Oil price fluctuations and its effect on GDP growth
A case study of China and Germany
Bachelor Thesis
to graduate from the School of Business and Social Sciences of the
Århus University, Denmark
Author:
Christopher Dirzka
Academic supervisor:
Dr. Habil Peter Kesting
Matriculation number:
201208062
Word count:
99.780
Århus, 04th May 2015
Abstract
Since the 1980s when economists and government leaders understood the potential
and threat of oil dependence, the research field dramatically expanded. The fact
that rising oil prices have adverse effects on macroeconomic activity, has become
widely accepted due to James D. Hamilton’s article ”Oil and the Macroeconomy
since World War II” in 1983.
Many others confirmed his results, however changes to the oil market also affected
the focus of research, in the sense that not only the price levels had an effect on the
GDP growth, but price volatility as well.
To give a perception; an increase 10% in oil prices, which is according to the WTI spot
price per barrel from the 30th March 2015 - 4.86$, might decrease the GDP growth by
0.6% (Hooker, 1996), in relation to the U.S. GDP a potential loss would be between
tens and even hundreds of billion dollar.
Moreover, several researchers found evidence that oil prices also affect a wide
range of economic factors, such as employment, interest rate, stock markets,
inflation- and exchange rates.
Yet the exact correlation between oil price fluctuations and GDP growth for a
particular country remains controversial.
The author chooses to analyse the relationship between GDP growth and oil price
fluctuations, via a bivariate analysis for the time 2000, 1st quarter to 2015, 1st quarter.
Germany and China, where chosen to exemplify this relationship. The backbone of
both economies is the export of production goods; this implies a sizeable
transportation sector, especially road transportation, which is fuelled by petroleum.
In the observation period, both GDPs grew, yet the oil consumption declined in
Germany, while China’s GDP increased proportional with the consumption.
The analysis indicates that Germany’s and China’s GDP are correlated to each other
and that the relationship in the third quarter after the change is negative and
statically significant for Germany, however China’s GDP and the oil price fluctuations
are positive directly linked without any lag.
2
Table of Content.......................................................................................................................3
1 Introduction...........................................................................................................................5
1.1
1.2
1.3
1.4
1.5
1.6
Introduction to the subject .......................................................................................5
Problem statement and research questions ..........................................................7
Purpose........................................................................................................................8
Delimitations ...............................................................................................................8
Method........................................................................................................................9
Structure of the thesis ................................................................................................9
2 Background.........................................................................................................................10
2.1
2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
2.1.6
2.1.7
Oil Price History..........................................................................................................11
History Overview........................................................................................................11
Pre-Embargo Period.................................................................................................12
Middle East Crisis.......................................................................................................13
Role of the OPEC 1980 - 2000..................................................................................14
After 11th September 2011.......................................................................................15
Oversupply in 2014-2015..........................................................................................17
Sub – Conclusion......................................................................................................18
3 Oil price and economical activity....................................................................................19
3.1
3.1.1
3.1.2
3.1.3
3.2
3.3
3.3.1
3.3.2
3.3.3
Literature Review......................................................................................................20
Models in relation to the GDP and employment..................................................20
Models in relation to the stock market...................................................................22
Literature Summary...................................................................................................23
Correlation economy and oil prices.......................................................................23
Oil Price Increase......................................................................................................24
Impact of an oil price increase on exporting countries.......................................24
Impact of an oil price increase on importing countries.......................................25
Stock market and exchange rate..........................................................................26
4 Cases study Germany and China....................................................................................28
4.1
4.2
Germany....................................................................................................................28
China..........................................................................................................................30
5. Analysis...............................................................................................................................33
5.1
5.2
5.3
Data background.....................................................................................................34
Descriptive Analysis...................................................................................................34
Spearman's rank-order correlation.........................................................................35
6 Conclusion...........................................................................................................................35
3
7 References...........................................................................................................................36
7.1
7.2
Summary Figures Reference....................................................................................43
