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Structural Transformation and the Oil Price

  • Radoslaw Stefanski

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 by generating endogenously falling aggregate elasticities of substitution between oil and non-oil inputs. The model is used to measure the impact of changing sectoral composition in China and India on world oil demand and 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. Using a standard growth model misses this non-linearity and can give misleading implications about the long-term oil price. To understand the impact of growth on the oil price, it is necessary to take a more disaggregated view than is standard in macroeconomics.

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Paper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 048.

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Date of creation: 2010
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Handle: RePEc:oxf:oxcrwp:048
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