Oil Prices, Geography and Endogenous Regionalism: Too Much Ado About (Almost) Nothing

This paper studies the effect of oil prices on the geography of international trade. We model transport costs as a function of variable and fixed costs. By affecting the first cost component,oil prices can then modify the structure of transportation costs across partners. This, we argue, acts as a factor of distortion in relative prices, thereby creating a reallocation of trade at the expense of remote countries. In that respect, an increase in oil prices should favor regionalism. This mechanism is empirically tested using data on US bilateral imports and transportation costs. The empirical results are consistent with the theoretical intuition. But, the elasticity of freight rates to oil prices, directly linked to geographical distance, appears to be low: between 0.088 for close to US countries and 0.103 for faraway ones. We then estimate the contribution of the dramatic increase in oil prices, in recent years, to relative changes in the countries' probability to export to the US (extensive margins) along with their relative market shares (intensive margins). We find that the recent oil price increases that took place after 1999 have had only a maigre contribution: the last oil shock had contributed marginally to increase Canada and Mexico's relative performance.