Summary Appendix Reference...............................................................................46
8 Appendix.............................................................................................................................47
Figures
Figure°1 BP Review: World consumption...............................................................................6
Figrue°2 Purpose: Link between oil price and GDP.............................................................8
Figure°3 Structure of the Thesis...............................................................................................9
Figure°4 Structure of the Chapter 2.....................................................................................10
Figure°5 Average Historic Oil prices per barrel from 1861 to 2013...................................11
Figure°6 Average Oil prices per barrel from 1946 to 1972................................................12
Figure°7 Average Oil prices per barrel from 1972 to 1983................................................13
Figure°8 Average Oil prices per barrel from 1980 to 2000................................................14
Figure°9 Total Oil Supply (Thousand Barrels Per Day) from 1980 to 2004.........................15
Figure°10 Average Oil prices per barrel from 1999 to 2013..............................................16
Figure°11 Total Oil Supply (Thousand Barrels Per Day) from 1999 to 2013.......................16
Figure°12 Oil prices per barrel – Benchmark WTI & Brent from 2011 to 2015...................17
Figure°13 Recessions in the U.S. from 1970 to 2012............................................................18
Figure°14 Structure of the Chapter 3...................................................................................19
Figure°15 Worldwide GDP vs. Oil price per barrel in international real 2010$................23
Figure°16 Oil price increase in relation to oil exporting nations.......................................25
Figure°17 Oil price increase in relation to oil importing nations.......................................25
Figure°18 Total Primary Energy Supply of Germany in 2010 (Mtoe).................................28
Figure°19 German Production vs. Consumption from 1991 to 2013................................28
Figure°20 German GDP vs. Total Oil Consumption from 1991 to 2013............................29
Figure°21 Total Primary Energy Supply of China in 2011....................................................30
Figure°22 Chinese Production vs. Consumption and Ratio from 1987 to 2013...............31
Figure°23 Chinese GDP vs. Oil Consumption from 1991 to 2013......................................32
SPSS
Figure°24 Frequency Test Germany and China.................................................................34
Figure°25 Spearman's rank-order correlation.....................................................................35
Appendix
Appendix I: Production & Consumption by region............................................................47
Appendix II: World consumption by energy source..........................................................47
Appendix III: Histogram German_GDP_Growth.................................................................48
Appendix IV: Histogram China_GDP_Growth....................................................................48
Appendix V: Descriptive Statistics Germany......................................................................49
Appendix VI: Descriptive Statistics China............................................................................49
Appendix VII: Descriptive Statistics WTI Spot Price.............................................................49
4
1 Introduction
This chapter provides for the reader a basic overview of existing studies in relation to
macroeconomic consequences of oil price fluctuations and GDP growth.
It also contains the problem statement with the research questions, which this paper
aims to answer in the consecutive sections. Some boundaries are acknowledged in
delimitations section and lastly the structure of the thesis is presented.
1.1 Introduction to the subject
“By the fall of 1918, it was clear that a nation's prosperity, even its very survival,
depended on securing a safe, abundant supply of cheap oil.” - Albert Marrin,
Chairman of the History Department at New York's Yeshiva University (2012)
In his book - Black Gold: The Story of Oil in Our Lives, published in 2013 he outlines the
significance of oil for the being of our humanity in the 20 th and 21st century.
The usage of crude oil is not delimited to fuel vehicles / airplanes; it also can be
transformed into heat and components of it are used in almost all chemical products.
Until the availability of a more efficient resource, crude oil will shape humanities
further development. (http://www.wintershall.com/en/company/oil-and-gas/oil-cando-more.html)
For instance, the thirteen of the thirty biggest companies in relation to their revenue,
are oil & gas producers. (http://fortune.com/global500/.)
The history of dependence could be determined by the invention of the four-stroke
combustion cycle by the German engineer Nikolaus Otto in 1867. He created the first
internal combustion engine that compressed the fuel mixture prior to combustion for
higher efficiency. At the time of creation, it was superior to any other engine.
Currently almost all vehicles, which run on any form of crude oil, use this particular
combustion engine, called Otto cycle. (Grenning, 1991)
Due to the appearance of renewable energy sources, such as wind, water, and solar
power and higher efficiency of combustion engines, the importance of crude oil as
the main source of energy has been diminished. Nonetheless, the significance of oil
exceeds economic aspects and affects social life in general.
Oil represents one of the most important macroeconomic factors for the world
economy; thusly the crude oil market is the largest commodity market in the world.
According to the Energy Information Administration (EIA) Global economic
performance remains to this the day highly correlated to oil prices.
(http://www.eia.gov/finance/markets/demand-nonoecd.cfm)
According to the IEA Research Paper, by R. Sauter and S. Awerbuch (2003), crude oil
differentiate itself from any other commodities, due to its nature to affect the GDP of
a country asymmetrically. Oil price increase and decrease do not have the same
overall impacts. (Mork, 1989) Moreover, when the price of oil per barrel increases, oil-
5
exporting countries can accumulate higher revenues, on the other hand importing
countries generally suffer due to higher prices. Thusly this effect is also visible in
reverse, when prices decrease.
The Journal of Political Economy published the article, “Oil and the Macroeconomy
since World War II” by J. D. Hamilton (1983), which is seen by many scholars as the
keystone of Oil & GDP research.
