 1.52 − 3.4*** 0.57** 0.33 F-statistic 1% asymptotic 5% asymptotic 10% asymptotic
LCOILP 0.35 − 5.22*** 0.24 − 6.23*** 0.51*** 0.17 critical value critical value critical value
3.97 Lower Upper Lower Upper Lower Upper
Note: ***, **, and * designate significance at 1%, 5% and 10%, respectively. bound bound bound bound bound bound
4.13 5.00 3.10 3.87 2.63 3.35

Note: ***, **, and * designate significance at 1%, 5% and 10%, respectively.

3
The symmetry test is carried out using Eviews 13 software.

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M. Belloumi et al. Resources Policy 86 (2023) 104179

negative changes in crude oil prices on economic growth are different

whereas their effects on inflation are identical for the case of Saudi
Arabia. Therefore, we estimate a NARDL model for economic output
whereas an ARDL model for inflation.
The different findings associated to NARDL model of economic
output are reported in Table 5. It is shown that the value of F-statistic of
the bounds test is superior to the upper bound at 5% significance level.
Thus, the results of bounds test indicate the existence of the long run
impacts of oil price variations on output growth in Saudi Arabia.
Furthermore, the error correction term has a negative and significant
effect at 1% significance level. Its value is equal to − 0.44, which means
that the system in convergent and the output growth converge rapidly at
a speed of 44% from the short run to its long run stability after a shock.
This result confirms the previous result of bounds test that reports the
presence of a long-run association between real GDP growth and crude
oil prices.
Fig. 3. CUSUMSQ test for economic output NARDL model.
The results of diagnostic tests (the Jarque-Bera normality test, the
Breusch-Pagan-Godfrey heteroskedasticity LM test, the Breusch-Godfrey
coefficient in both short and long run but insignificant. As for the fact
serial correlation LM test, and the autoregressive conditional hetero­
that the downturn in oil prices does not affect economic growth in the
skedasticity (ARCH) LM test) indicate that the error terms are normally
long term, it can be explained that Saudi Arabia has accumulated pre­
distributed, homoscedastic and not correlated in the NARDL model of
ventive financial reserves that are used when necessary. Hence, the long-
economic output. In order to check the stability of the coefficients in the
run results support the theoretical literature dealing with the impact of
estimated model, we employ the cumulative sum (CUSUM) of recursive
oil price on economic growth in oil exporting countries. In addition, in
residuals and CUSUM of Squares (CUSUMSQ) of recursive residuals
the short term, positive and negative oil price changes do not affect
tests. The CUSUM test identifies systematic changes in the regression
economic growth in Saudi Arabia. A possible interpretation of short-
coefficients, while the CUSUMSQ test detects sudden changes from the
term results may be because the government in Saudi Arabia generally
constancy of the regression coefficients. If the CUSUM and CUSUMSQ
sets fuel prices. The country does not allow the adjustment of the market
statistics fall inside the critical bands of the 5% confidence intervals of
for domestic fuel prices. Another explanation is that fuel prices are
parameter stability, we say that there exists stability in the coefficients
subsidized in Saudi Arabia; therefore, short-term economic activities
over the sample period (Turner, 2010). As shown in Figs. 2 and 3, overall
may not feel the impact of rising or falling real oil prices. Nevertheless,
the findings of CUSUM and CUSUMSQ tests for parameter stability show
since 2016, following the "economic bomb”, Saudi Arabia has raised fuel
that the blue line lies usually between its boundaries (red lines) at 5%
prices by 50%. The government has not only increased fuel prices since
significance level. Therefore, the NARDL model estimated is stable.
2016, but also subsidies for water and electricity have been reduced.
Therefore, we can consider that our findings of NARDL are reliable.
These extreme measures were aimed at countering the country’s record
The results of estimation of the NARDL model shown in Table 5
budget deficit as oil prices fell on that date. Our findings are similar to
report that only positive changes in crude oil price affect significantly
those reported by Brown and Yücel (2000), Nusair (2016) and Foudeh
output growth in the long run. In fact, the variable representing in­
(2017) who found a symmetric positive relationship between oil price
creases in oil price (COILP+) has a positive and significant impact at 1%
critical level in the long run. Thus, we can conclude that a higher crude
oil price induces a rise in economic output in Saudi Arabia in only the
long run. In particular, a 10% increase in crude oil prices can lead to an
increase of real GDP by about 0.8% in the long run. This finding is ex­
pected and in accordance with economic theory for an oil exporting
country as an increase in oil prices has a positive direct impact on eco­
nomic growth in Saudi Arabia, especially through the increase in gov­
ernment expenditure on the projects, and the indirect effect of trade
generated by the increase in oil export earnings. However, the variable
representing the decreases in crude oil price (COILP− ) has negative

