Structural transformation and the oil price

    Research output: Contribution to journalArticlepeer-review

    21 Citations (Scopus)

    Abstract

    What part of the high oil price can be explained by structural transformation in the developing world? Will continued structural transformation in these countries result in a permanently 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 the developing world on global oil demand and the oil price in the OECD. I find that structural transformation in non-OECD countries accounts for up to 53% 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.
    Original languageEnglish
    Pages (from-to)484-504
    JournalReview of Economic Dynamics
    Volume17
    Issue number3
    DOIs
    Publication statusPublished - 1 Jul 2014

    Keywords

    • Oil price
    • Structural Transformation
    • China
    • Price
    • Industralization
    • India
    • International trade
    • Multi-sector models
    • Commodity prices

    Fingerprint

    Dive into the research topics of 'Structural transformation and the oil price'. Together they form a unique fingerprint.

    Cite this