Hamilton demonstrated that the historical correlation between oil price increase and
economic downturns were no coincidence. In the time period from 1948 – 1980, his
results showed that after an increase in oil price, 3 to 4 quarters later the economic
growth decreased, which was followed by a recovery beginning after 6 to 7 quarters.
Thusly most post WW2 recessions were preceded by a sharp increase in oil price (Guo
& Kliesen, 2005), due to simultaneous rising production costs. Moreover the price
fluctuation in itself creates uncertainty of risk, which will delay investments and trigger
higher unemployment. (Sauter & Awerbuch, 2003)
To understand the vital importance of oil for the world economy and our everyday
life, the following figure°1 from the BP Statistical Review of World Energy 2014, shows
that nearly 30% of the worldwide energy consumption relies on crude oil.
Figure°1 BP Review: World consumption
The transportation sector, especially road transport, which accounted in 2012 for
more than 50% of the worldwide oil demand, would suffer under higher prices.
(Baroni, 2013)
In January 2000 the oil price per barrel rose from 25.56$ to 145$ in July 2008. Referring
to this issue the professor of the University of California J. D. Hamilton (2014) expected
that “hundred dollar oil is here to stay”; meaning that the price per barrel will remain
in the future above the 100$ mark. In contrast to Hamilton’s assumption, John Kemp,
Senior
Market
Analyst
for
Commodities
and
Energy
at
Reuters
(http://www.rigzone.com/news/oil_gas/a/134256/Kemp_Forecasts_for_Higher_Oil_Pri
6
ces_Misjudge_the_Shale_Boom/?all=HG2), forecasted a decline in oil prices due to
the additional supply of oil by the shale industry.
The sky rocking prices in 2008 made the previously uneconomical hydraulic fracturing
commonly referred to as fracking, for private and governmental energy agencies
attractive. The U.S.A as the former main importer of oil ranks on the second place
after Russia in shale oil resources and is ranked fourth globally after China, Argentina
and Algeria in shale natural gas resources. (Kuuskraa. & Stevens, 2013) Subsequently,
this contributed to the current oil price of 47$ in March 2015, which is the lowest level
since 2009.
To sum up, inexpensive oil is a vital commodity for the major economies of the world.
Moreover, it can be stated that countries with high economic activity (export /
industry) and marginal access to own recourses, are significantly more affected by oil
prices fluctuations than others.
For the aforementioned reasons, the case study chose to exemplify this struggle using
the two major export nations: Germany and China
1.2 Problem statement and research questions
Previous studies were concerned whether the relationship between oil prices and
output, might be just be a coincidence or actual statistically significant. Following
researchers rejected the hypothesis that this might be only a coincidence; Hamilton
(1983, 2000, 2005), Loungani (1986), Gisser & Goodwin (1986), Mork (1989), Lee et al.
(1995), Ferderer (1996), Rotemberg and Woodford (1996), Hooker (1996), Sadorsky
(1999) and Ciner (2001). These studies were mostly done in relation to the economy of
the United States of America, which might be explainable by the countries high oil
intensity.
However in the last decade the BRIC nations (Brazil, Russia, India and China) affected
the entire commodity market and shifted the primary oil demand away from the U.S.
Therefrom this thesis includes China in the case study, along with Germany as the
powerhouse of Europe.
Both were chosen due to their high - and industrial sector, which consumes most of
the total primer energy supply. While Germany’s GDP experienced a stable growth,
the oil consumption declined. On the other hand, Chinas GDP grew rapidly since the
early 2000s in correlation with the oil consumption.
Questions:



What is the general relationship between oil prices and economic activity?
Which factors contribute to oil price fluctuations?
What is the correlation between GDP and oil price fluctuations for the
countries Germany and China in a given time period?
7
1.3 Purpose
The purpose of this academic work is to display in a primarily theoretical manner how
the oil price fluctuations affect the economy of a country. Furthermore, the case
study aims to present similarities and differences in relation to this matter.
Oil Price
(Demand and
Supply)
Case-Study
(Germany
and China)
Previous
research
(Hamilton,
Awerbuch,
Mork, etc)
Figrue°2 Purpose: Link between oil price and GDP
The outcome of this paper will help companies and the governments, to predict
future risks and to construct mechanisms to prevent economic downturns due to
increasing oil prices. On the practical side, this paper aims to provide information for
the average customer to decide whether it is sustainable that the future
transportation vehicle should run on fossil fuel.
At last, it is important to mention that the purpose of this paper is to point out the
mechanisms, which influence oil prices and GDP growth, rather than offer new
solutions on how to overcome the issue of dependency.
1.4 Delimitations
Nearly all researches in the field of macroeconomic activity and oil focus on the U.S.
economy. However the results of these might be not universally applicable, due to
the issue that every country has a specific relationship between Oil & GDP and a
different geopolitical history. Factors such as oil intensity and own reserves can alter
the link.
