Essays on GCC Energy Economics and Saudi Arabia’s Economic Growth

Abstract

The first chapter analyzes the impact of energy subsidies on a select sample of nitrogen fertilizer producers in the Arabian Gulf Cooperation Council (GCC) region that disclose their financial statements. The paper estimates ammonia production costs per ton in the GCC region ranging from $53 to $116, and urea production costs ranging from $56.64 to $102.28 using Yara’s method. Using Budidarm’s method, the production cost for a ton of urea is estimated to range from $86.25 to $152.50. The differences in cost are attributed to differences in calculation methods. Subsidies for the selected sample were estimated using the price gap approach. Subsidy rates were on average well above 50% and subsidy size reaches billions of dollars. The paper then develops a translog multi-output, multi-input restricted profit function to evaluate the impact of the energy subsidy and international natural gas prices on inputs demand, outputs supply, and profit of the GCC producers. Results show that output supply, input demand, and profit are highly responsive to changes in urea prices. The results also show that international natural gas prices have an inelastic positive impact on the GCC firms’ profit. The study concluded that despite the distorting effect of subsidies in output supply and input demand, subsidy policy in the GCC region has achieved one of its major goals by increasing demand for labor. Furthermore, the GCC corporate nitrogen fertilizer executives’ concern that a reduction in the energy subsidy would have an adverse effect on their companies’ profitability has been confirmed in this paper to be a valid concern. The second chapter aims to accomplish two objectives. The first is to extend the existing method of total factor productivity growth decomposition by incorporating network characteristics. The second objective is to empirically evaluate technical change and productivity of the Saudi electricity sector. The results show that the Saudi electricity sector operates under the presence of economies of output density, economies of customer density, and diseconomies of scale. The technology used in the Saudi electricity sector is a cost saving technology. It is characterized as fuel using, capital neutral, and energy saving technology. The estimated average technical change term is positive. It indicates a cost increase during the timeframe of this study. The estimated average total factor productivity growth is positive using both the proposed and existing method. Compared with the proposed method, the existing method overestimated total factor productivity growth of the Saudi electricity sector. Furthermore, the paper estimated an optimal scale of output to be almost 11 percent larger than the maximum output level generated by the Saudi Electricity Company. The paper concludes that the Saudi Electricity Company needs to expand its size to reach the optimal output level. The third chapter investigates the impact of the overall financing activities on economic growth in Saudi Arabia. The study developed a financing index that takes into account the overall available credit in Saudi Arabia. The index was shown to be sensitive to economic and political shocks such as the Arab Spring. Using Johnson cointegration approach, the paper found an evidence of a long run relationship between real GDP per capita, financing, real interest rate, public labor force, and capital. Using a vector error correction model, the paper found a robust estimate that proves the positive impact of financing on economic growth in Saudi Arabia. Furthermore, the Granger-Causality Wald test indicates that financing influences economic growth in Saudi Arabia.