This study examines the dynamic relationship between global oil prices, fiscal policy, and non-oil economic activity in Saudi Arabia. It provides an integrated analysis of how oil price shocks are transmitted to domestic macroeconomic conditions and examines the role of fiscal policy in shaping economic adjustment and diversification dynamics under Vision 2030. Using quarterly data from 2010Q1 to 2025Q3, a Vector Error Correction Model is applied to analyze long-run equilibrium relationships and short-run dynamics among oil prices, consumer prices, government consumption expenditure, and non-oil GDP. The findings reveal a dominant role for fiscal policy within the estimated transmission framework, with oil price increases significantly stimulating government spending. Although fiscal expansion supports non-oil output, its effects remain modest and short-lived, reflecting relatively weak fiscal multipliers. Oil price shocks influence inflation mainly through indirect fiscal channels. While the variables exhibit long-run equilibrium relationships, the response of non-oil GDP to oil price shocks remains indirect, moderate, and transitory, suggesting gradual but incomplete progress toward economic diversification. The study highlights the importance of strengthening countercyclical fiscal frameworks, improving expenditure efficiency, and sustaining structural reforms to enhance macroeconomic stability and reduce vulnerability to oil price volatility.
Mabrouk et al. (Tue,) studied this question.