Secondly, the sources used, are in some cases out-dated, or only usable for a specific
time period, the outcome is in some cases not transferable, e.g. hydraulic franking
shifted the role of the U.S.A from 2008 onwards from the main oil importer to the
second biggest oil producer. This reduces the overall effect from external oil price
shocks, triggered in the Middle East and also changes the relationship between
importing- and exporting countries.
8
1.5 Method
The bivariate correlation, the Spearman rank correlation method was selected to test
the relationship between oil price fluctuations and GDP growth, due to the issue that
all three variable sets failed the assumption to be normally distributed. The
Spearman's rank-order correlation is the nonparametric version of the Pearson
correlation and measures the strength of association between two ranked variables.
Furthermore based on the findings by Hamilton (1983) and Lee et. al. (1995), the
analysis will include lags, its can be generally assumed that oil price fluctuations will
have no immediate effect on GDP growth.
For the entire analysis the IBM SPSS statics program is used; Chapter 5 will contain the
main findings of the tests and the appendix the overall output.
The model uses quarterly GDP- and the benchmark crude, West Texas Intermediate
(WTI) data of the time period from 2000, 1st quarter to 2015, 1st quarter.
1.6 Structure of the thesis
Figure°3 illustrates the structure of the thesis, which starts with the current chapter 1 –
the introduction, followed by chapter 2 – background information, which discusses
the concept of demand & supply for the crude oil market and the oil price history.
The third chapter summaries the findings of previous studies in this research field; the
general relationship between the economic output, the oil price fluctuations on
economic growths and the asymmetry of the effects. Furthermore the fourth and fifth
chapter, analyses the relationship between oil prices and the GDP from the countries;
Germany and China.
Oil price
fluctuations and
GDP growth
Abstract
Chapter 1 Introduction
Chapter 2 Background
1.1 Introduction
Chapter 3 - Oil price
and Econmy
Chapter 4 Casestudy
Chapter 5 - Analysis
Chapter 6 Conclusion
Case study
Gemrnay and
China
1.2 Problem
statement and
research questions
....
1.6 Structure of the
thesis
Figure°3 Structure of the Thesis
9
2 Background
The theory of demand and supply can be considered as the keystone of a free
market economy, the roots date back into the fourteenth-century century
(http://www.islamic-banking.com/early-muslim-thinkers.aspx.) and was shaped by
the most influential economics, such as John Locke (1691) or David Ricardo (1817).
According to the theory the market is divided into demand, for a desired product, for
which the buyer is willing to pay a certain price and on the other hand the supply,
which refers to the quantity the producer of the specific product can offer at a
certain price. Therefore, the final market price for this product is the reflection of the
demand for the goods and the supply. It can be summarized that in a free market
the price of the good will vary until the equilibrium for price and quantity is met.
In the case of the commodity - crude oil, prices have the nature to reflect the
demand and supply by OPEC and non-OPEC and are correlated to shortage or
oversupply of the market. On the other hand, the price of crude oil is not only
determined by a simple demand and supply approach, the reality is far more
complex, in the sense that geostrategic-, speculative- and even cultural factors play
a role.
To finalize the introduction of the second part it is crucial to point out the difference
between crude oil and petroleum; Crude oil is a “mixture of hydrocarbons that exists
as a liquid in natural underground reservoirs” and Petroleum is “produced from the
processing of crude oil and other liquids at petroleum refineries”
(http://www.eia.gov/dnav/ng/TblDefs/ng_enr_deep_tbldef2.asp.)
The following chapter 2 displays the history of demand and supply for oil, to enable
the reader to understand how the price is determined. This section is separated
chronologically into the periods: before the embargo in the 1973, the crisis in the
Middle East in the 1980th and finalized by the abstract of current events. In addition,
this part also covers the role of the OPEC during the 80s & 90s and the current
decrease of the oil price in relation to the hydraulic fracking.
2.1.1 History Overview
2.1.2 Pre-Embargo Period
2.1.3 Middle East Crisis
2 Background
2.1 Oil Price history
2.1.4 Role of the OPEC 1980 - 2000
2.1.5 After 11th September 2011
2.1.6 Oversupply in 2014-2015
2.1.7 Sub – Conclusion
Figure°4 Structure of the Chapter 2
10
2.1 Oil Price History
The price of oil refers to the spot price of one of the four main benchmarks: West
Texas Intermediate (WTI), Brent Blend, OPEC Reference Basket and Dubai Crude.
