Oil prices and the global economy: A general equilibrium analysis

a r t i c l e i n f o A global computable general equilibrium model is used to analyze the economic impacts of rising oil prices with endogenously determined availability of biofuels to mitigate those impacts. The negative effects on the global economy are comparable to those found in other studies, but the impacts are unevenly distributed across countries/regions or sectors. The agricultural sectors of high-income countries, which are relatively energy intensive, would suffer more from a rising oil prices than that in lower-income countries, whereas the reverse is true for the impacts across manufacturing sectors. The impacts are especially strong for oil importers with relatively energy-intensive manufacturing and trade, such as India and China. While the availability of biofuels does mitigate some of the negative impacts of rising oil prices, the benefit is small because capacity of biofuels to economically substitute for fossil fuels on a large scale remains limited. A good understanding of adverse impacts of oil price rise in an economy is essential to design policy responses to reduce those impacts. However, the impact of oil price shocks on global economy is debated in the literature., present a good account of this debate. Using data since World War II until the first oil crisis in 1973, Hamilton (1983) finds that oil shocks contributed to some of the US recession prior to 1972. Similarly, analyzing data since the first oil crisis until 2000, Barsky and Kilian (2004) show that oil price increases contributed to US recessions although the impacts were not as large as commonly thought. Recently, Morana (2013) shows that oil prices increases exacerbated economic recessions during the Gulf wars and also financial crisis in 2008. Other key studies investigating the impacts of oil price increases on macroeconomy includes Hamilton Most of these studies use econometric approach to establish the relationship between changes in oil prices and GDP based on historical data. One limitation of this approach is that the correlation between oil prices and GDP could be just a statistical coincidence (Hamilton, 1983). Kilian (2008) argues based on time series estimates that the GDP impacts of oil price shocks depend significantly on whether the observed oil price changes were exogenous or endogenously induced by other factors. A few studies have examined the impacts of oil price rise on GDP using structural models, particularly the computable general equilibrium (CGE) models. For example, Sanchez (2011) shows, …