An Investigation of the Asymmetric Effects of Oil Price Fluctuations on the Composition of the Government's Expenditures in Iran (The application of Mork and Hamilton Definitions)

اقتصاد پولی مالی

Article 2, Volume 22, Issue 10, January 2016   

Document Type: پژوهشی

DOI: 10.22067/pm.v22i10.39350

Authors

Shahab Matin^{* 1}; Mohammad Taher Ahmadi Shadmehri¹; Mohammad Ali falahi²

¹Ferdowsi mashhad

²Ferdowsi University of Mashhad

Abstract

One of the major economists’ interests in the recent decades has been oil and its causes. Oil is one of the key strategic commodities in the world that plays a major role in setting the political and economic relations among countries. The economic structure of the petroleum exporting countries' dependency on oil revenues causes the affection of global economy in recession boom to economy of such countries. In most oil-exporting countries (e.g. Iran), oil revenues are the government's and state-owned. As the recipient of oil revenues, leads the current and development budgets of these revenues to different economic sectors. To make a good decision and to improve their societies, the governments need to design the budget. To do its functions, a government uses budget as a planning and financial tool. Accordingly, oil price fluctuations have a major influence on the government's spending of oil revenues as a major source for financing different expenditure categories. Iran has a history of more than a century in the exploration and production of oil; the first successful well exploration was Masjid Suleiman on May 26, 1908. Since then, based on the latest oil and gas reports, 145 hydrocarbon fields and 297 oil and gas reservoirs have been discovered in Iran, with many fields having multiple pay zones. Proved oil reserves in Iran, according to the government, ranks as the fifth largest one in the world at approximately 150 billion barrels as in 2014, although it ranks as the third country if Canadian reserves of unconventional oil be excluded. This is roughly 10% of the world's total proven petroleum reserves.
Oil sector in most of the oil exporting countries (such as Iran) is a state-run sector and oil revenues belong to government. Iran is an energy superpower in which the petroleum industry plays an important part. In 2004, Iran produced 5.1 percent of the world’s total crude oil (3.9 million barrels per day), which generated revenues of US$25 billion to US$30 billion and was the country’s primary source of foreign currency. In 2006 levels of production, oil proceeds represented about 18.7 percent of gross domestic product (GDP). However, the importance of the hydrocarbon sector to Iran’s economy has been far greater. The oil and gas industry has been the engine of economic growth, directly affecting public development projects, the government’s annual budget, and most foreign exchange sources. In 2009, the sector accounted for 60 percent of total government revenues and 80 percent of the total annual value of both exports and foreign currency earnings. Oil and gas revenues are affected by the value of crude oil on the international market. It has been estimated that at the Organization of the Petroleum Exporting Countries (OPEC) quota level (December 2004), a one-dollar change in the price of crude oil on the international market would alter Iran’s oil revenues by US$1 billion. In 2006, exports of crude oil totaled 2.5 million bpd, or about 62.5 percent of the country’s crude oil production. The direction of crude oil exports changed after the Revolution because of the U.S. trade embargo on Iran and the marketing strategy of the NIOC. Initially, Iran’s post-revolutionary crude oil export policy was based on foreign currency requirements and the need for long-term preservation of the natural resources. In addition, the government expanded oil trade with other developing countries. While the shares of Europe, Japan, and the United States declined from an average of 87 percent of oil exports before the Revolution to 52 percent in the early 2000s, the share of exports to East Asia (excluding Japan) increased significantly. In addition to crude oil exports, Iran exports oil products. In 2006, it exported 282,000 barrels of oil products, or about 21 percent of its total oil product output. Iran plans to invest a total of $500 billion in the oil sector before 2025. In 2010, Iran, which exports around 2.6 million barrels of crude oil a day, was the second-largest exporter among the Organization of Petroleum Exporting Countries. Several major emerging economies depend on Iranian oil: 10% of South Korea’s, 9% of India’s and 6% of China's oil imports come from Iran. Moreover, Iranian oil makes up 7% of Japan’s and 30% of all Greek oil imports. Iran is also a major oil supplier to Spain and Italy. This study investigates the asymmetric effects of oil price fluctuation on government expenditure based on Mork's (1989) and Hamilton's (1996) definitions. In order that, To this end, the oil prices, total government expenditure, current and development expenditures of the government, per capita total expenditure, per capita current and development expenditures and the deviation of the real exchange rate during the period of 1965 to 2011 have been used within the framework of the vector autoregressive model.
The results indicated that fluctuations in oil prices have asymmetric effects on government expenditure. According to both definitions, oil prices increase relative to oil prices decrease has a greater effect on government spending; however, the effect of oil prices decrease on government spending is more sustainable than oil prices increase. Also, such changes in oil prices rise or fall have more impact on construction costs compared to current expenditures that verifies the stickiness of current expenditures.

Keywords

Oil price fluctuations; Asymmetric effect; Government Expenditure; VAR models; Iran

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