(George & Breul, 2014)
These benchmarks differentiate by content and primary trading location; The West
Texas Intermediate (WTI), a light crude oil, is used for New York Mercantile Exchange's
oil futures contracts in North America. In contrast to the WTI, the Brent Blend is traded
on the Intercontinental Exchange and is produced by oil suppliers located in the
North Sea. The third major benchmark for crude oil is the Dubai crude, which is
produced in the Emirate of Dubai and the Middle East. The fourth is the OPEC
Reference Basket, which uses a weighted average of prices for all eleven blends
produced by the OPEC countries. (Miller et. al., 2010)
The price of a barrel on the free market is correlated to its specific gravity, the sulfur
concentration and the production costs, including location and production method.
For example, a barrel produced in Saudi Arabia costs between 10$ - 25$ while a
barrel from the North Dakota Bakken, hauled by hydraulic fracking 54$ – 79$. (Mohr,
2014)
2.1.1 History Overview
From 1861 to 2013, the average inflation adjusted oil price, from the U.S. dollar rate of
2013 is 33.03$, only 45 of 153 (29%) recordings were higher than the average price.
(http://www.bp.com/en/global/corporate/about-bp/energy-economics/
statistical-review-of-world-energy/2013-in-review.html)
The lowest recorded price was 9.94$ in the year 1931, during the “Great Depression”,
which lasted from 1929 to 1932, the worldwide GDP, and the oil consumption fall
during this period. On the other hand, the highest price was reached in 1864 and the
second highest in 2011, at around 115.22$ per barrel.
Oil Prices 1861 - 2013
30.00
140.00
25.00
120.00
100.00
20.00
80.00
15.00
60.00
10.00
40.00
20.00
0.00
0.00
1861
1866
1871
1876
1881
1886
1891
1896
1901
1906
1911
1916
1921
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
5.00
$ money of the day
$ 2013
Figure°5 Average Historic Oil prices per barrel from 1861 to 2013
11
By separating the historical oil price data, into four time periods, 1861-1946, 1946-72,
1972-2000 and 2000-13, intense price fluctuations are visible. These fluctuations can
be illustrated using the ratio of values, which are higher than the average of the
given sample period and the absolute number of the samples.
The periods 1861-1946 and 1972-2000 indicate that 26% and 41% of the values are
higher than the average of the particular time period, respectively. Given this fact,
severe price changes were common in these times.
The following section will analyse the period after 1946 and links oil price fluctuations
to historic events.
2.1.2 Pre-Embargo Period
After the Second World War the nominal crude oil price per barrel rose, from 1.12$ in
1946 to 2.48$ in 1973, translated into real 2013 dollar; 13.35$ to 13.81$.
Pre Embargo Period
3.00
25.00
2.50
20.00
2.00
15.00
1.50
10.00
1.00
$ money of the day
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
1960
1959
1958
1957
1956
1955
1954
1953
1952
1951
1950
1949
0.00
1948
0.00
1947
5.00
1946
0.50
$ 2013
Figure°6 Average Oil prices per barrel from 1946 to 1972
From 1961 till 1970 the nominal oil price stayed constant at 1.8$, however the inflation
adjusted price decreased from 14.93$ to 10.79$.
The rescission 1960-61 in the United States of America was the only one, which was
not caused by a significant increase in oil price. (Hamilton, 2011)
The decrease in oil price in 1969 to 1970 is related to the discovery of the Ekofisk oil
field in December 1969 and the giant Forties Oil Field in October 1970, which are
located in Norwegian and British waters, respectively. (Robelius, 2007)
Another event happened in this time period; the establishment of the OPEC,
Organization of the Petroleum Exporting Countries in 1960, which included Iran, Iraq,
Kuwait, Venezuela, Iraq, Kuwait and Saudi Arabia. (Trott et al., 2009) Later in 1971
Qatar, United Arab Emirates, Indonesia, Algeria, Nigeria and Libya joined the
Organization of the Petroleum Exporting Countries.
12
2.1.3 Middle East Crisis
The nominal price per barrel in US$ was in the year 1972 at around 2.48$, this
changed during the last quarter of the year 1973, initiated by the 19 days war of Yom
Kippur between Israel and a coalition of mainly Islamic- and communist nations, in
particular Syria and Egypt (Williams, 2011). On the 25th of October 1973, the war
ended in a ceasefire and an Israeli victory. As retaliation, several Arab countries
stopped their oil export towards Israel and its Western allies, including the United
States of America.
Middle East / OPEC
150.00
100.00
50.00
0.00
1972
1973
1974
1975
1976
1977
1978
$ money of the day
1979
1980
1981
1982
1983
$ 2013
Figure°7 Average Oil prices per barrel from 1972 to 1983
All together the Arab nations in the coalition produced before October 1973
approximately five million barrels per day, which vanished from the free market
during the embargo, resulting in a nominal price increase from 3.29$ in 1973 to 11.58$
in 1974. (17.25$ to 54.74$ in real 2013 US$) Converted into percentage, the oil price
rose from 1973 to 1974 by 252%.
