Download How Oil Price Fluctuation Impact National Economy – Model

How Oil Price Fluctuation Impact National Economy – Model
Establishment and its Application
，
Gao Jian Dong Xiucheng
School of Management,
University of Petroleum (Beijing), P.R.China, 102249
Abstract: In order to set up relations between crude oil price fluctuation and the development of
national economy scientifically, on the basis of drawing lessons from domestic and foreign experts’
correlative models, considers the time-lagged feedback of different national economy targets have on oil
price fluctuation and other factors, as well as sets up models of the impact oil price fluctuation have on
national economy. Then make use of dynamic models of the impact oil price fluctuation have on
national economy, to fix relative coefficients in each part of the model, finally put up actual analysis and
forecast according to the model obtained, and take measures to avoid the risk of the influence of oil
price fluctuation.
Keywords: crude oil, price economic growth, model, economic security
1 Introduction
In company with the speed up of the process of world industrialization, crude oil plays a more and
more important role in national economy, and is regarded as “the blood of industry” and “black gold”, so
the impact oil price fluctuation have on the development of national economy is inevitably valued by
economists in all countries. Through using each kind of economic models to analyze and forecast this
influence, simulation study the impact oil price fluctuation have on national economy, guarantee state
economic security and energy security, supply decision-making gist for government’s making
development plan and crude oil policy, and becomes focus subjects of every government in the world,
experts and scholars.
Juncal Cunado and Fernando Perez de Gracia discovered the influences caused by oil price
fluctuation to some countries are remarkably different. For example, the industrial production index of
Luxembourg is much easier influenced by oil price than other countries. Hilde Christiane the Bjrnland’s
demonstration research indicates the rising of actual oil price caused reduction of German and US'S
GDP in the first 2-3 years, and reaches the summit after 6 quarters, Oil price fluctuation of one standard
deviation will cause GDP decreasing from 0.3% to 0.5%. Hereafter, this kind of influence of Germany is
basically vanished, but real GDP of American permanently reduces 0.4%. The influences real oil price
have on the rate of unemployment are both small, and will increase less than 0.1% after two years. The
result of resolving of predict error deviation reveal that oil price fluctuation has a little effect on output
at the beginning, but real oil price can explain 15% of the output fluctuation of US after two years.
(Rises to 20% after three years) and 7%-8% of the output fluctuation of German. Economic structure
may have played an important function in the adjustment of macro economy to oil price fluctuation.
Those produces have low dependence on oil demand petroleum consumption share is little and lower
labor-intensive countries suffer relatively little influence of oil price fluctuation in the process of
production.
The influences oil price fluctuation has on national economy are in many aspects, and as there are
different time lagged lagging effects when oil price fluctuation influences different aspects of national
economy; the direct and indirect influences crude oil price fluctuation has on national economy should
be considered synthetically, generally speaking, to most countries the indirect influence caused by oil
price would reflect in one year and a half to two years.
Tilak Abeysinghe studied and compared dozens of countries and areas at the same time to see the
direct and indirect impact of oil price fluctuation on their economies. Indirect impact makes function
mainly through economic trading partner. For example, Malaysia and Indonesia are net exporters of oil,
and their mainly trading partner is Singapore. Singapore is a net importer of oil .While the higher oil
price has a negative impact on the growth of Singapore’s GDP, Malaysia and Indonesia will benefit from
、
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the rising oil price and increase their foreign exchange earning. Conversely, it will increase their imports
from Singapore. The impact the rising oil price has on Singapore depends on the size of these direct and
indirect impacts. The result of demonstration shows that the direct impact high price has on Malaysia
and Indonesia is positive, but they can't avoid the negative influence from their trading partner, for long
terms, the impact they received is still negative. For other net importers, direct and indirect influences
are both negative, but Singapore is very special, as a net importer of oil, high oil price have a slightly
positive impact on it at the beginning, but along with the negative impact Malaysia and Indonesia get
from high oil price, Singapore will go through a greater indirect influence too. There seems to be a
inconsistent between Tilak Abeysinghe’s result and Younaho Chana, Joon Fong Won’s result of study on
Singapore. Younaho Chana and Joon Fong Won make use of the data from the first quarter in 1978 to
the third quarter in 2002 to study, the result of study shows that oil price fluctuation have a indistinctive
influence on Singapore’s economy. The reason they think should contribute to the declining trend of oil
consumption density after 1989 and the percentage oil consumption in Singapore take up in its nominal
GDP.
