An ARDL investigation on the nexus of oil factors and economic growth: A timeseries evidence from Sultanate of Oman

Javed, Sarfaraz; Husain, Uvesh Article An ARDL investigation on the nexus of oil factors and economic growth: A timeseries evidence from Sultanate of Oman Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Javed, Sarfaraz; Husain, Uvesh (2020) : An ARDL investigation on the nexus of oil factors and economic growth: A timeseries evidence from Sultanate of Oman, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 8, Iss. 1, pp. 1-17, https://doi.org/10.1080/23322039.2020.1838418 This Version is available at: https://hdl.handle.net/10419/269996 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Published online: 10 Dec 2020. Submit your article to this journal Article views: 1034 View related articles View Crossmark data Citing articles: 6 View citing articles GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE An ARDL investigation on the nexus of oil factors and economic growth: A timeseries evidence from Sultanate of Oman Sarfaraz Javed 1 * and Uvesh Husain 1 Abstract: The study is conducted to comprehend the relation of the oil sector with Oman’s economic growth. Oman is an abundant oil country, and the oil sector plays an influential part in its economic development. The data were gathered from a range of 1989 to 2018 from the National Center for Statistics and Information of Oman; it published the statistical year for variables including oil revenue, oil price, gross capital formation, total revenue, and production or export of Crude Oil. The data were analyzed with the help of the ARDL cointegration approach and Granger causality test. The results enlighten that economic performance is significantly affected by the oil price, crude oil production, and gross capital formation, and the total revenue and oil revenue insignificantly influence it. The impact of export has a substantial adverse influence on economic growth. The variables have long-run granger cause on each other while short-run causal bidirectional relation exists among economic performance, crude oil production, and export of Crude Oil. The Sarfaraz Javed ABOUT THE AUTHORS Dr Sarfaraz Javed (PhD) is a researcher devoted to conducting research on emerging issues and challenges in business, corporate finance, economies and various interdisciplinary areas, particularly in finance and accounting. His area of interest is Corporate finance, managerial implications, Intellectual capital, Corporate social responsibility, Financial and Management accounting. Along with his extensive research experience, his teaching experience is also remarkable which he gains through national and international exposure. He’s handling Two funded projects from “The Research Centre” program named Block funded projects. Owais Husain (PhD) having more than 14 years of teaching and research experience. I’m equipped with Extraordinary Caliber and appreciable academic potencies. Presently working with MAZOON COLLEGE as a HOD of the Economics and Business Studies Department, appointed as Assistant Professor. My areas of specializations are Commerce (Accounting& Finance). Mine published Research and Article in various National and International Journals. Currently, I’m working on Two FUNDED projects along with the two books. Moreover, I’m actively participating in International Conferences and workshops. I’m also serving as a reviewer for numerous journals. PUBLIC INTEREST STATEMENT The purpose of this study was to know how the Oil sector of Oman is impacting the economy of Oman. So, this study has focused on the fact that how the oil revenue, oil price, gross capital formation, total revenue and production or export of crude oil is impacting the economic growth of Oman. In this study, the researcher has used data regarding the factors under study through the National Center for Statistics and Information of Oman. The results of this study have revealed that the oil revenue can decrease the economic growth, the enhancement in oil price can enhance the economic growth, the oil production can enhance the economic growth of Oman while the enhancement in crude oil export can decrease the economic growth of Oman as well. This study can impact the focus of Omani government on the oil sector and the government can better make policies regarding investing in the sector for enhancement of the economic growth of Oman. Javed & Husain, Cogent Economics & Finance (2020), 8: 1838418 https://doi.org/10.1080/23322039.2020.1838418 Page 1 of 17 Received: 26 July 2020 Accepted: 14 October 2020 *Corresponding author: Sarfaraz