University Economics Report: Oil Price Volatility and China's Economy

This report provides a critical analysis of the ongoing oil price volatility and its significant economic impacts on China. It examines the fluctuations in crude oil prices from 2009 to 2019, highlighting the factors behind price changes, such as political instability, climate change concerns, and trade wars. The report explores the effects of oil price shocks on China's industrial growth, inflation, and trade, particularly in the context of the US-China trade war. It discusses how China's reliance on imported oil and its monetary policies interact with oil price volatility. The analysis includes references to empirical studies and provides insights into the complex relationship between oil prices, economic policy uncertainty, and China's economic performance. The report emphasizes the challenges and policy implications for China's economic stability and growth in the face of fluctuating oil prices.

Running head: ECONOMICS
Critical analysis of the on-going oil price volatility, its economic impacts and policy
implications for China
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1ECONOMICS
Critical analysis of the on-going oil price volatility, its economic impacts and policy
implications for China
Crude oil prices are one of the major economic factors that have highly significant impact
on the world economy. In the past 10 years, the oil prices have experienced many ups and downs
leading to severe effect on the economies of many countries.
Figure 1: WTI oil price from 2009 to 2019 ($/bbl)
(Source: Macrotrends 2020)
The above image shows that the oil price faced extremes in this decade with highest at
$110/bbl and lowest at $26/bbl. The price went up to $110/bbl during 2011 due to the political
turmoil in the oil producing countries in the Middle East and sudden fall in the oil production
and supply (Macalister 2011), and it collapsed in 2015-16 due to the issues of climate change
and reducing carbon emission to keep the global temperature rise within 1.5 degree Celsius

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above the pre-industrial levels, which lowered the demand for crude oil globally (Stocker et al.
2018). In 2018-19, the oil prices showed a steep decline due to the effects of US-China trade
war. As China is the biggest oil importer, the trade war affected the demand and that pushed the
oil price down. Furthermore, higher oil price volatility might hinder the chances of China’s
economic recovery, especially after the effects of the trade war.
China has the biggest automobile market and therefore is the largest importer of oil.
Furthermore, it has been observed that the dynamic oil prices affected the industrial growth of
China positively but the global economic policy uncertainty had a negative impact on China’s
industrial economic growth. The oil price shocks also affected the inflation level in the short run,
however, the long term effected appeared to be diverse (Wen et al. 2019). According to Kang
and Ratti (2013), the economic shocks from oil price and economic policy uncertainties are not
only interrelated but also influence the stock market jointly, however, the direction of impact on
the Chinese economic growth had been opposite.
Being one of the largest emerging economies of the world, the demand for crude oil
import in China is highest and by 2015, the Chinese energy sector consumed 18.1% of crude oil.
Dependence on imported oil increased to 67.4% in 2017. The real export and trade terms in
China was hit negatively due to positive shocks from oil price in the past decade, but the
negative impact of economic policy uncertainty on China’s trade was higher (Wei 2019).
To address this negative impact of increased oil price, the Chinese government increased
money supply through expansionary monetary policies, which partly offset the negative effect of
the oil price shocks on the economic growth of China. It has also been observed that China’s
monetary policies had positive impact on the crude oil prices. However, during the on-going US-

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China trade war, the shocks from the crude oil prices had a more negative impact on China’s
economic growth. Empirical studies have shown that the fall in the oil prices had greater positive
influence on China’s industrial economic growth while the positive shocks, that is, rise in the oil
prices, were not much significant, as the uncertainties in economic policies were more impactful
for the negative effects on the Chinese economic growth (Wen et al. 2019).

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References
Kang, W. and Ratti, R.A., 2013. Oil shocks, policy uncertainty and stock market return. Journal
of International Financial Markets, Institutions and Money, 26, pp.305-318.
Macalister, T., 2011. Why Are Oil Prices So High?. [online] the Guardian. Available at:
<https://www.theguardian.com/business/blog/2011/nov/03/why-oil-prices-so-high> [Accessed
25 March 2020].
Macrotrends, 2020. Crude Oil Prices - 70 Year Historical Chart. [online] Macrotrends.net.
Available at: <https://www.macrotrends.net/1369/crude-oil-price-history-chart> [Accessed 25
March 2020].
Stocker, M., Baffes, J., Some, Y.M., Vorisek, D. and Wheeler, C.M., 2018. The 2014–16 oil
price collapse in retrospect: sources and implications. The World Bank.
Wei, Y., 2019. Oil price shocks, economic policy uncertainty and China’s trade: A quantitative
structural analysis. The North American Journal of Economics and Finance, 48, pp.20-31.
Wen, F., Min, F., Zhang, Y.J. and Yang, C., 2019. Crude oil price shocks, monetary policy, and
China's economy. International Journal of Finance & Economics, 24(2), pp.812-827.