The price of oil : three essays on the financialisation of commodity markets, indebtedness of resource-rich countries and economic development in Saudi Arabia.

Abstract

Oil price fluctuations have been prominent in economy since World War II. Researchers have been busy exploring the possible transmission mechanisms from these fluctuations to the economy, with their task being complicated over the years by a changing economic environment and transforming dynamics in the oil industry. This thesis uniquely brings on board the study of three topical research areas pertaining to the oil market that have attracted attention both in academic and industrial circles. The first chapter explores the role of financial participants in the oil futures market by applying Markov-switching vector autoregressions. A popular view has been that significant oil price changes cannot be explained solely by fundamentals. Investigating whether oil prices convey information about supply-demand forces, or they are a result of `speculative effects', can be of importance for the economy as their information content constitutes a key input in a variety of decisions, from businesses to governments and regulators. The second chapter studies the relationship between public debt and economic growth for hydrocarbon-rich developing economies. The dependence of these countries on oil and gas revenues can raise serious concerns about their fiscal sustainability, especially during the oil industry's bust cycles. By employing threshold analysis, this work examines whether a common threshold debt level exists for these countries beyond which debt can adversely affect the economic performance. The third chapter is a case study for Saudi Arabia, the largest exporter of crude oil in the world. The internal economic and social conditions of Saudi Arabia are, indirectly, important for the world as the Kingdom has the ability to decrease or increase oil production levels during supply interruptions or high demand growth, which in turn can affect global oil prices. While the natural resource endowment has been translated into more financial wealth for the Kingdom, placing the Saudi economy to the 19th position of the global rank, it remains questionable to what extent this wealth has further been translated into economic development and social progress for the Saudi population. Our findings suggest that oil prices are driven by the forces of demand and supply, with trader positions having little impact on oil prices. The Markov-switching model with two regimes proves to be a good description of the behaviour for the majority of the futures market participants. Next, the results of the debt-growth relationship confirm existing empirical evidence that debt can stimulate growth, with the impact turning negative and having a detrimental effect on the country's economic activity when debt crosses a certain tipping point. Finally, the case study analysis on Saudi Arabia shows that oil prices have had significant repercussions on the economic development and social progress of the country. Saudi Arabia, heavily reliant on hydrocarbon revenues, has failed to successfully utilise its oil wealth and convert it into development and welfare levels equivalent to those economies with similar-sourced incomes.