The Impact of Oil Price Dynamics on Economic Growth in Selected OPEC Countries: Evidence from Dynamic Panel Threshold Regression Model

Abstract

This study investigates the impact of oil price dynamics on economic growth in selected OPEC countries over the period from 1985 to 2022, employing a comprehensive methodological framework centered on a Dynamic Panel Threshold Regression Model. To ensure the robustness of the analysis, various tests were conducted, including the BDS test for nonlinearity, which indicated the presence of nonlinear characteristics. Cross-sectional dependence tests confirmed interconnectedness among OPEC nations regarding oil prices and economic growth. Panel unit root tests specifically Pesaran's CADF and Karavias and Tzavalis (2014) revealed stationarity after differencing and identified structural breaks in 1986q3 and 1992q3. Cointegration tests by Westerlund (2008) validated long-term relationships among the variables. Applying the dynamic panel threshold approach, the analysis identified an oil price threshold of approximately 4.712%, delineating regimes with contrasting effects on GDP. Below this threshold, oil price fluctuations significantly depress economic growth, with a 1% increase leading to a 34% decline in GDP, highlighting the vulnerability of OPEC economies to declining oil prices. Above the threshold, oil prices exhibit a positive but statistically insignificant influence on GDP, suggesting limited benefits of rising oil prices in high regimes. Structural breaks notably negatively affect economic growth, underscoring the importance of external shocks and internal shifts. These findings contribute to the nuanced understanding of oil price dynamics and its asymmetric effects on economic growth. The study therefore, recommends that, the study recommends OPEC policymakers closely monitor oil price fluctuations, diversify economies, and build fiscal buffers during high-price periods to mitigate shocks. Emphasis should also be placed on enhancing productivity and innovation for sustainable growth, independent of oil prices. Additionally, adopting flexible policies that account for structural breaks can help ensure economic stability amid external shocks.