Dynamic forecast error variance decomposition as risk management process for the Gulf Cooperation Council oil portfolios

The Ukraine-Russian war and the pandemic have stressed the importance of energy security. Accordingly, this study: i) develops a new definition of energy security that adopts the understated perspective of oil exporters by assessing the risk faced by Gulf Cooperation Council (GCC) countries in managing their oil demand; ii) provides a new analytical toolkit to assess the cross-market contagion and systemic risk from the exporter's perspective. Coherently, we first construct two oil export portfolios for each GCC countries using historical oil export ‘mirror’ data for five GCC countries between the 2008 and the 2018 (the period includes the oil market turmoil of 2015). The returns of the two portfolios are expressed in both physical terms (the monthly growth of exports) and price terms. Directional volatility spillovers of the oil export portfolios are then measured using the generalised forecast error variance decomposition and the rolling window VAR method. We extend the analysis to check the robustness of the results by using the TVP-VAR model and comparing the results of different rolling schemes. The results show strong pairwise connectedness among the oil export portfolios. The rolling window VAR method reveals that the dynamics of the volatility spillovers of the export growth rate portfolios are more stable than those of the volatility spillovers of the price portfolios. The study contributes to the literature also highlighting that the demand risk management is a crucial tool for energy security, and it helps to address energy policy- making toward national security strategies, taking into account the overlooked oil exporter's point of view.