Dynamic Interactions Between Oil Price Volatility and Fiscal Policy: Empirical Evidence from GCC Countries

This article examines how the volatile oil price affected Saudi Arabia’s and the other GCC countries’ fiscal policy dynamics from 2000 and 2024. The region’s fiscal systems are vulnerable to external shocks due to their substantial reliance on petroleum profits, even with ongoing efforts to diversify. The dynamic links between government spending, budget balances and oil prices are examined using a panel vector Autoregression (PVAR) model. We also estimate different fiscal reaction functions for Saudi Arabia and several of its neighbors with somewhat more diversified income systems, like Kuwait and the United Arab Emirates. This study’s primary contribution is its direct comparative analysis of GCC fiscal responses using a long panel (2000–2024) that encompasses major oil price cycles, and the application of a dynamic PVAR framework to quantify the persistence and heterogeneity of these effects across countries. The data shows that different countries have different fiscal responses. For example, Saudi Arabia reacts to oil shocks more slowly than other nations with more diverse revenue sources, who have better consolidation mechanisms. These results highlight the necessity of strong fiscal frameworks that build resilience to fluctuations in commodity prices and offer insightful guidance to policymakers seeking sustainable fiscal management in countries that rely heavily on natural resources.