Modeling GDP losses from unexpected oil price shocks: An extended CGE analysis in China

Oil price fluctuations exert significant impacts on macroeconomic performance. While existing studies predominantly employ data-driven models to examine the effects of oil price increases, decreases, or volatility on aggregate output, few have investigated the macroeconomic mechanisms through which unanticipated price changes affect production. This study develops an extended Computable General Equilibrium (CGE) model that incorporates expected prices into production planning, evaluating the output effects of crude oil price variations across different volatility levels and production plan horizons, supplemented by empirical analysis using real oil price data. The results demonstrate that unexpected oil price changes distort production resource allocation, leading to output decline, with greater losses associated with higher price volatility and longer production plan adjustment intervals. From January 2017 to May 2023, GDP losses attributable to unanticipated oil price fluctuations ranged between 33.42 and 175.53 billion CNY, with the majority concentrated during the COVID-19 pandemic in 2020, highlighting the acute economic impact of abrupt short-term price shocks. The study reveals the micro-level mechanism through which unexpected price changes affect output via resource misallocation; and it provides a dynamic tool for quantifying GDP losses under various volatility scenarios, offering actionable insights for policymaking.