Crude oil price volatility and energy mix in Saudi Arabia

ABSTRACT

The status of crude oil in the global energy mix shows that crude oil is the most sought after energy source worldwide. Saudi Arabia is an important crude oil exporting nation heavily dependent on its crude oil revenue—which dominates the energy mix in the country. The quest for energy production from fossil in Saudi Arabia by directly burning crude oil for electricity power generation have negative impact on industrial production in the Kingdom with significant cost implication and the adverse effect on the environment. Employing the Markov switching regression model, our simulation confirms the negative impact of crude oil price volatility for the industrial sector return in Saudi Arabia. An energy intensity target for the industrial sector and the diversification of energy source will help ensure the elimination of waste in the production and consumption of energy in the Kingdom—boosting energy efficiency in general with diminishing production cost.

KEYWORDS:

• Crude oil
• energy mix
• industrial sector
• Markov switching
• volatility

Notes

¹ See Maheu and McCurdy (2000) and Perez-Quiros and Timmerman (2001).

² In the interest of brevity, this result is not reported because it is similar to that of the constant Markov switching model. The result is available upon request.