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Structural Transformation and the Oil Price

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  • University of Minnesota
  • Radoslaw Stefanski

Abstract

What part of the rising trend in the oil price is driven by structural transformation in China and India? Will continued structural transformation in these countries result in a permanently higher oil price? I identify an inverted-U shaped relationship in the data between aggregate oil intensity and the extent of structural transformation - countries in the middle stages of transition spend the highest fraction of their income on oil. A decomposition of aggregate oil intensity shows that only in the middle stages of transition are an economy's largest sectors also its most oil intensive ones. I construct a multi-sector, multi-country, general equilibrium growth model that accounts for these facts and use it to measure the impact of changing sectoral composition in China and India on world oil demand and hence the oil price in the OECD. Structural transformation in China and India accounts for up to a quarter of the oil price increase in the OECD between 1970 and 2007. However, continued structural transformation in China and India results in falling oil intensity and a drop in the oil price. Omitting structural transformation from the model misses this non-linearity and can give misleading implications about the long-term oil price. In the model, non-homotheticities and unbalanced sectoral growth drive the structural transformation. Changing, sector-specific oil intensity and inelastically growing oil supply drive the price result.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1050.

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Date of creation: 2009
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Handle: RePEc:red:sed009:1050

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Cited by:
  1. Baran Doda, 2012. "Evidence on CO2 emissions and business cycles," Grantham Research Institute on Climate Change and the Environment Working Papers 78, Grantham Research Institute on Climate Change and the Environment.
  2. Murat Üngör, 2009. "De-industrialization of the Riches and the Rise of China," DEGIT Conference Papers c014_040, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. Luca Guerrieri & Martin Bodenstein, 2012. "Oil Efficiency, Demand, and Prices: a Tale of Ups and Downs," 2012 Meeting Papers 25, Society for Economic Dynamics.
  4. Kei-Mu Yi & Jing Zhang, 2010. "Structural Change in an Open Economy," Working Papers 595, Research Seminar in International Economics, University of Michigan.
  5. Zhou, Xiaoyan & Zhang, Jie & Li, Junpeng, 2013. "Industrial structural transformation and carbon dioxide emissions in China," Energy Policy, Elsevier, vol. 57(C), pages 43-51.
  6. David M. Arseneau, 2011. "Explaining the energy consumption portfolio in a cross-section of countries: are the BRICs different?," International Finance Discussion Papers 1015, Board of Governors of the Federal Reserve System (U.S.).
  7. Ercio Muñoz & Miguel Ricaurte & Mariel Siravegna, 2012. "Combinación de Proyecciones para el Precio del Petróleo: Aplicación y Evaluación de Metodologías," Working Papers Central Bank of Chile 660, Central Bank of Chile.
  8. Robert Dekle, 2013. "Real Exchange Rates in a Model of Structural Change: Applications to the Real Yen-Dollar and Chinese RMB-Dollar Exchange Rates," IMES Discussion Paper Series 13-E-02, Institute for Monetary and Economic Studies, Bank of Japan.

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