Energy-GDP relationship for oil-exporting countries: Iran, Kuwait and Saudi Arabia

The purpose of this paper is to examine the causality issue between energy consumption and economic growth for three typical oil-exporting countries: Iran, Kuwait and Saudi Arabia. We use two different test methods to test for causality, namely, the error correction model and Toda-Yamamoto (1995) procedure. The results based on both approaches consistently show a unidirectional long-run causality from economic growth to energy consumption for Iran and Kuwait and unidirectional strong causality from energy consumption to economic growth for Saudi Arabia. So, the results support the neutrality hypothesis of energy consumption with respect to economic growth for Iran and Kuwait and vice versa for Saudi Arabia. The findings have practical policy implications for decision makers in the area of macroeconomic planning, as energy conservation is a feasible policy with no damaging repercussions on economic growth for Iran and Kuwait. However, increased GDP requires enormous energy consumption in Saudi Arabia. So, it seems misleading to recommend the same policy for different oil-exporting countries. Copyright 2007 Organization of the Petroleum Exporting Countries.