Structural Transformation and the Oil Price

Radoslaw Stefanski

No 48, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: What part of the high oil price can be explained by structural transformation in China and India? Will continued structural transformation in these countries result in a perma- nently higher oil price? To address these issues 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. I construct and calibrate a multi-sector, multi-country, general equilibrium growth model that accounts for this fact by generating an endogenously falling aggregate elasticity of substitution between oil and non-oil inputs. The model is used to measure and isolate 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 26% of the oil price increase in the OECD between 1970 and 2010. However, the impact of structural transformation is temporary. Continued structural transformation induces falling oil intensity and an easing of the upward pressure on the oil price. Since a standard one-sector growth model misses this non-linearity, to understand the impact of growth on the oil price, it is necessary to take a more disaggregated view than is standard in macroeconomics.

Date: 2010-07-05
New Economics Papers: this item is included in nep-dev and nep-ene
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Journal Article: Structural Transformation and the Oil Price (2014)
Working Paper: Structural Transformation and the Oil Price (2009)
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