Javed, Economics and Business Studies Department, Mazoon College, Muscat, Oman E-mail: [email protected] Reviewing editor: Muhammad Shafiullah, Economics, University of Nottingham - Malaysia Campus, Malaysia Additional information is available at the end of the article © 2020 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. study helps Oman’s Government understand the importance of the oil sector and aids in maintaining or forecasting the oil revenue and government spending to retain a stable economy. Subjects: Economic Theory & Philosophy; Monetary Economics; Development Economics Keywords: economic growth; oil revenue; ARDL estimation; Oman 1. Introduction Several research types have revealed that the states’ economic reforms depend on their naturally available resources in their soils. The growth hikes with numerous resources and Oil are the predominant sources. Oman is one of the blessed countries having Oil as a central reserve prevailing on their land and glorifying the Sultanate of Oman. The country’s exports are comprised of 87.6%, which are linked to global crude oil exports. Over 85% of the state’s revenue is produced from crude Oil of the Sultanate and contributes to the country’s GDP growth. According to a national survey, a 2.6% increase in crude oil production has been observed on an annual basis; a 4.2% hike has been observed in crude oil production daily and 55.4% has been the sale ratio from the oil refineries and petroleum sectors of the country like Oman (WB, 2010). However, crude oil prices fell up to 7% in 2019 compared to the year 2018. Furthermore, the sector of crude oil has become the primary mode of GDP growth of the Sultanate as compared to other sectors such as the corporate sector, manufacturing sector, etc. consequently, facts and figures solidify the significance of Oil in the economic growth of the country at supreme level. According to the international data providing body, the exports of Oman crude oil have been higher in 2016 with 887.500 barrel/day (CEIC, 2020). The oil and petroleum production of Oman helped to develop over the last five decades. Nonetheless, Oman has collaborated with various groups but still could not get the Organization of Petroleum Exporting Countries (OPEC). The history of oil production is dated back from 1964 in the region of Oman named Fahud. It is the predominant oilfield of the Sultanate of Oman, situated in the desert of the Western area. In the year 1967, the proper extraction and oil production was started by the Petroleum Development of Oman (PDO). This oil extraction body shares 60% ownership with the Government of Oman, and 40% ownership is held under foreign-based investment, including the Royal Dutch Company and Françoise des Petroleos. The reserves have been dwindling due to their depleting nature in the oil reserves. In the 1980s, the production of Oil fell to 285,000 barrels per day compared to 366,000 barrels per day in 1976. Price levels also fell, and Oman recovered by escalating the production. However, in 1986 the economy was severely affected due to uncertainty and changing oil prices, and to counter the situation, production was severely affected and decreased temporarily in response to the Organization of Petroleum Exporting Countries (OPEC). However, the production surge came by 1987 with 600,000 b/d, the revenue of the country increased. Ostensibly, by 2000, the oil extraction and production increased up to 900,000 barrels per day. By the year 2000, Oman faced a massive increase in Oil production at such a massive level and enhanced the economic growth of the Sultanate of Oman. Following the report issued in yearly publication 2018 by Oman’s Central bank, the price of crude Oil recorded up to US$69.7 in the year 2018, which was more than the prior year. Moreover, the economic boost has been predicted by the World Bank report, and this growth would be hiking up to 2021 as various projects are estimated to contribute, such as Oil-based sectors and non-oil sectors. Owing to the Government expenditure has been more generous on the country’s oil sector along with the social welfare spending and defense system of the region. Moreover, the debt to GDP ratio is estimated to increase by 58% by the year 2020. According to the National Statistics Centre, crude oil production has fallen at the end of the year 2019 with a rate of 3.4%, and this condensation in production affects economic performance. However, according to the PDO report, Oman’s Oil sector faces various challenges ahead. The factors include the size of the industry, location, and operational maturity of the oil sector. These