The researcher J. D. Colgan from Brown University (2014), concluded that the
embargo demonstrated the threat of oil dependence. In the following decades, the
industrial nations diversified their supply, to overcome future shortages.
In the next four years till 1978, the oil price remained fairly stable (54.74$ to 50.09$ in
real 2013 US$), due to a worldwide production increase of nearly 25%.
The years from 1978 onwards were marked by the Iranian revolution and the Iran –
Iraq War, which occurred straight afterward. According to P.Ditté and Dr. P. Roell
(2006) Iran lost due the collapse of the Shah regime nearly 2.0 - 2.5 million barrels per
day of oil production, which doubled the oil price. Shortly after the Islamic revolution
and the installation of the Ayatollah Khomeini as the country leader in February 1979,
the pre-revolution oil production got restored.
Due to the invasion of Iran in 1980 and the following nearly seven years lasting war,
the production capacities of the former major oil exporters decrease from 6.5 million
barrels per day to only one million. In a broad context, the daily net oil production
decreased by 5.5 million barrels, which represented nearly 10% of the worldwide
output.
Thusly the oil price more than doubled from 14.02$ per barrel in the year 1978 to
36.83$ in 1980. (50.09$ to 104.12$ in real 2013 US$)
13
Due to the aforementioned events, between 1973 to 1981, it can be concluded that
oil price fluctuations would have been less significant if the U.S.A., as the biggest oil
importer at that time, would have been less dependent on crude oil. (Barsky & Kilian,
2004)
2.1.4 Role of the OPEC 1980 - 2000
The previous part dealt with worldwide events to the beginning of the 1980; this
section presents the role of the OPEC in the 80s and 90s.
The OPEC, Organization of the Petroleum Exporting Countries, was founded in 1960
and coordinates the petroleum policies of its Member Countries in order to influence
the oil price. (http://www.opec.org/opec_web/en/about_us/25.htm.)
During the embargo in 1973, the OPEC became aware of its the market power and
displaced Railroad Commission of Texas, as the most influential oil regulation agency.
(Williams, 2011)
However in contrast to the Railroad Commission of Texas, the OPEC can not enforce
policies for their oil-producing members. According to the Journal of Energy Security
(Brune, 2010), the only enforce “mechanism that ever existed in OPEC is Saudi spare
capacity”. Given this fact the OPEC as an organization of several oil exporters, relies
on the power of one country. Saudi Arabia could increase with these spare
capacities the production, which would lead to a decline in oil price.
Role of the OPEC 1980 - 2000
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
$ money of the day
$ 2013
Figure°8 Average Oil prices per barrel from 1980 to 2000
Due to the missing enforce mechanism, the Saudi government failed in 1980, after
peaking oil prices, due to the Iranian revolution and the Iran-Iraq war, to urge the
other OPEC members to increase oil production, in order to decrease prices.
(Williams, 2011)
14
The lack of responsible price control mechanisms resulted from 1982 onwards in a
production increase by Non OPEC countries, with the aim to overcome the price
monopoly of the OPEC.
Thusly from 1981 to 1988 the oil production of Non OPEC countries increased by 15%,
in contrast the production by the OPEC, which decreased by 7%.
In 1988, the oligopolistic position of the OPEC in the oil market diminished, due to
lower demand and higher supply by Non OPEC nations. (Alkhathlan et. al., 2013)
OPEC vs. Non OPEC production
60000
50000
40000
30000
20000
10000
0
OPEC
Non OPEC
Figure°9 Total Oil Supply (Thousand Barrels Per Day) from 1980 to 2004
In reaction to the price plunge of 1981 - 86 the OPEC tried to reduce the production
quotas, in order to hold the price per barrel on a higher level.
In August 1990, the oil price stopped to decline and rose again due to the Iraq Kuwait invasion, which resulted into the first Gulf War. (Looney, 2003) The following
years the price stayed stable around 20$ until the year 1998, when the economic
boom in Asia stopped and “Indonesia, Japan, Malaysia, South Korea, and Thailand
experienced a recession, which lasted from 1998 to 1999” (Manning, 1998)
Due to the increase of oil production, by the OPEC and Non OPEC, in correlation with
the decrease in economic activity in Asia the oil prices reached the pre-Iran
revolution level from 1976.
