Structural Transformation and the Oil Price

University of Minnesota and Radoslaw Stefanski

No 1050, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: 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 and use it to measure the impact of changing sectoral composition in China and India on world oil demand and hence 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. Omitting structural transformation from the model misses this non-linearity and can give misleading implications about the long-term oil price. In the model, non-homotheticities and unbalanced sectoral growth drive the structural transformation. Changing, sector-specific oil intensity and inelastically growing oil supply drive the price result.

Date: 2009
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Related works:
Journal Article: Structural Transformation and the Oil Price (2014)
Working Paper: Structural Transformation and the Oil Price (2010)
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