threats are of political, economic, as well as social nature. The main challenge is based on deliverability. Issues are prevailing based on costs and price hikes in the Javed & Husain, Cogent Economics & Finance (2020), 8: 1838418 https://doi.org/10.1080/23322039.2020.1838418 Page 2 of 17 industry of oil reserves and production declination in this particular sector. In addition to it, the current demands of Oil by the social communities have increased blatantly. According to the World Bank, crude Oil production has been facing various troubles related to the country’s current scenario. The Gross Domestic Product’s growth is observed to flow downward with a ratio of 1.1% compared to the ratio of 3.1% for the year 2018. The significant hindrances have occurred due to the limitations carved by OPEC at an international venue. Contrarily, nonhydro-carbonated sectors such as tourism, fishing, and manufacturing are expected to enhance the GDP with a rate of 1.5% (WB, 2019). These challenges are consistent with the report published by the World Bank in the year 2010. The report predicted the upcoming hurdles occurring during the processing of crude oil extraction and production. Moreover, 20–25 years have been estimated as a lifespan for the whole oil reservoirs in Oman, and it would be hitting the sector of Oil in awful manners. The publication was named “Oman energy sector review,” and the study has already predicted the forthcoming trials for the Oman energy sector (WB, 2010). Several previous studies have laid out the importance of the oil sector for the countries that are directly dependent on their oil reserves and oil production for their economies. However, most of the studies have failed to significantly and separately explain all of the aspects of the oil sector and their importance for those countries’ economies. Similarly, several studies that have been reviewed by the researcher as well have not shown any significant research being done on all of the factors of the oil sector of Oman and have also not empirically given exact figures according to which it can be determined that whether or not the contributions of the oil sector of Oman are significant for the economic performance of Oman as well. The researcher has closely observed all of these drawbacks and has carried out this study to highlight the impacts of each aspect like oil price, crude oil production, and oil revenue on Oman’s economic performance. The researcher feels that the oil sector has significant importance in the economy of Oman. However, the researchers are undermining the importance as they are not conducting full-fledged research regarding each aspect of the oil sector that impacts the economic performance and economic growth of Oman (Al-Mawali et al., 2016). Despite the gaps present in the previous researches, the researcher has taken the essential variables from the oil sector of Oman in order to clarify that how the economy of Oman is getting impacted by these variables, so the researcher has used the latest tools, software, and techniques to analyze and interpret these impacts. The researcher has chosen this topic so that the Government of Oman can closely focus on those aspects of the oil sector that can enhance Oman’s overall economic performance and growth. The research has several significant contributions to the literature, as the researcher has highlighted and filled the gaps present in the past research, such as the absence of empirical evidence of the impacts of Oman’s oil sector on the economy of Oman. There was an absence of suitable references and cross-study proofs to explain the relationship between Oman’s oil sector and the economy. The researcher has also clearly mentioned the impacts cast by each factor of the Oil sector of Oman on economic performance so that those aspects can better be focused by the sector and companies to enhance revenue and economic growth. Moreover, the researcher has given proofs, adequately analyzed, and interpreted results for the Government of Oman, which can now significantly make policies and rules regarding the improvement and funding of the oil sector to enhance economic performance and growth of Oman. 2. Literature review Economic growth is several times studied and explained by different researchers according to their perceptions (Nkalu & Edeme, 2019), this is a topic that has attracted most of the researchers, but there is still not a single definition that can satisfy all of the aspects that are involved in economic growth. However, when researchers talk about a specific country’s economic development, the descriptions become