Relationship between crude oil prices, economic growth in OPEC countries & global business cycle

Abstract

This paper examines the relationship between crude oil prices and economic growth of OPEC countries. The variables considered as a proxy for economic growth of a country are GDP and Stock index. Since OPEC countries are major world oil players, their stock markets may be susceptible to oil price shocks. This paper contains inferences on the impact of crude oil price volatility on economies of OPEC countries gained through literature review, study of oil price shocks from game theoretic approach and analysis of macroeconomic data gathered from various sources. Game Theory helps explain the causes of oil shocks in 1973-74, 1985-86 and 2014. Our analysis shows that there is a strong positive correlation between Crude Oil Prices and GDP of OPEC countries. Stock Indices of Saudi Arabia, Kuwait, UAE and Nigeria are positively correlated with Crude Oil prices; whereas Venezuela’s stock index is negatively correlated with Crude Oil prices. The Crude Oil price is dependent on the stock indices of OPEC countries; with Saudi Arabia & Venezuela being the only significant contributors. A possible explanation for this is other OPEC countries – Kuwait, UAE & Nigeria’s stock indices are strongly correlated with Saudi’s index and thus, Saudi Arabia and Venezuela emerged to be the representative significant covariates. The paper further discusses the relationship between world economic activity and Crude Oil price changes. The variables considered as proxy for world economic activity are major stock indices in world like FTSE 100 & S&P 500, GDP growth rates of different countries and world. This paper contains insights and inferences drawn from different hypothesis testing the correlation, predictive power, lagged impact between the variables and change in relationship in face of major infliction points in oil history. The paper concludes the study with a risk hedging hypothesis to understand efforts of different countries in reducing dependency on crude oil prices.