Abstract
Name : Mohammad Ali Ansari
Program of Study : Accounting and Finance
Title : The effect on capital structure during the OPEC engineered 2014-2015 Oil
Shock: An Analysis of the Middle-East Oil & Gas Industry
The 2014-2015 oil shock has affected many industrial companies all around the world. Many believe
this shock could lead to a full crisis if not handled correctly. The unique point about this crisis is that it
was specifically engineered by the OPEC mainly to handle the recent rise of Shale Oil corporations.
This study seeks to assess the impact on leverage and capital structure during this shock for the oil &
gas industry of the Middle-East.
Panel data of Middle-East firms from 5 different countries were collected, with sampled data
ranging from Q1 2011 – Q1 2015. The research applies 4 linear regression models with response
variables including the gearing, book long-term debt, market short-term debt and book short-term debt
ratios. The estimators applied include OLS, Fixed/Random models, GLM and NLM.
The results find a very weak linear relationship between Middle-East capital structure and the oil
price and similar support for a non-linear relationship suggesting that further drops in the oil price will
have an appropriate exponential effect to the leverage. In particular, the leverage in general rises in Q1
2015 with Middle-East firms, similar to the global economy albeit to a lesser degree and is expected
to rise further as the oil price continues to fall.
The Middle-East has been capable of mitigating some of the effects of the oil shock, however
further falls in the oil price may cause uncontrollable consequences to the economy. The results
suggest a further fall in the price will cause a large rise in debt of the economy. Certain Middle-East
countries have already started to have adverse effects on the economy, the recommendation is that
these countries should treat this oil shock as a serious affair and not something they can simply
mitigate with their large oil supply. The capital structure theories suggest raising debt in situations of
crises and the Middle-East should ideally follow the same process as the rest of the global economy.
Keywords: Middle-East, OPEC, Capital Structure, Leverage, Oil Shock.
