On the mixed indirect effects of oil prices on international trade

• Author: Engin Akman,Ibrahim Bozkurt
• Date: 01 December 2016
• DOI: http://doi.org/10.1111/opec.12087
• Published date: 01 December 2016

On the mixed indirect effects of oil prices on

international trade

Engin Akman* and Ibrahim Bozkurt**

*Department of International Trade, Faculty of Economic and Administrative Sciences, Cankiri Karatekin

University, Uluyazi Campus, 18100 Cankiri, Turkey. Email: enginakman@karatekin.edu.tr

**Department of Banking and Finance, Faculty of Economic and Administrative Sciences, Cankiri Karatekin

University, Uluyazi Campus, 18100 Cankiri, Turkey. Email: ibozkurt@karatekin.edu.tr

Abstract

This study concentrates on the indirect effects of oil prices on the international trade of oil-

exporting countries and their trade partners. We analysed the total imports of the leading oil-

exporting countries (Saudi Arabia, Nigeria, Venezuela, Kuwait, United Arab Emirates, Algeria and

Mexico) and exports of the major trade partners exporting to them (China, United States, India,

France, Korea, Germany and Japan). VAR models, Granger Causality Tests, Impulse Response

Function and Variance Decomposition analysis are used as empirical methods. We find that oil

price increases have a negative impact on the imports of oil-exporting countries in general.

However, effects on the exports of their trade partners are varied across the countries. Oil prices

have positive indirect effects on the foreign trade of China, India and France while a negative

effect is observed for Korea and the United States.

1. Introduction

Economic growth depends significantly on energy consumption and it is a crucial factor

in wealth generation (Stern, 2011). Energy resources are crucial for sustainable

economic development (Ruggiero et al., 2015). Oil is a primary energy source with a

share of 31 per cent followed by coal and natural gas. Although its share in electricity

production has been dropped to 5 per cent, the transport sector still depends on oil for 92

per cent of its energy needs in 2013 (IEA, 2014). Oil is one of the most important input

factor for the manufacturing industry and a cost constituent for the output subject to

transportation. The dependence to oil changes with the industrialisation level of a nation,

and developments in the oil industry have effects on many sectors. Oil is the most traded

commodity and has the largest commercial flow. About 70 per cent of the extracted oil is

contingent on international trade (Negut, 2011: 643). Therefore, although a single

commodity, oil prices have an impact on the many aspects of economies including

JEL classification: F14, F43, Q43, C22.

©2016 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

374

industrial output. Kang et al. (2015) and Sadath and Acharya (2015) showed that high

volatility, unexpectedly low or high oil prices significantly lowers investments in

manufacturing industries due to the unreliability of feasibility studies, the rise in the cost

of production and lowered demand for the output. Oil prices are determined by supply

and demand dynamics congruent to other commodities. However, factors influencing oil

supply and demand are multidimensional and more intricate.

1

Oil prices show a cyclical

pattern generally but the severity of instability has increased with record high and lows

in the past few years. Historical increases and drops were experienced in 2008 and in

2014, respectively. Steep price rises are related to strong demand growth in emerging

countries, particularly in China, not met by production increases (Hamilton, 2009). Price

slumps are due to demand weakness in major emerging and developed countries along

with production increases in non-OPEC countries including the United States as well as

the decision of OPEC to maintain present production levels (IMF, 2015). However,

future shifts in OPEC’s strategy and geopolitical strains in some oil-producing countries

on the supply side are sources of uncertainty. Moreover, oil price volatility has future

impacts affecting supply and demand grounds. Oil companies implement cost cutting

schemes to cope with the diminishing revenues. For example, most of the 200 major

international oil and gas projects are susceptible to cancellation or postponement as the

projects are not economical at the current prices (Olson, 2015).

Oil prices have a significant impact on many aspects of economies and are therefore

debated in the literature extensively.

2

Oil price volatilities are one of the sources of

shocks that adversely affect the economic output, having a direct effect on macroeco-

nomic factors and economic growth (Dincer and Kandil, 2011). The following studies

argue the impacts of oil prices on several macroeconomic factors: Lizardo and Mollick

(2010), Sari et al. (2010), Wu et al. (2012), Brahma srene et al. (2014), Fowowe (2014)

and Turhan et al. (2014a) on currency exchange rates; Ki lian (2008) and Alvarez et al.

(2011) on inflation; Soytas and Sari (2003), Lee (2006) and Mehrara (2007) on growth

rates; Ji and Fan (2012) and Turhan et al. (2014b) on major commodity markets;

Nazlioglu and Soytas (2012) on agricultural commodity prices; Basher et al. (2012),

Chen and Xin (2015), Kang et al. (2015), Narayan and Gupta (2015) on stock market

returns. Although the direction and importance of the impact are varied across the

countries, the studies record a significant relationship between macroeconomic indicators

and oil prices.

It is a reasonable assumption that oil export revenues for oil-producing countries and oil

import expenses for oil-dependent countries increase directly when oil prices increase, and

vice versa. This is known as ‘direct effect’of oil prices which is addressed in the established

literature. Indirect effects on international trade also referred as asymmetric effects, are the

effects of oil prices on the imports of oil-exporting countries and exports of oil-im porting

countries. Backus and Crucini (2000), Lutz and Meyer (2009), Korhonen and Ledyaeva

©2016 Organization of the Petroleum Exporting Countries OPEC Energy Review December 2016

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