Effect of oil price shocks on output and prices: evidence from Saudi Arabia

The primary objective of this article is to estimate how the spike in oil prices has impacted Saudi Arabia’s output and other macroeconomic indicators. To address this question, the study utilizes a simple VAR estimation and VAR estimation with sign restrictions, specifically an oil demand shock and an oil supply shock, to determine the influence of oil price shocks. The study’s findings are consistent with conventional wisdom and current research from oil-exporting countries. Consistent with all model specifications for both periods (monthly 2010q1 to 2020q2 and quarterly 1996q1 to 2020q2), the study finds that an oil price shock benefits the Saudi Arabian economy. The results indicate that a 10% increase in oil prices leads to a 2% increase in output, a 0.15 percentage point increase in the consumer price index, a 6% increase in export value, and a 3% increase in import value. The study highlights the importance of considering both oil supply and demand shocks in analyzing the impact of oil price fluctuations and concludes that the demand shock is more influential than the supply shock.