Fig. 4. Cumulative dynamic multipliers of crude oil price shocks on eco­

Fig. 2. CUSUM test for economic output NARDL model. nomic output.

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M. Belloumi et al. Resources Policy 86 (2023) 104179

and economic growth in Saudi Arabia. Furthermore, they go along with

the findings obtained by Mehrara (2008) for the oil exporting
economies.
In addition, dynamic structure analysis can be illustrated by cumu­
lative dynamic multipliers. This allows us to track growth in economic
output after crude oil price shocks (Fig. 4). It is shown that the upper and
lower dashed lines represent the cumulative dynamics of output growth
relative to a one unit change in crude oil prices. The figure indicates a
relatively stronger effect of positive shocks on oil prices in the long term.
The equilibrium adjustment is achieved in about 3 periods (3 years).
Subsequently, it can be observed that the reaction of output growth to
negative changes becomes statistically nil. In summary, the results show
that output growth is more sensitive to higher oil prices over the long
run and that output growth does not respond to negative long-term
shocks. The dynamic multiplier behavior is in line with short- and
long-run asymmetry.
Fig. 5. CUSUM test for inflation ARDL model.
Turning now to the linear ARDL model of inflation. The findings of
estimation of this model are presented in Table 6. It is shown that the
value of F-statistic (9.04) of the bounds test is superior to the upper
bound at 1% significance level. Thus, the results of bounds test indicate
the existence of the long run impacts of crude oil price, real GDP and real
effective exchange rate on inflation in Saudi Arabia. Moreover, the co­
efficient of the ECT is negative and significant at 5% significance level.
Thus, inflation converge at a lower speed of adjustment of 12% from the
short run to its long run equilibrium after a shock. The disequilibrium is
persistent. This implies that a shock takes a long time to restore equi­
librium for inflation in Saudi Arabia. This result is in accordance with
that of Sek et al. (2015) who found that the speed of convergence for
inflation to long run equilibrium is slow in low oil dependency countries.
In addition, the result of ECT is conform to that of bounds test, which
indicates the existence of a linear long-run relationship between infla­
tion and crude oil prices. All diagnostic tests report that the error terms
are normally distributed, homoscedastic and not correlated in the ARDL
model of inflation (Table 6). Moreover, the CUSUM and CUSUMSQ of
Fig. 6. CUSUMSQ test for inflation ARDL model.
recursive residuals tests show the stability of coefficients of the ARDL