The majority of literatures which study the influence oil price fluctuation have on macro economy
utilize time series (such as coordination, causality, VAR etc) non-linear and some econometrics methods.
And the main research methods are function of total production true business cycle etc; in addition, the
general equilibrium model (CGE model) can be used for quantifying the overall influence of oil price
fluctuation to economy.
There are a large amount of models discussed the relationship between oil price fluctuation and
national economy (GDP) home and abroad, but there is no thorough analysis toward the influence oil
price have on every aspects of the whole national economy, so we are unable to show the dynamic
process of the impact of oil price fluctuation intuitionisticly.
、
、
2 Creating the Model of the impact Oil Price Fluctuation Have on National
Economy
（
）
Michael Beenstock 1995 made use of regression of time array data to create models of crude oil
imported developing countries' economy, analyzed the dynamic influence price fluctuation have on
economy of oil net importer countries, according to this way to simulate regression of the relationship
between our national economy and oil price.
Our country is a capital-intensive pure importer of crude oil, gross national product highly relies on
the input of capital and cheaper labor cost to realize export growth then driving the fast growth of the
whole national economy, the price of crude oil and non-crude oil production materials have a greater
influence on national economy. Compared with developed countries the elasticity of crude oil supply
and elasticity of demand for crude oil in our country is a little smaller, it is inevitable that crude oil price
fluctuation causes pulsating effect on national economy through extension of industry chain.
In allusion to the characteristic of our national economy, choosing historical data of national economy
from 1993 to 2003 to carry on simulation of quantity toward the relationship between oil price and
national economy, the reason for choosing the year of 1993 is our country began to import crude oil
formally in that year (become net importer of crude oil after 1996, and it was in 1998 that the crude oil
price is really integrated with the world crude oil price), but seen from the analyzing and
comparing ,there is no dramatic differences between our typical Daqing crude oil price and crude oil
price in the world market, and can be seen identical approximately. (Reality is the planned economy
price of the large amount of crude oil before 1998 is set by administrative regulation and control)
2.1GDP Modle
GDP function (total output) adopts similar form of Cobb-Douglas’production function, and its
equation is:
GDP =F1 ( K,L,Poil ,Pcom )
1
（）
Changes of capital storage function: ∆K =K -1 − δ K −1 δ -depreciation ratio of fixed assets in the
whole society. There are several independent variables in GDP (total output) function as follows:
K-total capital storage (comparable price), L-the number of labors, Poil -crude oil price, Pcom -the
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price of general raw material. The relative coefficients for crude oil imported countries
F11 ,F12 > 0; F13 ,F14 < 0 If the first two items are positive, it means GDP and capital technique have
a positive correlation with labors, however, oil price and raw material have a negative correlation with
the development of national economy.
2.2 Investment Modle
2
Function of fixed assets investment in the whole society: I = F2 ( ∆GDP,R,K/GDP )
：
（）
F21 > 0, F22 <0, F23 <0 , I -total amount of fixed assets in the whole society (comparable price),
R -return on asset (could be denoted by interest rate), K / G D P - capital storage occupies in GDP, and
it has a positive correlation with total amount of fixed assets in the whole society.
Changes of total output function: ∆ GDP = F3 ( ∆ GDP * ,GDP-1* ,(M/P)-1 ,GDP-1 )
Because of the pulsating effect oil price fluctuation has on national economy, national economy will
appear great fluctuation in short-term, However, under the long-term tend, along with the adjustment of
national economy, national economy would function according to equation (1), (that is
GDP = GDP * ).
2.3 Inflation Rate Model
Inflation rate is subject to the following factors, M represents the currency needed in the process of
national economy, and P stands for price index (consumer price index)
*
（）
function of inflation: ∆π = F4 ( ∆M/M ,(M/P)-1 ,GDP-1 , ∆GDP )
3
Under the circumstance of economic stability in long range, equation of demand for money:
M/P = F5 ( GDP,π ) F51 > 0,F52 < 0 the demand for money has a negative relationship with
inflation rate, and has a positive correlation with the current economic growth.
2.4 Import and Export Trade Model
For balance of payment, we comply with Beenstock’s balance of payment theoretical hypothesis, and
export function is on the basic of Goldstein and Khan’s model. Total export in international trade is
enslaved to the development of world macroeconomic and the price of export goods.
X D = F6 (Y * ,PX /PX* E )
Demand for export function:
（4）
*
Y stands for economic growth conditions of the rest countries’ in the world (the development of
*
world macroeconomic), PX /PX E represents world relative price index. PX on behalf of export price,
Px* refers to export price of the rest countries’ in the world, E stands for relative exchange rate (middle
rate) F61 > 0,F62 < 0 .
