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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 、 972 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 973 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 974 ; 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 975 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.2 976 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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