precise and relate to that country’s characteristics only. (Rafindadi, 2015) put forward the concept of economic growth as an increase in the production of the goods and services in a stateprovided in a specific period and measured with the removal of inflation. Financial growth results in the enhancement of profits for the businesses present in a country; it also enhances the firms’ stock prices Javed & Husain, Cogent Economics & Finance (2020), 8: 1838418 https://doi.org/10.1080/23322039.2020.1838418 Page 3 of 17 in a country. Also, it provides the companies and businesses present in a country with the necessary capital that can be invested for development and innovation. In all of this process, more employees can be hired, more jobs are created, and the overall income rises (Suliman et al., 2018). On the other hand, the consumers become able to buy more of the services and the products that are produced within a country; when the purchases go up, they also enhance the economic growth with them, and the economic growth is then indicated positive (Al Samman & Jamil, 2018). Most researchers have mired the economic growth factor using the gross domestic product, exports, and imports of a country. At the same time, past studies do not effectively describe economic growth in relationships with different sectors present in a country (Li et al., 2018). Oil importing states have been discussed in various studies, while the oil-exporting states have significantly less focus in the research areas. However, a study conducted in the oil-exporting country has been keenly observed (Mahdi, 2019). The effect of fluctuation of oil prices on different variables has been examined by some researchers, GNP, exchange rates, unemployment level, and inflation rate using time series data (Saeed & Hatem, 2017). The study has found that prices of Oil have no impression in the shorter period. However, oil prices have a substantial impact on the inflation level of the country. Most of the research that the researcher has gone through has indicated different opinions of other researchers regarding different countries’ economic growth. Still, there were the least researches based on economic growth in several specific sectors of a nation. Most of the time, the economy and the GDP of a country are calculated based on the resource in which the Government is rich and abundant. For Oman, this product is its production of Oil. However, most of the researchers in the past studies have addressed both the oil and gas sector of Oman when it comes to discussing the economic growth of Oman. The survey of (Ahmed, 2018) has discussed sultan Qaboos’ time, who reformed the oil and gas sector for the sole purpose of Oman’s economic growth. The sultan invested billions of dollars in the oil sector of Oman for the sole purpose that this will result in 10 times the profit of the amount that is invested in the project; with this investment, it was made clear that most of the economic growth an GDP of Oman is based upon its oil sector. Results have identified that the proposed model has been harmonized with the theories of economics. There is mainly a statistically significant relationship between the country’s economy and the rate of exchanges via numerous price factors. Furthermore, a significant level of policy breakthroughs is demanded the economic sector’s revival (Alkhateeb et al., 2016). Later on, most of the studies and surveys proved that Oman is an Oil abundant state and the only way to make the economic growth positive and the GDP go higher is to invest in this sector. The Government is making continuous efforts to enhance their reserves for the hydrocarbons and to sustain the oil production; it has also been proven through different studies that the resources that are present in Oman are much lower than other states in the Gulf, yet some of the researchers have confirmed that the reserves of hydrocarbons are enough to make the economic growth go higher than what the other gulf countries have (Şentürk & Ali, 2019). Some of the researchers have argued that Oman lacks the vision that is needed to consistently use and take advantage of the reserves of hydrocarbons present in the country; some of the researchers have also pointed out the fact that there is a lack of enough investment which is needed for proper oil extraction and refining, doing what Oman will be completely taking advantage of all of the reserves that it has. Most of the studies have only pointed out the drawbacks of the oil sector of Oman, some reviews that the researcher has gone through include proving the abundance of oil reserves and the