Export supply function: X
S
= F7 ( K ,L,PX /P,Poil ,Pcom )
（5）
PX /P refers to international relative export index, F71 ,F72 > 0; F73 ,F74 ,F75 < 0 implies that the
ability of export supply has a negative correlation with price of crude oil and price of other raw
materials.
When the market clears out, the ability of demand for export and export supply are in balance that is
X S = X D . Therefore, the total value of exports X S PX or X D PX , in the aspect of import, the volume
of imports have a negative correlation with GDP and relative price.
2.5 Balance of Payment Model
Imports value function: I M = F8 ( GDP,Pim E/P,RES /I M )
（6）
I M -total value of imports, Pim E/P -relative price index of imports, RES /I M -the ratio of foreign
exchange reserve takes up in import , Pim -import price from other countries, RES -foreign exchange
reserve, when foreign exchange reserve decreases, total value of imports fall off correspondingly. The
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；
corresponding coefficients are F81 ,F82 > 0 F83 < 0
2.6 International Capital Flow Modle
International capital flow correlated with national economy highly, relative interest rate of capital
can be fixed by formulae as follow:
（ 7）
CAP = F10 ( ∆GDP,RISK ,R* ,D-1 ,RES /I M )
*
CAP -capital inflow, R
-interest rate of international capital, RISK represents the risk of national
capital, D means foreign loans, and relative coefficients F101 ,F105 > 0; F102 ,F103 ,F104 < 0
（8）
In this function, foreign loan function: ∆ D = CAP = I M − XPX /E + D-1 R *
（9）
*
foreign exchange reserve function: ∆RES = XPX /E − I M + D-1 R
3 Application and examination of the model
《
》
Most data in the model derive from statistical yearbook in China published by Chinese statistic
bureau, and some portions originate from World Bank and OECD.The computer software used in the
model is EVIEWS4.0, which is advanced internationally.
3.1Selection and substitution of the index
In practical operation, because there is no capital value in national statistic, and there is only fixed
asset investment, fixed asset investment takes the place of capital input, that is fixed asset investment in
the whole society(hundred million Yuan);The price index of raw material is the purchase price of raw
material.
For the sake of using fewer capital in the process of production in China (more labors), most output in
China are Labor Intensive products, this proportion in China is lower than industrialized countries who
have advanced technology, the proportion of capital GDP is 2 in industrialized countries. Along with the
ceaseless development of our economy depreciation δ takes on a decrease tendency, but generally, it is
about 5%.For the convenience of operation we consider δ as constant. Labor Input –L is fixed by the
number of social employed people every year in China.
3.2 Results of data simulation
Results of raw data simulation
GDP
ln G D P = - 1 .5 9 - 0 .0 3 8 ∆ ln Pc o m - 0 .0 7 9 5 1 ln Po il -1 + 0 .0 7 2 ln (M /P )-1 + 0 .6 2 2 1 8 5 ln K + 0 .6 4 7 ln l + 0 .4 6 2 ln G D P-1
(2 .5 2 ) (0 .9 6 )
R 2 = 0 .9 9 8 1
(2 .9 0 )
σ = 0 .0 1 8
(1 .9 9 )
(2 .7 5 )
( 2 .8 7 )
(3 .2 9 )
D W = 1 .5 8
Inflation Rate
π = 1 . 8 8 + 0 . 5 ( ∆ M / M )- 1 + 0 . 6 1 l n ( M / P )- 1 + 0 . 0 4 5 l n G D P - 1 + 0 . 1 3 ∆ l n ( P X
( 3 .0 ) ( 3 .1 6 )
R
2
= 0 .9
( 3 .3 4 )
( 2 .9 9 )
σ = 0 .0 3 8
D W = 2 .1 6
ic
E )- 1 + 0 . 3 3 π
( 1 .4 1 3 9 )
-1
( 2 .3 0 )
Fixed assets investment in the whole society
I = 9 3 .4 8 + 3 7 .5 4 ∆ ln G D P -0 .2 5 R + 0 .5 5 3 I
( 3 .1 6 ) ( 2 .9 1 )
R
2
= 0 .8 8 5
σ
( 3 .8 )
= 0 .7 1 2
Demand for export
D W
2
− 2 0 . 6 3 l n ( K / G D P )−
( 1.76 )
R = 0.996 σ = 0.029
1
( 2 .7 6 )
= 1 .8 3
） + 0.81∆lnGDP + 0.351lnGDP + 0.097lnOECM
lnX = - 0.83+0.46ln(PX ic /PX) + 0.287ln(PX ic /PX
( 2.29 ) ( 2.21 )
− 1
( 4 .9 7 )
-1
ic
( 1.73 )
( 2.83 )
DW = 2.57
Export ability
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ic
