The Time-Varying Effects of Oil Shocks on the Trade Balance of Saudi Arabia

Abstract

This study aims to analyze the impact of oil shocks on the external balance of Saudi Arabia, as one of the largest net oil-exporting countries. To this end, a time-varying parameter vector autoregression model (TVP-VAR) is estimated by using quarterly data covering the period between 1991: Q1 and 2021: Q4. We find that identifying the source of shocks plays an important role in understanding the time-varying impact of shocks on its economy. Our findings indicate that the global oil production shocks excluding Saudi Arabia have a negative and significant impact on the trade balance and are greater than the impact of the Saudi oil production shocks, which is not significant for most of the period. In addition, we found that oil price shocks have more profound and much greater impacts than global and domestic oil supply shocks. This may be attributed to the fact that oil price shocks are more than oil supply shocks, and supply shocks are linked to oil price shocks. However, impulse responses show that the effects of oil shocks are volatile over time and their effects are generally more pronounced during and immediately after global shocks. Our findings have serious implications for the trade balance of Saudi Arabia, particularly in the low and volatile oil price environment.