model (Figs. 5 and 6). Therefore, the ARDL model estimated is stable
Table 6 over the period of investigation. Hence, our estimates are reliable and
Results of estimation of inflation ARDL model. they can be discussed without doubt.
Variable Coefficient Std. error Prob. The estimation results of the inflation ARDL model indicate that the
Short run influence of crude oil price on consumer price index is positive and
C − 0.10 1.06 0.92 significant in both the short and long run respectively, at 10% and 1%
D (LGDP) 0.11 0.08 0.19 significance levels (see Table 6). Thus, we can deduce that an increase in
D (LRECR) 0.14* 0.07 0.06
crude oil price induces an elevation in consumer price index in both the
D (LCOILP) 0.02* 0.01 0.10
D (LCOILP − 0.03** 0.01 0.03
short-run and long run. The inflation in Saudi Arabia comes from the
(-1)) higher prices of the imported goods caused by the increase in oil prices
Long run through the increase in production costs and transport costs as oil serves
ECT − 0.12** 0.06 0.05 as a major input for various economic activities across the world. In
LGDP 0.02 0.04 0.60
addition, increases in oil prices lead to higher export receipts and thus to
LRECR − 0.01 0.03 0.60
LCOILP 0.03*** 0.008 0.00 higher income in Saudi Arabia as an oil exporter. Therefore, this causes
Diagnostic tests increases in consumption and price of goods and services. According to
R squared 0.99 our estimation results, when crude oil price increases by 10%, the
Jarque-Bera 5.47 0.07
inflation will increase by 0.2% in the short run and by 0.3% in the long
stat
Breusch- 1.15 0.32
run. Thus, these findings indicate that the long run impact of an increase
Godfrey in oil price is more important than that of the short run. Moreover, as the
LM(2) impact of crude oil price is symmetric, a decrease in oil price induces a
Breusch- 0.38 0.92 decrease in consumer price index in Saudi Arabia in the short-run and
Pagan-
long run. A decrease of crude oil price by 10% would lead to lower
Godfrey
LM inflation by approximately 0.2% in the short run and 0.3% in the long
ARCH(2) 1.26 0.29 run. Overall, crude oil price increases cause higher inflation whereas
Bound test decreases in crude oil price lead to lower consumer price index in Saudi
F stat 1% asymptotic 5% asymptotic 10% asymptotic
Arabia. These results are similar to those found by Aleisa and Dibooĝlu
critical value critical value critical value
9.04 Lower Upper Lower Upper Lower Upper
(2002) and Aloui et al. (2018) for the case of Saudi Arabia where an
bound bound bound bound bound bound increase in oil price is inflationary but a decrease in oil price is disin­
3.65 4.66 2.79 3.67 2.37 3.20 flationary. They are also in accordance to those obtained by Ibrahim
Note: ***, **, and * designate significance at 1%, 5% and 10%, respectively. (2015) for the case of Malaysia. However, our finding is not in

