An Empirical Examination of the Asymmetric Relationship Between Oil Price and Economic Growth and its Implications on the UAE

Abstract

This study explores the impact of oil price fluctuations on economic growth in the United Arab Emirates (UAE), with a specific focus on Abu Dhabi and Dubai. These two emirates have distinct economic structures—Abu Dhabi relies heavily on oil exports, while Dubai has a more diversified economy. The research aims to understand whether oil price changes affect their GDPs differently and to what extent economic diversification has reduced the UAE’s dependence on oil.

Using data from 2001 to 2020, collected from the World Bank, IMF, and local statistical centers, the study applies both Ordinary Least Squares (OLS) regression and Vector Autoregression (VAR) models to capture long-term and short-term economic responses to mainly oil price shocks, labour and capital. The results show that labour is a significant driver of GDP growth across all models, while capital investment plays a crucial role in Dubai’s economy but has a weaker influence in Abu Dhabi and the UAE as a whole. Interestingly, oil price fluctuations do not have a direct statistical significant impact on GDP in the OLS analysis, suggesting that economic diversification efforts have helped buffer the UAE from oil price volatility. However, the VAR model reveals that Abu Dhabi’s GDP initially responds positively to oil price shocks but declines over time, indicating short-term benefits but potential long-term vulnerabilities. Dubai’s economy, on the other hand, remains relatively stable in response to oil price changes, reinforcing its economic resilience.

These findings highlight the success of the UAE’s diversification strategies and provide valuable insights for policymakers. Abu Dhabi may need to further expand its non-oil sectors to reduce exposure to oil price fluctuations, while Dubai’s investment-driven growth model suggests that strategic capital allocation will continue to be a key factor in its economic expansion. This study contributes to the broader discussion on the relationship between oil prices and economic growth, offering practical guidance for strengthening economic stability in oil-exporting nations.

Date of Award	15 May 2025
Original language	American English
Supervisor	ALBERT Wijeweera (Supervisor)