Do Global and Domestic Oil Prices Affect Industrial Output Differently? Evidence from Bangladesh

Aims: To investigate the effects of fluctuations in global and domestic crude oil prices on Bangladesh's industrial output. Study Design: A quantitative time-series study using the autoregressive distributed lag (ARDL) bounds testing approach. Sample Size: The analysis is based on monthly macroeconomic data for Bangladesh from July 2004 to June 2026, comprising 264 observations. Methodology: The Quantum Index of Industrial Production (QIIP) was used as a proxy for Bangladesh's industrial output and domestic economic activity. Global crude oil prices, domestic crude oil prices, the US federal funds rate, Bangladesh's repo rate, the consumer price index, the exchange rate, and industrial production in the Organisation for Economic Co-operation and Development (OECD) countries were included as explanatory variables. Given the mixed order of integration of the variables, the ARDL bounds testing approach was employed to examine the existence of a long-run relationship. An error correction model was subsequently estimated to assess short-run dynamics. Results: The bounds test confirms a statistically significant long-run relationship among the variables. A 1% increase in the domestic oil price is associated with an approximately 0.11% to 0.15% reduction in Bangladesh's industrial output in the long run. Depreciation of the Bangladeshi currency lowers industrial output by increasing the cost of imported inputs. But higher industrial production in OECD countries is positively associated with domestic industrial output. The error correction coefficient indicates that approximately 80% of short-run disequilibrium is corrected each month, demonstrating a rapid adjustment towards long-run equilibrium. Diagnostic tests indicate that the model is free from significant serial correlation and heteroskedasticity. Conclusion: Bangladesh's industrial sector is vulnerable to oil price hikes, with higher international oil prices inducing higher domestic oil prices, which adversely affect industrial output over the long run. The findings highlight the importance of energy diversification, improved energy security, and appropriate counter-cyclical monetary and macroeconomic policies to mitigate the adverse effects of oil price shocks on industrial activity.