results of hydrocarbons present in Oman. Almost none of the past studies has discussed the oil sector factors that can be beneficial when it comes to the enhancement of economic growth and GDP of Oman. Almost none of the past studies has discussed the enhancement of economic growth with the help of different oil sector factors. None of the past reviews have concerned how oil price, oil exports, oil refining, and oil diversification can impact the economy of Oman. The researcher has strived to fill this gap and provide Javed & Husain, Cogent Economics & Finance (2020), 8: 1838418 https://doi.org/10.1080/23322039.2020.1838418 Page 4 of 17 enough empirical evidence regarding these factors in the present research. The study of (Zayed, 2016) has shown how the oil revenue can impact Oman’s gross capital formation and revenue from Oman’s oil sector. Still, the analysis yet is short of necessary pieces of evidence and factual data. The course has significantly enlightened how crude oil production is required for the growth of Oman’s GDP and exports, but the study has not focused on the economic growth of Oman at all. 3. Research methodology The study was done to evaluate the influence of the oil sector on Oman’s economy. The data gathered for the analysis is drawn from a statistical years-book published by the National Center for statistical information of Oman. The data collected were from the year range of 1989 to 2018 based on the availability of statistics. The indicators used to measure the oil sector’s contribution are export of crude oil, oil production, oil price, revenue generated by Oil, GCF, and total revenue, while GDP determines the economic growth. 4. Econometric approach This research’s primary objective was to show the impact of the oil segment on the economic development of Oman. The approach used to analyze the data is autoregressive distributive lag (ARDL), which is used to conduct an abound test and cointegration test proposed and developed (Pesaran et al., 2001). The core advantage of this approach is that it uses and takes the regressors stationarity at the first difference of I (1) or I (0) and maybe a mixture of both, which aid in evading the hurdles generated in the test of a unit root. Endogeneity issues are also efficiently resolved by the ARDL approach (Lin & Moubarak, 2014). The ARDL test can easily be applied to small sample size for substantially inspecting cointegration, while the Johansen technique needs a large sample size to run the analysis for cointegration. This approach quickly evaluates the variables even if they have different optimal lags (Ozturk & Acaravci, 2010). The model of ARDL bound approach of multivariate unrestricted error correction model (UECM) is as follows in equation 1: ΔGDPt¼αþγ1GDPt1þγ2ORt1þγ3OPt1þγ4COPt1þγ5COEt1þ γ6GCFt1þγ7TRt1þ∑ n i¼1 1ϕiΔGDPt¼iþ∑ n1 j¼0 δiΔORt¼jþ∑ n2 l¼1 ηiΔOPt¼1þ ∑ n3 m¼1 θiΔCOPt¼mþ∑ n4 k¼1 ρiΔCOEt¼kþ∑ n5 h¼1 τiΔGCFt¼hþ∑ n6 s¼1 ωiΔTRt¼sþμt (1) Here, GDP refers to the gross domestic product OR indicates oil revenue; OP stands for the oil price, COP stands for crude oil production, COE stands for crude oil export, GCF indicates gross capital formation, and TR stands for total revenue. ∆ is used to present the operator difference, the error is denoted by µt and the long-term multiplier is symbolized as γt. The variables of equation 1 have been changed into a natural logarithm, which reduces the chances of heteroscedasticity in data. The bound test consists of threesteps and is based on joint F-statistics for the cointegration procedure. Step one is to analyze the possibility of long-run association among the series with the help of ordinary least square (OLS), which aids in identifying the joint significance of coefficient at the lagged level in equation 1. The null hypothesis of the series is shown as “H0: γ₁ = γ₂ = γ₃ = γ₄ = γ₅ = γ₆ = γ₇ = 0” and on the other hand, the alternative hypothesis is expressed as “H1: γ₁ ≠ γ₂ ≠ γ₃ ≠ γ₄ ≠ γ₅ ≠ γ₆ ≠ γ₇ ≠ 0.” The bound test shows the values of I (1) and me (0) for regression, and it is also possible that it may be a combination of both of them or mixed integration. If the computed F-statistics value is less than the lower bound value, the rejection of the null hypothesis is impossible, which means no-cointegration exists among the variables. On the other hand, if computed F-statistics is more than the upper bound value, the null hypothesis of no integration is rejected, representing a long-run association and cointegration present among the variables. The test is inconclusive when the value of computed F-statistics falls amongst the bound values. The