in the percentage of the real price of oil is calculated as follows:
∆rpoilt =α1+
l
X
j=1
β1,jS1,t−j+1,t. (4.5)
According to Equation (4.5), an increase of 0.1 percentage point in the dynamic re-sponse of annual real GDP growth forecasts for China and India increases the real price of oil by approximately 5%.
According to the economic theory, two problems are encountered in evaluating the effects of the real price of oil:
First, shareωi,t, where the country’s purchasing power-adjusted real GDP in purchas-ing power-adjusted world real GDP (for example, the share of China’s real GDP in world real GDP is 15.9% in 2009) is used, practically expands such effects because the share of China’s oil consumption in the world’s total level was only pegged at 10.76%, a value smaller than the proportion accounted for by China atωi,t.ωi,tcan then be used to analyse the effects of China’s economic activity on the world economy, but not its effect on the real price of oil. Therefore, the share of China’s oil consumption in the world’s total level is a better index in Equation (4.5), as adopted by Hamilton (2009b), which introduces the share of consumer energy expenditure in total personal consumption expenditure. The oil consumption of China does not correspond to its aggregate economic activity, but is rather restrained by the monopolistic market. For example, as the main oil-consuming sector, the automobile industry reflects the level of civilian use of motor vehicles per thousand people, with 128 as the world’s average level in 2007. This level was only 55 in China at the end of 2010, which is not even half of the average level because domestic gasoline prices under a monopolistic market are higher than in developed countries.
Second, multiplier β1,j equals 0.1 as a constant in the distributed lag model. In the short term, the effect of multipliers of the real economic activity of two countries on the real price of oilβ1,0may be large, but in the long term,β1,17is foreseen to be a very small multiplier.
The current study is the first to actually take the real economic activity of China as a single variable in the structural VAR model and subsequently utilize the share of China’s oil consumption against the world’s total level to explain the effects on oil price. Using these methods, the role of China’s economy in oil price changes in recent decades was examined.
Before 2002, China had no power to affect the real price of oil. Since 2002, however, the rapid growth of China’s economy stimulated a large demand for crude oil. This de-mand increased oil prices, but only to a very minimal and temporary extent because of the low share of China’s oil consumption in the world’s total level. The shocks of the OECD’s real economic activity demand and market-specific demand were the primary drivers of the increase in the real price of oil. Moreover, oil production as an exogenous variable resulted in almost no change in the real price of oil in the recent two decades.
Except for the previous four shocks, another important factor contributing to oil price changes is the substantial amount of stored crude oil in some countries or organizations, allowing these countries to control the crude oil market to stabilize prices. For example, during the Persian Gulf War of 1991 and Hurricane Katrina of 2005, when a shortage in the supply of crude oil occurred because of war and natural calamity, the International Energy Agency (IEA) placed a large amount of stored of crude oil in the world market to stabilize prices. Such an action often entails a small amount over short time, but its role is very important because it can eliminate fears in the futures markets.
One other important factor contributing to oil price changes is the pricing mechanism of crude oil. Since the 1970s, the price of crude oil has been pegged in US dollars in the futures markets. Thus, the price of crude oil can be affected by exchange rates between the US dollar and other major currencies. If gold were used to determine price, the oil price will become very stable in its evolution in history.
Until 2010, the role of China’s real economic activity has no bearing on the real price of crude oil. As the primary sector identified for huge oil consumption, the world average level of civilians using motor vehicles per thousand people is pegged at 128. However, this value is only 55 in China at the end of 2010, not even half of the average world level.
Thus, in the future, a large demand for crude oil in China may increase oil prices in the international market.
Finally, the crude oil stored by of the OECD amounts to 4.337 billion barrels, amongst which only 0.78 billion barrels are held by the US at the end of August 2010. China should also store a large amount of crude oil to guarantee its oil consumption and decrease its shock on the international market.
Data Sources
Items Sources
WTI and RAC EIA
World production of crude oil EIA
Industrial production of OECD www.oecd.org
Industrial production of China the National Bureau of Statistics of China The real GDP data for each country Penn World Table 6.2
The trade statistics from each area International Monetary Fund Note: The index of industrial production is season adjusted.
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