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Assessing UAE's oil dependence: an optimal control approach

Cedwyn Fernandes (Middlesex University Dubai, Dubai, United Arab Emirates)
Ajit Karnik (University of Wollongong in Dubai, Dubai, United Arab Emirates)

Education, Business and Society: Contemporary Middle Eastern Issues

ISSN: 1753-7983

Article publication date: 29 May 2009

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Abstract

Purpose

The main purpose of this paper is to understand the impact on the United Arab Emirates (UAE) economy of the objective of reducing its dependence on oil, trying to achieve the Gulf Cooperation Council (GCC) fiscal convergence criterion and the inevitable depletion of oil resources.

Design/methodology/approach

An 18 equation compact macro‐econometric model is constructed and is evaluated and calibrated employing dynamic simulation techniques. Optimal control techniques are used to analyze the economic impact of the three objectives listed above.

Findings

Each of the optimal control experiments that has been carried out has served to reinforce the fact that the UAE is still critically dependent on oil. An increase in the share of the non‐oil sector, adhering to the GCC fiscal criterion and any reduction in oil output production will affect government finances adversely.

Research limitations/implications

The macro‐econometric model developed is for the UAE and further research is needed to see if the conclusions can be generalized to the other oil exporting countries.

Practical implications

The estimated macro‐econometric model and the optimal control experiments indicate to the policy makers the need to continue the diversification of the economy and for government to actively explore and enhance non‐hydrocarbon sources of revenue.

Originality/value

This paper develops a compact macro‐econometric model of the UAE and uses optimal control techniques which go well beyond the standard simulation techniques and the routine counter‐factual experiments to understand the working of the economy.

Keywords

Citation

Fernandes, C. and Karnik, A. (2009), "Assessing UAE's oil dependence: an optimal control approach", Education, Business and Society: Contemporary Middle Eastern Issues, Vol. 2 No. 2, pp. 138-152. https://doi.org/10.1108/17537980910960708

Publisher

:

Emerald Group Publishing Limited

Copyright © 2009, Emerald Group Publishing Limited