next step in the ARDL approach is estimating long-run coefficients if cointegration is found among the variables. The ARDL model is presented as follows in equation 2: Javed & Husain, Cogent Economics & Finance (2020), 8: 1838418 https://doi.org/10.1080/23322039.2020.1838418 Page 5 of 17 GDPt¼αþ∑ n i¼1 β1GDPtiþ∑ n1 j¼0 β2ORtjþ∑ n2 l¼0 β3OPtlþ∑ n3 m¼0 β4COPtmþ ∑ n4 k¼0 β5COEtkþ∑ n5 h¼0 β6GCFthþ∑ n6 s¼0 β6TRtsþμt (2) Here, GDP refers to the gross domestic product OR indicates oil revenue; OP stands for the oil price, COP stands for crude oil production, COE stands for crude oil export, GCF indicates gross capital formation, and TR stands for total revenue. The last step of this approach is the estimation of the short-run coefficient by applying an error correction model, which is shown below in equation 3: ΔGDPt¼αþ∑ n i¼1 ϕΔGDPtiþ∑ n1 j¼1 δjΔORtjþ∑ n2 l¼1 ηlΔOPtlþ∑ n3 m1¼1 θmΔCOPtmþ ∑ n4 k¼1 ρkΔCOEtkþ∑ n5 h1¼1 τhΔGCFthþ∑ n6 s¼1 ωsΔTRtsþΨECTt1þμt (3) The symbol Ψ indicates the error correction term (ECT) utilized to adjust disequilibrium in each period, and it is statistically substantial with a negative sign. It is very beneficial and helps prove long-run relationship stability (Banerjee et al., 1998). While Φ, δ, η;ρ;τ;ω and θ are representing the short-run coefficients. Here, GDP refers to the gross domestic product, OR indicates oil revenue, OP stands for the oil price, COP stands for crude oil production, COE stands for crude oil export, GCF indicates gross capital formation, and TR stands for total revenue. After implementing the cointegration by bound test, there is a need to inspect casual association among elements. It is accomplished by applying the Granger causality test because of cointegration purposes; the presence of causality in the elements is not enough to specify the direction (Eddrief-Cherfi & Kourbali, 2012). So, Granger (1988) suggested causal direction between variables if cointegration is found, then VECM should be applied instead of VAR. The VECM model is more appropriate in this study to estimate the Granger causality test by taking variables on the first difference and combining the long-run relationship as an error correction term in this model. The model of VECM is presented as follows in equations 4 to 10: ΔGDPt¼λ10 þ�1ECTt1þ∑ m1 i¼1 λ11iΔGDPtiþ∑ n1 i¼1 λ12iΔORtiþ∑ p1 i¼1 λ13iΔOPtiþ ∑ q1 i¼1 λ14iΔCOPtiþ∑ s1 i¼1 λ15iΔCOEtiþ∑ k1 i¼1 λ16iΔGCFtiþ∑ h1 i¼1 λ17iΔTRtiþμ1t (4) ΔGDPt¼λ10 þ�1ECTt1þ∑ m1 i¼1 λ11iΔGDPtiþ∑ n1 i¼1 λ12iΔORtiþ∑ p1 i¼1 λ13iΔOPtiþ ∑ q1 i¼1 λ14iΔCOPtiþ∑ s1 i¼1 λ15iΔCOEtiþ∑ k1 i¼1 λ16iΔGCFtiþ∑ h1 i¼1 λ17iΔTRtiþμ1t (5) (6) ΔCOPt¼λ40 þ�4ECTt1þ∑ m4 i¼1 λ41iΔGDPtiþ∑ n4 i¼1 λ42iΔORtiþ∑ p4 i¼1 λ43iΔOPtiþ ∑ q4 i¼1 λ44iΔCOPtiþ∑ s4 i¼1 λ45iΔCOEtiþ∑ k4 i¼1 λ46iΔGCFtiþ∑ h4 i¼1 λ47iΔTRtiþμ4t (7) Javed & Husain, Cogent Economics & Finance (2020), 8: 1838418 https://doi.org/10.1080/23322039.2020.1838418 Page 6 of 17 ΔCOEt¼λ50 þ�5ECTt1þ∑m5 i¼1λ51iΔGDPtiþ∑n5 i¼1λ52iΔORtiþ∑p5 i¼1λ53iΔOPtiþ ∑q5 i¼1λ54iΔCOPtiþ∑s5 i¼1λ55iΔCOEtiþ∑k5 i¼1λ56iΔGCFtiþ∑h5 i¼1λ57iΔTRtiþμ5t (8) ΔGCFt¼λ60 þ�6ECTt1þ∑m6 i¼1λ61iΔGDPtiþ∑n6 i¼1λ62iΔORtiþ∑p6 i¼1λ63iΔOPtiþ ∑q6 i¼1λ64iΔCOPtiþ∑s6 i¼1λ65iΔCOEtiþ∑k6 i¼1λ66iΔGCFtiþ∑h6 i¼1λ67iΔTRtiþμ6t (9) ΔTRt¼λ70 þ�7ECTt1þ∑m7 i¼1λ71iΔGDPtiþ∑n7 i¼1λ72iΔORtiþ∑p7 i¼1λ73iΔOPtiþ ∑q7 i¼1λ74iΔCOPtiþ∑s7 i¼1λ75iΔCOEtiþ∑k7 i¼1λ76iΔGCFtiþ∑h7 i¼1λ77iΔTRtiþμ7t (10) Here, GDP refers to the gross domestic product OR indicates oil revenue; OP stands for the oil price, COP stands for crude oil production, COE stands for crude oil export, GCF indicates gross capital formation, and TR stands for total revenue. The coefficient of error correction term ξ used to explain the explanatory variable deviation from long-run equilibrium and lagged of error correction term (ECT₋₁) was also acquired by long-run relationship equilibrium. The coefficients mᵢ, nᵢ, pᵢ, qᵢ, sᵢ, kᵢ, and hᵢ are used to pinpoint optimum lag length, and their basis of determination depends on Akaike Information Criterion (AIC), Schwarz Bayesian Criterion (SBC), and Hannan–Quinn information criterion. The coefficient significance of lagged error correction term helps VECM captures the long-run causality among variables that aid in showing how quickly disequilibrium adjusted between variables. Meanwhile, the Wald test or F-statistics helps in accessing the short-run causality, and the test is used to highlight the implication of all lagged dynamic terms, which help measure the short-run causal effect (Sulub et al., 2020). Another test helps in adjusting the disequilibrium among variables known as a joint test for short-run which give signs to a variable that can bear the short-run adjustments to maintain the equilibrium in the long run due to any shock in a structure (Asafu-Adjaye, 2000). The long run’s causality was analyzed by accessing the H₀: ξᵢ = 0 and the short-run accessed through H₀: λᵢ = 0. It means that if the null hypothesis is rejected, then the causal relationship is found among variables. 