The Economic Impact of Oil Price Fluctuation

This research paper explains the impact of oil price fluctuation on the economy, government budget revenues, and production cost of importers. It aims to find the impact of oil price volatility on exporting countries and explains the world oil market. The paper uses econometric models to find the relationship between crude oil and economic fluctuation. The methodology used is the VAR model to estimate the relationship between crude oil prices and macroeconomic fluctuations. The paper concludes by suggesting policy implications that can help economies deal with unexpected oil price changes.

THE ECONOMIC IMPACT OF OIL
PRICE FLUCTUATION

Introduction
■ The fluctuation in the oil price always affects production cost of the
importers.
■ Fluctuation in oil prices therefore affects government budget
revenues.
■ Oil and gas revenues plays a strategic role in the economy.

Objective
■ Oil price fluctuation became an important topic in the filed of
economics after the first oil price shock.
■ The paper aims to find the impact of the oil price volatility on the
exporting countries,
■ The paper also explains about the world oil market.
oil-price-share.jpgoil-price-share.jpg

Structure
Research background
Methodology
Empirical result
conclusion

Structure
■ The first Part of the paper consists of the background of the study.
■ The second part of the paper provides an explanation to the oil price
transition mechanism.
■ The third part consists of methodology and data description.
■ The last part of the paper consist of the conclusion.

World crude export of oil
The graphical representation above shows the crude oil export from the
year 1965 to 2015 of both the OPEC and Non OPEC countries.

The above graph shows the movement of the real oil price and the real effective
exchange rate.

Methodology
■ In this paper the author develops an econometric model for explaining
the impact of price fluctuations.
■ The author uses the VAR model to estimate the relationship between
the crude oil prices and the macro economic fluctuations

• In case of empirical analysis the monthly data
set which consisted of 288 observations are
taken
• The data used in this case `does not include
any logarithmic growth rates.
• The next part of the paper identifies the
structural break in the data sample when the
economy started recovering.
• A standard Chow test has been used to check

Findings
■ In this part the results of the impulse response functions have been
found out.
■ The test was conducted in order to find the dynamics of the structural
VAR model.
■ The result of the analysis suggests that the growth of the GDP is
positively affected by the oil prices.

• The price of oil in the international market is
determined in U.S dollars and therefore, a rise in oil
prices positively affects the foreign reserves .
• It also results in the appreciation of the domestic
currency.
• When there is an improve in exchange rate it
makes the consumer good cheaper.

The above graph shows the oil prices, exchange rate and import price in the year
1997 – 2014.

LIKES
• The author uses econometrics
models o find the relationship
between crude oil and the
economic fluctuation.
• The paper also mainly focuses
on the large OPEC and NON
OPEC countries.
• Findings suggests that the
author mainly focus on the oil
price shocks.
DISLIKES
• The author only focuses on the
large countries instead of
focussing on the whole world.
• The author also does not take in
to account any kind of
logarithmic growth data.
• Effects of price fluctuation on
stock markets can also be
shown.

Conclusion
■ In this paper the oil price movement effects on the macro
economic indicators of one of the oil exporting countries.
■ Comparing the impacts of oil price shocks on this group of
economies and finding patterns will eventually contribute to
the development of policy implications that can possibly help
these economies to strategically deal with unexpected oil price
changes.

Reference list
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■Cunado, J., Jo, S., & de Gracia, F. P. (2015). Macroeconomic impacts of oil price shocks in Asian economies. Energy Policy, 86, 867-879.
■Le, T. H., & Chang, Y. (2015). Effects of oil price shocks on the stock market performance: Do nature of shocks and economies matter?.
Energy Economics, 51, 261-274.
■Taghizadeh-Hesary, F. F. (2015). Macroeconomic effects of oil price fluctuations on emerging and developed economies in a model
incorporating monetary variables. Economics and Policy of Energy and the Environment.
■Caldara, D., Cavallo, M., & Iacoviello, M. (2018). Oil price elasticities and oil price fluctuations. Journal of Monetary Economics.