( 2.49 )
-1
+ 0.786lnX -1
( 7.57 )
l n X = - 1 3 . 2 6 + 0 . 3 7 6 l n ( P X E / P ) + 1 . 6 4 l n k -1 − 0 . 1 5 4 l n Pc o m − 0 . 1 1 4 l n P o i l − 1
( 4 8 .5 1 ) ( 6 .4 3 )
R
2
= 0 .9 9 7 3
(3 8 .7 9 )
σ = 0 .0 2 8
DW
( 2 .7 0 )
( 8 .7 9 )
= 1 .5 8
Volume of imports
l n I M = - 1 3 . 6 7 + 0 . 1 8 4 l n ( R E S / I M ) + 0 . 0 1 5 i + 0 .2 2 6 ( X / G D P ) + 0 . 9 3 5 l n G D P − 0 . 1 4 l n ( P I M E / P )
( 3 .0 3 )
R
2
( 2 .4 9 )
( 3 .1 9 )
σ = 0 .0 2 3
= 0 .9 9 7 5
( 2 .3 5 )
(2 4 .3 6 )
( 3 .3 9 )
D W = 2 .5
Net Capital Inflow
C A P /X
= 2 .1 8 + 0 .8 3 ∆ ln G D P + 0 .0 0 4 ln ( R
( 1 .4 7 )
R
2
( 2 .9 1 )
= 0 .9 9 7
E S
/I
M
)-1 − 0 . 0 0 2 4 R + 0 . 6 4 ( C A P / X )-1
( 1 .2 5 )
σ
= 0 .0 3
(0 .7 4 )
D W
( 6 .2 3 )
= 2 .2 7
3.3 Long-term effect Model
Due to the adaptability of national economy development, in the initial stages of oil price fluctuation,
national economy takes on great fluctuation, generally, after a few years’ adjustment the effect will show
a decrease tendency, of course this economic adaptability would differ, because of different economic
structure and other factors, but there is no exception in this attenuation phenomena.
As national economy is a system engineering project whose subgroup interact each other, crude oil
price not only has accelerating effect on non-crude oil production material, but also has impact on the
growth of national economy through the indirect effect it has on demand for money, price index,
international trade and capital flow etc, in order to describe the long-term effect of national economy
development and crude oil price, the equation approximately depicts the ultimate impact is:
ln G DP = 1.897 ln K + 2.64 ln L − 0.047 ln Poil − 1.25 π e
3.4 Application of the Model
According to data in the model to forecast the impact oil price fluctuation has on national economy,
assume exogenous variable (variables except oil price) is fixed, and under the condition of all keep basic
point’s (2004) variation rate or trend, the pulsating effect oil price increases by 10 dollars has on
national economy are as the following charts:
Fig.1
GDP
Fig.2
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Inflation Rate
Fig.3 Fixed assets investment
Fig.4
Fig.5 Volume of imports
Fig.6
Demand for export
Net Capital Inflow
The rising of crude oil price brings negative effect on most aspects of national economy, and have
different time lagged impacts on different economic variants, thereby the appearing year of effect
extremum it has on different variants would have an extreme distinction. Along with the increasing of
crude oil imports and the ceaseless adjustment of industrial structure, the fluctuation of crude oil price
would have more and more great effect on national economy, it is necessary to take every measures to
avoid the negative effect oil price fluctuation brings.
4 Conclusion
Oil price fluctuations have long-term effect on our national economy development and along with the
speed up of industrializing process; demand for crude oil especially demand for import crude oil will go
up dramatically, sensitive degree national economy has on crude oil price fluctuation is increasing
ceaselessly, rising price of crude oil causes the rising of price index and even inflations through pushing
raw material cost and labor cost, the massive crude oil import counteracts trade deficit, reduces foreign
exchange reserve, what’s more ,the rising crude oil price would cause economic depression,
consequently, it will affects terms of international trade and economic growth;Likewise,depressing crude
oil price will make domestic oil company one disaster after another in the circumstance of the cost of
crude oil production, the smuggle of crude oil and product oil in a large amount has a impact on
downstream industry of petroleum and petrochemical industry.
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