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DYNAMIC INTERACTIONS BETWEEN OIL PRODUCTION, REAL OIL PRICES, AND GLOBAL MARKET TRENDS: EVIDENCE FROMSAUDI ARABIA (1970-2021)
Keywords:
oil production, real oil prices, global market trends, Vector Error Correction Model (VECM), cointegration analysis, Impulse Response Functions (IRFs), Variance Decomposition (VD), Saudi Arabia oil marketDOI:
https://doi.org/10.17654/0972361725056Abstract
The dynamic interactions between Saudi oil production, real oil prices, and global market trends have significant implications for the stability of the global energy market and economic growth. This study aims to analyze these interactions over the period from 1970 to 2021, focusing on the long-term equilibrium relationships and short-term adjustments among the variables. Utilizing advanced econometric techniques, including stationarity tests, cointegration analysis through the Johansen test, the estimation of a Vector Error Correction Model (VECM), and Variance Decomposition (VD), this research provides a comprehensive understanding of the key drivers influencing oil production. The Augmented Dickey-Fuller (ADF) test results confirmed that oil production and real oil prices are non-stationary in their original forms but achieve stationarity after differencing, while global GDP growth is stationary at level. The Johansen Cointegration Test identified a significant long-term equilibrium relationship, with oil production being negatively influenced by real oil prices and positively influenced by global GDP growth. The Impulse Response Functions (IRFs) demonstrated that oil production experiences a short-term negative response to price shocks, followed by a gradual recovery, indicating the adaptive nature of Saudi Arabia’s oil production policies. Variance decomposition highlighted the short-term dominance of oil prices in explaining production variability, whereas GDP growth plays a more substantial role in the long-term. The findings underscore the importance of strategic production policies, diversification efforts, and adaptive measures to enhance market stability and economic resilience. However, limitations of the study include potential structural breaks and the exclusion of certain geopolitical factors that may affect oil markets. The practical implications of this research are significant for policymakers, emphasizing the need for flexible, data-driven strategies to manage production, mitigate the impact of price shocks, and ensure long-term sustainability in the global energy sector.
Received: April 24, 2025
Accepted: June 24, 2025
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