2.1.5 After 11th September 2011
The burst of the “Dot-com bubble” in the first quarter of the year 2000 weakened the
U.S economy (Kraay & Ventura, 2007). Additionally the non-OPEC countries
expanded further their production, which resulted in a drop in oil prices in 2001- 02.
To counter the decrease, the OPEC countries lowered their quota at around 3 million
barrel per day in the time period between 2000 and 2002.
15
After 11th September
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$ money of the day
$ 2013
Figure°10 Average Oil prices per barrel from 1999 to 2013
Under normal circumstance the decrease of production by the OPEC would have
increased the price per barrel again, yet the attack on the Twin Towers on the 11th
September 2011, weakened the U.S. economy further and the aggregate demand
decreased. (Jackson, 2008)
OPEC vs. Non-OPEC production
70000
60000
50000
40000
30000
20000
10000
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Non OPEC
OPEC
Figure°11 Total Oil Supply (Thousand Barrels Per Day) from 1999 to 2013
In the year 2002 the OPEC and Russia reduced their production, to raise the oil price
again over 25$. (Schlink, 2012)
However, the Iraq War in 2003 and the general strike of the state-owned oil company
PDVSA in Venezuela, between 2002-2003, diminished in both OPEC countries nearly
the entire production capacities. To compensate, the other OPEC countries needed
to raise their production again.
During the year 2003, the Asian demand for crude oil was rising and the U.S. economy
recovered from the recession; due to the aforementioned struggles in Iraq and
Venezuela, the other OPEC members had to increase their production so far that
their spare capacities reached the limit.
In relation to the demand and supply theory, the price of oil increased between 2003
and 2008, from 36.5$ to 97.26$. An article of the magazine The Economist in 2005,
16
named the Hurricane Katrina, as another factor for rising oil prices, due to supply
interruptions in the Golf Coast area.
December 2007 marked the start of the Great Depression, which refers to financial
crisis and subprime mortgage crisis. Throughout the years 2008 and 2009 the oil price
dropped, due to lower demand, from 97.26$ to 61.67$. Followed by a cutback in oil
production by the OPEC, to stabilize the prices. (Hamilton, 2009)
The increase in 2010, is related to the Arab Spring (Darbouche & Fattouh, 2011),
which interrupted the oil production in most of the Middle Eastern and North African
countries, especially Libya, where the civil unrest continuous still in the year 2015.
2.1.6 Oversupply in 2014-2015
In June 2014 the market price for the crude oil benchmarks, Brent & WTI started to fall
steadily and reached in January 2015 the lowest price since the 2009, converted into
percentage the price per barrel lost 252% of its value.
Figure°12 Oil prices per barrel – Benchmark WTI & Brent from 2011 to 2015
The U.S. shale oil production is another factor that contributed to the decline; from
mid 2008 till 2015 the oil production in the Bakken Region, increased from
200thousand to 1300thousand barrels per day, which is approximately the output of
the OPEC member Qatar, in the year 2007. (EIA Bakken Report, 2015)
In November 2014, Reuters published (http://www.reuters.com/article/2014/11/27/usopec-meeting-idUSKCN0JA0O320141127.) an article, which stated that “Saudi Arabia
blocked calls on Thursday from poorer members of the OPEC oil exporter group for
production cuts to arrest a slide in global prices, sending benchmark crude plunging
to a fresh four-year low”
According to the Saudi government, the low oil price is necessary to make the U.S.
shale oil production uneconomical, which needs an oil price above 60$, to pay for
17
the running costs. (http://www.format.at/wirtschaft/preisverfall-oel-saudis-5191403.)
Further increase in shale oil production would weaken the market position of the
OPEC, especially Saudi Arabia’s.
The current market prices for the crude oil benchmark WTI and Brent, are around
51.95$ and 57.14$, respectively. However, according to International Business Times a
slow recovery is predicated, which would increase the price up to 70$ by the end of
2017.
(http://www.ibtimes.co.in/strong-recovery-crude-oil-prices-unlikely-saysanalysts-629858.) Already in April 2014, (Hou et. al., 2014) the working paper “The
development implications of the fracking revolution” presented the “winner” (United
States and China) and “looser” (Russia & the OPEC). In general it can be stated that
former oil intense nations will reach a relative independence from the OPEC and
Russia, due to the shale oil production.
2.1.7 Sub – Conclusion
The Chapter 2 analysed the main historical events and price fluctuations; to
introduce the next section, which displays the theoretical framework, the following
Figure°13, illustrates the connection between oil price peaks and rescissions in the U.S.
To sum up the foregoing sections, between 1970 and 2012 the U.S. economy
experienced five major recessions, all of them were related partially to peaking oil
prices.