9
M. Belloumi et al.
accordance to that of Nusair (2019) for the case of GCC countries. He
found an unequal effect of oil price changes on inflation with positive
significant impact of an increase in oil price but insignificant impact of a
decrease in oil price.
For the control variables, only the variable LRECR is significant at
10% level in the short-run. This means that real effective exchange rate
has a positive effect on inflation in the short-run in Saudi Arabia. An
increase in real effective exchange rate implies an appreciation of Saudi
riyal. Appreciation of local currency leads to an increase in inflation in
only the short run because of the increase in domestic consumption. In
addition, the appreciation of exchange rate makes the imported goods
less expensive and thus a rise in the level of prices caused by domestic
consumption can be observed in only the short run. This finding for
Saudi Arabia is in conformity to many previous studies for oil exporting
countries such as Shitile and Usman (2020) for the case of Nigeria.
However, our finding is in contrast to that found by the study of Bala and
Chin (2018) when they considered the African OPEC member countries.
Exchange rate does not affect long run inflation in Saudi Arabia. This
result is expected because Saudi Arabia has a fiscally dominant economy
where changes in exchange rate do not affect the volume of exports in
the long run. However, the coefficient of real GDP is insignificant in both
the short and long run. This result is unexpected as economic theory
states that output growth and inflation go hand-in-hand.
5. Conclusion and policy implications
Our work is carried out to analyze the symmetric and asymmetric
impacts of oil price fluctuations on real GDP and inflation in Saudi
Arabia by employing the linear and nonlinear ARDL models over the
period 1980–2021. The results of the symmetry test (Wald and Fisher
statistics) indicate that the impact of crude oil price on economic output
is asymmetric while its impact on inflation is symmetric. Thus, the ef­
fects of oil price changes to economic growth are unequal in Saudi
Arabia whereas the oil price changes to inflation are equal. The results of
non-linear ARDL model show that increases in crude oil price positively
influence output growth in only the long run whereas the decreases in
crude oil price do not affect output growth in both the short and long
runs in Saudi Arabia. The cumulative dynamic multipliers analysis
confirms these results. It shows that economic growth is more sensitive
to higher oil prices over the long run and that economic growth does not
respond to negative long-term shocks. Therefore, the positive effects of
rising oil prices on economic growth are limited to only the long term.
Higher oil revenues that contribute to investment and expansion of
economic activities can explain the positive impact of higher oil prices
on Saudi Arabia’s long-term economic growth. The non-significance of
the impact of negative changes in oil prices on Saudi Arabia’s long-term
economic growth can be explained by the fact that Saudi Arabia hedges
huge financial reserves to be used when necessary. Both positive and
negative changes in oil price do not affect Saudi Arabia’s short-term
economic growth because the government intervenes through sub­
sidies and does not allow the adjustment of the market for domestic fuel
prices. These results are in line with the oil exporter’s preconditions.
Moreover, the results of the inflation ARDL model report that oil
price increases or decreases affect significantly inflation in both the
short and long run in Saudi Arabia. The increases in crude oil prices may
lead to higher inflation whereas their decreases may lead to lower
inflation in both the short and long run. These results mean that the
sharp rise in crude oil prices is causing a severe shock to domestic supply
and demand because of the rise in the country’s oil revenues. This leads
to significant increases in Saudi Arabia’s public and private spending.
This explains the significant impact of rising oil prices on Saudi Arabia’s
inflation. While rising oil prices are a boon that allows the country to
spend on its development projects and increase welfare levels in its so­
ciety, they cause high inflation rates that can have a negative impact on
low-paid and stable individuals. On the other hand, lower oil prices
reduce inflationary pressures. The conclusion that changes in oil prices
10
Resources Policy 86 (2023) 104179
affect inflation have serious implications for Saudi Arabia. Every time
the price of oil fluctuates, so does the price level. Consequently, changes
in oil prices will have an impact on price levels as long as oil remains one
of the main production inputs in various sectors of the economy.
Accordingly, appropriate anti-inflation policies should be developed
when there is a sharp rise in future oil prices. First, one of the most
important measures that can be taken is to link private and public sector
wage levels to inflation levels. Second, public spending should not in­
crease too quickly when oil explodes to reduce its negative effects on
inflation levels. In fact, since the implementation of the Saudi vision
2030 in 2016, the Saudi government separates public spending from oil
price fluctuations. Finally, sudden fluctuations in oil prices should be
accompanied by global changes in fiscal, monetary and price policies in
order to reduce the severity of such changes to the economy’s direct
performance. Price stability as a key macroeconomic objective can be
achieved if the country is able to adjust monetary and fiscal measures to
withstand the impact of changes in oil prices on price levels so that oil
