WORLD OIL PRICE SHOCKS AND THE SAUDI ARABIAN ECONOMY: A MACRO ECONOMETRIC SIMULATION

The Saudi Arabian economy is heavily dependent on oil income as a major source of government revenues and foreign exchange. Recent developments in the world oil markets have adversely affected the Saudi economy. This thesis is devoted to a study of the impact of these changes in the international oil market on the different sectors of the Saudi economy. A macro economic model of the economy was developed and econometrically estimated using annual data from 1962-1983. The model consists of thirty-one relations, sixteen behavioral equations, and fifteen identities. The predictive ability of the model was established through historical simulation and a one-period out of sample forecast.;Ex-ante simulations were performed for the period 1985-1990. These simulations were divided into two stages: the first covering the period 1985-1986 for which actual data for oil prices, production, exports, and government revenues were available; the second covered the years 1987-1990, in which the future of the Saudi economy was examined under three different world oil price scenarios. Analysis of the results of these scenarios revealed that the Saudi economy is sensitive to fluctuation in world oil prices and also very vulnerable.;Even under the optimistic price scenario, government oil revenues will fall considerably short of the estimated 200 billion Saudi riyals suggested by the Fourth Development Plan, 1985-1990 in which oil sales are assumed to represent the principal source of revenue. If the goals of this development plan are to be achieved, other sources of revenue must be found.;The thesis considered and evaluated several alternative revenue sources that have been suggested to fill the gap between forecasted government spending and expected oil revenues. If these supplementary sources of revenue are inadequate, the development plan may need to be revised to cope with the unsettled world oil market.;In general, the present model is superior to existing models of the Saudi economy because it is more disaggregated and also because it is structured to allow the simulation of alternative economic futures.;The disaggregated macro model of the Saudi Economy developed in this thesis should be useful in evaluating the effects of alternative development strategies.