Pricing and Volatility Relationships for the Largest Oil Producer: Saudi Arabia

Abstract

Using OLS, ARIMA and Change Point Analysis, this paper empirically analyzes the time series relation between oil price and production and explore various kinds of model that can be utilized to overcome statistical problems and to understand the relationship in Saudi Arabia, one of the fastest growing economies in the Middle East and North Africa and the largest oil producing country in the world, with a large current account surplus. This paper methodically analyzed a times series data and built up models to overcome statistical problems such as non linearity, autocorrelation, and change point. Our findings indicate Saudi Arabia had been consistently producing oil in linear fashion before 2001. However, any international or Middle East dispute can change the trend, as is evident from our change point analysis. Nonetheless, it is likely that Saudi Arabia may increase their oil production during such times of conflict to meet the energy requirements of the world.