The Dynamics of Financial and Macroeconomic Determinants in Natural Gas and Crude Oil Markets: Evidence from Organization for Economic Cooperation and Development/Gulf Cooperation Council/Organization of the Petroleum Exporting Countries

International Journal of Energy Economics and Policy ISSN: 2146-4553 available at http: www.econjournals.com International Journal of Energy Economics and Policy, 2017, 7(3), 167-187. The Dynamics of Financial and Macroeconomic Determinants in Natural Gas and Crude Oil Markets: Evidence from Organization for Economic Cooperation and Development/Gulf Cooperation Council/Organization of the Petroleum Exporting Countries Countries Merve Karacaer-Ulusoy1*, Ayhan Kapusuzoglu2 Department of International Trade and Business, Ankara Yildirim Beyazit University, Turkey, 2Department of Banking and Finance, Ankara Yildirim Beyazit University, Turkey. *Email: 1 ABSTRACT This study analyzes the countries in the Organization for Economic Cooperation and Development, Gulf Cooperation Council and Organization of the Petroleum Exporting Countries to test the casual relationship between world energy prices (Brent Oil, West Texas Intermediate, Dubai, Henry Hub (HH), Japan and Russia) and the liquidity level, stock market and industrial production. Augmented Dickey Fuller, Phillips-Perron and Kwiatkowski-PhillipsSchmidt-Shin unit root tests, Johansen cointegration and Granger causality analyses are implemented during the study. The empirical findings indicate that there are multidirectional relationships between the above-mentioned variables. These relationships can be explained by the factors that each country group owns within the framework of their energy sources, financial markets, economic conditions and geographical positions. The data accrued and analyzed in this study is presented as a contribution to guide policymakers, global investors and researchers in constituting an extensive country specific energy, macroeconomic and financial policies. Keywords: Oil and Natural Gas Prices, Financial and Economic Developments, Cointegration, Causality JEL Classifications: C32, Q43 1. INTRODUCTION The volatility of oil prices has drawn attention to the importance of the effects of energy prices on macroeconomic activities. These effects have been considered using two different approaches. Many researchers have researched the effects of the oil prices shocks of the 1970s and 1980s on macroeconomic variables such as gross domestic product (GDP), inflation, interest rates, industrial production, productivity or liquidity. Numerous other researchers have investigated channels through which energy prices can affect macroeconomic variables (Burbidge and Harrison, 1984; De Pratto et al., 2009; Ferderer, 1997; Hamilton, 2008; Kilian, 2008). Theoretically, the increase in oil prices can have various effects four of which are given below. First, there is the supply-side effect in which in the case of increased energy prices, the input cost of the company increases while productivity and accordingly profitability decrease this in turn might force organizations to reduce new capital investments or use energy-efficient capital. Second is the demand-side effect. This refers to the income transfer from the oil importing countries to the oil exporting countries, which damages the aggregate demand in oil importing countries since the decrease in purchasing power of oil importing countries is higher than the increase in purchasing power of oil exporting countries. Third, the real-balance effect which is namely that increased energy prices have both direct and indirect effects on inflation. Initially, the increased energy prices will slowdown economic activities and cause inflation. Then, due to the higher prices of oil products (such as gasoline and heating-oil) the price of alternative energy sources will also increase. Thus, an indirect International Journal of Energy Economics and Policy | Vol 7 • Issue 3 • 2017 167 Karacaer-Ulusoy and Kapusuzoglu: The Dynamics of Financial and Macroeconomic Determinants in Natural Gas and Crude Oil Markets: Evidence from Organization for Economic Cooperation and Development/Gulf Cooperation Council/Organization of the Petroleum Exporting Countries Countries effect occurs due to the behavioral responses of companies and their workers, this is also called a second round effect. In this case firms can reflect the increased input costs in the prices of non-energy products. Furthermore, with the increased cost of living, workers can demand higher wages. A corruption in pricewage loop can damage the wealth of households, by reducing consumption and output. The fourth way that higher energy prices affect the economy is through the monetary policy channel. Increased energy prices decrease consumption, investment and stock prices, increase unemployment and construct new production methods which are less dependent on oil inputs (Cologni and Manera, 2008; Kumar, 2005). It has been observed that the increases in oil prices cause recession especially in industrialized countries, slowdown the productivity and growth, besides cause inflation (Barsky and Kilian, 2004; Hamilton, 1983; Mork and Hall, 1979). On the other hand, the effects of oil price changes differ depending on countries level of development, stage of economy and its organizational structure. For example; in oil-importing countries the increase in oil prices raises inflation and input costs, which effect manufacturing and transportation industries, besides leads to a decrease in demand of non-oil products; reflecting the lower purchasing power. Furthermore, a slowdown in economic growth leads to a reduction in labor demand; in other words employment level. On the fiscal side, government expenditures rise on the one hand and tax revenues drop on the other, leading to an increase in the budget deficit and interest rates (Yıldız and Ulusoy, 2015). These macroeconomic issues and their important impact on the financial system have also been discussed in the literature over many years (Lucas, 1998; Patrick, 1966; Robinson, 1952; Schumpeter, 1911). In particular, after 1980; the outcomes of financial liberalization regarding the financial system began to achieve prominence. The financial system plays a crucial role in encouraging the development of economic activities since the system includes financial markets, insurance companies, security markets, banks, other financial intermediaries and the supervision of these intermediaries. Knowledge acquisition, the costs of the execution of contracts and transactions have led need for financial contracts, markets and intermediaries. The differential costs due to administrative, legal and tax differences have led to the creation of district financial contracts, markets and intermediaries between countries (Levine, 2004). There are several views about the direction of the causal relationship between financial development and economic growth. A common view is that financial liberalization increases the shared risk; which in turn lowers the cost of equity while raising the borrowed money, capital accumulation, investments besides the demand for energy, and ultimately improves eco (...truncated)