What Drives the Economic Activity in the Oil-Producing Countries? An Empirical Evidence for Caspian Countries

This study investigates and assesses the economic activity in the five Caspian states - Azerbaijan, Iran, Kazakhstan, Russia, and Turkmenistan over the period from 1998 to 2021. In this regard, we used GDP as the dependent variable, while oil production, global oil price, natural gas production, global natural gas price, exports, and inflation were the explanatory variables in order to investigate and capture their impact on the economic activity in these energy-producing countries. In terms of methodology, we performed the regression models often used in the panel analysis - Common Effects Model and Fixed Effects Model, and also applied various robustness and diagnostic tests, namely: F-test, Jarque-Bera test, Breusch- Pagan LM Test or Chow Test. Our results showed that the Fixed Effects Model provides a more accurate estimation of the economic activity (in terms of GDP), since the exports and the oil production have a direct, positive and statistically significant influence on these economies. For instance, a 10% increase in the exports and oil production generates an increase in the level of GDP of about 0.96% and 3.12%. At the same time, the results showed moderate positive and direct correlations between GDP and inflation, as well as between oil prices and inflation, suggesting that oil prices exert a greater influence on producer prices because of oil’s role as a key input in these oil-exporting countries. Furthermore, by applying the Vector Error Correction model (VECM), our results showed that the variables are not cointegrated and the level of GDP per capita is not influenced by the co-movements of the explanatory variables in the long-run. In this sense, a policy implication of the study would be to develop more intensive co-operation and build new energy trade relationships between the Caspian Countries and other energy-dependent countries, especially the European Countries.