5. Results and discussion Subsequently, the analysis of the influence of oil division on economic reforms of Oman. Various tests and techniques applied to evaluate data’s stationarity, con-integration and causal effect among economic growth, oil revenue, oil price, production of crude oil, the export of crude Oil, gross capital formation, and total revenue. Table 1 shows the descriptive statistics that illustrate the mean, median, highest, lowest values, and normality of all elements. The mean value of economic growth is 4.017, with the highest and lowest point in 11.757 and −2.669. As the maximum value of oil, revenue is 9.386, and the minimum is 6.901 and has a mean of 8.016. The peak level of oil price is 4.697 and the lowest level of 2.438 and has a mean of 3.544. The production of crude oil has a mean value of 5.721, while the peak point is 5.907 or the lowest point of 5.425 and so on. The normality of variables accessed through the threshold value of skewness, which ranges from −1 to +1. As the value of all variables flow within the threshold value of skewness which indicates that all variable has normality Figure 1. It can be visibly seen from the results of the correlation test present in Table 2 that there is a high level of correlation present between the variables under study, as the correlation between OR and OP can be seen to be equal to 0.666, which is considered to be a high value of correlation. Moreover, the value of the correlation between OR and GCF can be seen to be equal to 0.731, which is also a high value when it comes to correlation. So, it is clear that the value of correlation is high between the chosen variables that need to be fixed. As some of the researchers have debated that this value should Javed & Husain, Cogent Economics & Finance (2020), 8: 1838418 https://doi.org/10.1080/23322039.2020.1838418 Page 7 of 17 shown that the oil prices will significantly and positively affect the economy of Oman in the long run. It has been depicted this way because, in the long run, Omani Government might take a look into how the oil revenues can be utilized in a significant way, thus enhancing the revenues and impacting the country’s economy as well. According to the study of (Ogbonna & Appah, 2012; Ogbonna & Ebimobowei, 2012), price enhancement in the oil prices leads to GDP enhancement of the countries that have their economy highly dependent on the oil sector. According to the results of this study, it has been confirmed that when prices of Oil start to trend upwards, the GDP of Oman will also start to trend upwards as well, so in short, it will enhance. (Bouchaour & Al-Zeaud, 2012) also observed a significant long-run association among oil prices and Oman’s economic growth as in the long run, if the oil prices enhance in Oman, the economic growth will enhance (Atil et al., 2020). The production of oil has occupied the economies of oil-rich states like Oman. It has been found that crude oil production positively and significantly co-integrates with the development of Oman’s economy in the short and long run. (KILISHI, 2010) also concluded that Oman’s economic development is positively and significantly supported by the production of crude Oil in Oman, so it can be said that if Crude oil production is enhanced in Oman, the economic development will enhance as well. It is also proven that crude oil export has a significant and harmful influence on Oman’s economic performance. Previous studies also concluded this result and showed that GDP is substantially and negatively influenced by Crude oil export (Eravwoke et al., 2014) (Ogbonna & Appah, 2012). The impact of total revenue on the performance of the economy of Oman is positive but insignificant. (Myles, 2000) also claims that the impression of total revenue on GDP is insignificant. This study analyzed that gross capital formation is positively and significantly associated with the economy. (Onyinye et al., 2017) examined substantial and positive impacts of gross capital formation on Oman’s economic growth (Pîrlogea & Cicea, 2011). Oman is blessed with the natural resource of Oil, and its economy is expected to be impacted by any rise and fall-related to this sector. The data is gathered from 1989 to 2018 from the National Center for Statistics and Information of Oman published a