price production can be maintained (Asghar and Naveed, 2015; Snud­
den, 2016; Mendes and Pennings, 2020). Therefore, it is very important
to understand the relationship between oil prices and inflation, because
this will help control inflation. This would greatly assist the monetary
authority in designing appropriate policies that could absorb oil price
volatility.
Saudi Arabia is a fiscally dominant open economy. The Saudi Central
Bank (SAMA) has only two objectives: a stable exchange rate and the
free movement of capital. The exchange rate was fixed to the US dollar at
a fixed rate. The exchange rate anchor offers only the long-term
framework for Saudi Arabia’s monetary policy. The monetary policy is
closely linked to the policy of the US Federal Reserve. There is only a
limited margin to move away from US interest rates, but SAMA retains
the flexibility to issue precautionary guidelines by adjusting reserve
requirements and issuing invoices to manage liquidity. Thus, in Saudi
Arabia, the role of monetary policy is to support fiscal policy by main­
taining price stability. Oil prices are at the root of Saudi Arabia’s mon­
etary and fiscal challenges. In the context of domestic inflation, rising oil
prices tend to drive up import prices while increasing domestic public
spending due to rising oil revenues and putting upward pressure on
consumer prices. Fiscal policy plays a crucial role in the economic sys­
tem. Saudi Arabia is implementing a countercyclical fiscal policy to
maintain price and currency stability. Countercyclical fiscal policy helps
the government sustain growth by using the fiscal surplus when oil
prices are high; When oil prices are low, the government strengthens the
economy through fiscal deficits financed by the accumulation of
external surpluses when oil prices were high (Al-Hamidy, 2010).
Overall, our results show that the continued rise in oil prices will
increase economic growth and price levels (inflation) in Saudi Arabia.
Rising oil prices also provide an important opportunity to increase
savings and reform government fuel subsidies, which is important in the
event of lower oil prices. Rising oil prices provide a favorable environ­
ment for fuel and tax reforms, with a moderate impact on domestic
prices paid by consumers. Therefore, for Saudi Arabia, rising oil prices
must support economic growth, but lead to higher inflation. On the
other hand, the continued decline in oil prices will reduce inflation.
Therefore, our results support Saudi Arabia’s 2030 Vision, which calls
for economic diversification to reduce the effects of oil price volatility.
As oil represents the most important sector in Saudi Arabia, the country
is trying to diversify its economic activities as stated by its vision 2030 to
be less dependent to oil industry and less vulnerable to oil changes.
Saudi Arabia should intensify its efforts to reduce its dependence on oil
by developing productive sectors and diversifying private and foreign
investments in order to diversify sources of income. Therefore, Saudi
Arabia has initiated important strategic reforms to respond to the sharp
drop in oil prices in November 2014. The Saudi vision 2030, lunched in
2016, includes ambitious political reforms that will reduce the oil
dependence of the economy and will promote growth at the expense of
the non-oil sector. It successfully developed specific mechanisms to
M. Belloumi et al.
promote infrastructure projects and create a possible public, private and
non-profit environment by supporting digital transformation, contrib­
uting to private sector development, developing economic partnerships,
promoting community development and ensuring the sustainability of
vital resources. While the government has paid particular attention to
infrastructure development programmes, it has focused on supporting
infrastructure for economic activities, mainly productivity support, as
well as providing a foundation for inclusive and sustainable growth. This
has resulted in a sustainable economy less dependent on the oil sector.
The economic diversification programmes have transformed the Saudi
economy from a rent economy based on oil income, to an economy
based on the diversification of sources of income such as industry,
agriculture and modern technologies.
One of the limitations of this study is that we use annual data that do
not allow taking into account intra annual variability of oil prices. The
average annual oil price levels may not accurately represent the overall
effects, especially in the short term. Therefore, future studies on this
subject may consider quarterly or monthly data and disaggregated
inflation (Anyars and Adabor, 2023). Moreover, the inclusion of other
control variables in the models such as the quality of institutions and the
money supply may be interesting. Despite these limitations, our results
remain valid and important at an aggregate level for Saudi Arabia.
CRediT authorship contribution statement
Mounir Belloumi: Conceptualization, Methodology, Software,
Investigation, Resources, Data curation, Supervision, Project adminis­
tration, Funding acquisition, Writing – original draft, Writing – review &
editing. Ahmed Aljazea: Conceptualization, Validation, Formal anal­
ysis, Investigation, Resources, Data curation, Visualization. Atef
Alshehry: Validation, Writing – review & editing, Visualization, Su­
pervision, Project administration.
Declaration of competing interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Acknowledgements
The authors are thankful to the Deanship of Scientific Research at
Najran University for funding this work, under the General Research
Funding program grant code NU/DRP/SEHRC/12/1.
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