statistical year. The effect and association among variables have been assessed through the ARDL approach and Granger causality. The outcomes highlight that oil prices, crude oil production, and gross capital formation positively and significantly affect Oman’s economy (Yusuf et al., 2020). Crude oil export has a substantial and adverse effect on Oman’s economy, while oil revenue and total revenue are insignificantly influencing Oman’s economy. The results of the Granger causality test illustrate the long run and bidirectional causality present among the variables. Although bidirectional causal relation exists among economic growth, production of crude oil, and export of Oman’s crude oil. The link among oil price, economic growth, and crude oil production is also observed to be bidirectional; however, Crude oil export has a unidirectional link with Oil Price and GDP with oil revenue. Oil revenue only has a bidirectional relationship with the oil price in Oman. Table 9. Granger causality test Variables Short run causality Long-run causality EG OR OP COP COE ECT −1 EG - −3.202** 3.073* 5.467*** −2.135* −1.1152*** OR 1.462 - 2.125* −0.758 0.689 −1.0241*** OP −2.299* 7.510*** - 2.187* −2.050 −1.3146*** COP 5.496*** −1.169 2.203* - 7.072** −1.0534*** COE −2.668** 0.989 2.486** 7.274*** - −1.2989*** Source: Author’s Contribution, Produced through Software EViews, version 10. *0.05 **0.005 ***0.001 Javed & Husain, Cogent Economics & Finance (2020), 8: 1838418 https://doi.org/10.1080/23322039.2020.1838418 Page 14 of 17 The research has several significant contributions to the literature, as the researcher has highlighted and filled the gaps present in the past research, such as the absence of empirical evidence of the impacts of Oman’s oil sector on the economy of Oman. There was an absence of suitable references and cross-study proofs to explain the relationship between Oman’s oil sector and the economy. The researcher has also clearly mentioned the impacts casted by each factor of the Oil sector of Oman on economic performance so that those aspects can better be focused by the sector and companies to enhance revenue and economic growth. Moreover, the researcher has given proof, properly analyzed, and interpreted results for the Government of Oman, which can now significantly make policies and rules regarding the improvement and funding of the oil sector to enhance economic performance and growth of Oman. With this research’s help, while the Government will invest in the oil sector, more jobs will be created, and the earnings per capita will enhance. Oman should develop a long-run strategy for reducing its dependence only on the oil sector. The Government should diversify the revenue on the different sectors and provide investment opportunities in the different sectors that grab investors’ attention and enhance their ability and competitiveness on a world level. The Government should also promote small and medium scale industries and work on the development of tourism activities. The Government would improve the agriculture sector, which would bring more revenue for country and advancement in the financial sector that can grab foreign investors’ attention if the loan is available at a moderate rate. Investors make more investment in non-oil products, which aid in diversifying the economy. The research can be further extended by examining the effect of the oil sector on business and comparing the effect of the oil or non-oil sector on the economy. The role of Government in the oil and non-oil sector and how Government diversifies their economy. A study conducted with limited variables and a short period that mostly highlights increasing oil price trends, further study can be extended with an extensive period that shows rise fluctuation in prices and more variables like political, domestic, government expenditure, etc. Funding The research leading to these results has received funding from the Research Council (TRC) of the Sultanate of Oman under the Block Funding Program. TRC Block Funding Agreement No: BFP/RGP/CBS/19/076 Author details Sarfaraz Javed 1 E-mail: [email protected] ORCID ID: http://orcid.org/0000-0002-1992-3484 Uvesh Husain 1 E-mail: [email protected] ORCID ID: http://orcid.org/0000-0002-8502-8488 1 Economics and Business Studies Department, Mazoon College, Muscat, Oman. Citation information Cite this article as: An ARDL investigation on the nexus of oil factors and economic growth: A timeseries evidence from Sultanate of Oman, Sarfaraz Javed & Uvesh Husain, Cogent Economics & Finance (2020), 8: 1838418. 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