These oil price shocks were caused by the following events: The embargo 1973 due to
the Yom Kippur war, the Iranian revolution in 1978, the Iran – Iraq War 1980, the Iraqi
invasion of Kuwait 1990 and the supply shortage in 2008.
Recessions in the U.S
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
$ money of the day
$ 2013
Figure°13 Recessions in the U.S. from 1970 to 2012
18





Mid 1970s recession (1973–75): Triggered by the embargo of 1973, which led
to quadrupling oil prices and high government spending because of the
Vietnam War. (Roubini & Setser, 2004)
Early 1980s recession (1981–82): Revolution in Iran, 1979, which abolished the
pro-American Shah regime, causing insecurity on the energy market.
Restrictive monetary policies of the U.S., to control the inflation resulted in the
recession. (Mussa, 1994)
Early 1990s recession (1990-91): Mix out of oil price shock in 1990 and debt
accumulation weakened the economy, which resulted in the recession. (Hall,
1993)
Early 2000s recession (2001): Due to the sharp oil price increase in 2000,
violent struggles in the Middle East, especially the Israel-Palestine conflict
(second intifada), burst of the speculative dot-com bubble and at last the
attack on the Twin Towers in New York, U.S. – decreased the GDP. (Roubini &
Setser, 2004)
End 2000s recession (2007-09): Housing bubble & subprime mortgage crisis of
the U.S., were preceded by the global financial crisis, including peaking oil
prices – Leading to the “Great Recession”. (Hamilton, 2009)
In conclusion, not all recessions were caused primarily by higher oil prices, but
according to the discussion paper “The Role of Oil Price Shocks in Causing U.S.
Recessions” by L. Kilian & R. J. Vigfusson (2014), the effect of this commodity,
contributing to a rescission is undeniable.
3 Oil price and economical activity
The following Chapter illustrates the relationship between oil price fluctuations and
the economic activity, in terms of the GDP. To provide an overview of these
contributions in this field is the primary aim of this thesis.
Researchers are confident about the existence of this correlation. However the exact
approach to model and the effects of it remain controversial.
Chapter 3 is structured in the following order; 3.1 presents the literature background
and is divided into, research overview and literature summary, 3.2 reviews the
correlation of the economy and oil prices and 3.3 analyses the effect of increasing oil
prices in relation to importing-, exporting oil countries and the stock market.
3.1.1 Models in relation to
the GDP and
employment
3 Oil price
and
economical
activity
3.1 Literature
Review
3.1.2 Models in relation to
the stock market
3.2 Correlation
economy and
oil prices
3.1.3 Literature Summary
3.3.1 Exporting Countries
3.3 Oil Price
Increase
3.3.2 Importing Countries
3.3.3 Stock market and
exchange rate
Figure°14 Structure of the Chapter 3
19
3.1 Literature Review
Due to the multi-dimensional impact of oil prices, many economists have dedicated
their research to investigate the relationship between economic growth and oil
prices. The literature to this date provides several different theories, which aim to build
the link between this commodity and economic factors.
The following section displays the findings in the chronological order.
3.1.1 Models in relation to the GDP and employment
The oil crisis in 1973 and 1979 triggered the interest to investigate and quantify this
relationship. The article, “Oil and the Macroeconomy since World War II” in the
Journal of Political Economy by J. D. Hamilton (1983), stated that three to four
quarters after an oil price increase the economic activity will slow down and recover
after six to seven quarters. The linear correlation was proven valid in the period from
1948 to 1980.
M. Gisser’s and T. H. Goodwin’s (1986) study confirmed the results of Hamilton (1983),
additionally they could prove that the model by Hamilton was applicable before and
after the oil embargo in 1973.
The book chapter, “Oil Price Shocks and the Dispersion Hypothesis” by P. Loungani
(1986) investigated the link between oil price increase and labour market, and
concluded that between 1947 - 1982 oil price shocks caused disturbances in the
labour reallocation process.
Another major contribution was made by Mork (1989), which focused on the collapse
of the oil market in the 1980s, using the negative correlation model previously
invented by J. D. Hamilton (1983). The results showed that the negative relationship
was even stronger than Hamilton (1983) had predicted. In contrast, he found out that
a decrease in oil price had not the same effects on the market as an increase, which
led to the assumption that oil as a commodity has asymmetric effects. The
contribution by Mork (1989) about asymmetric effects was thereafter considered as
valid for most of the further researches in this field.
Given this finding Mork, Olsen and Mysen (1994), tested the asymmetric effects on
other OECD countries than the U.S. economy and confirmed that an increase in oil
price will lead to a downturn in the economic activity, even if the particular nation is
less dependent on crude oil, on the other hand, a decrease will not stimulate the
economy.
The third major result in the field of oil price research was obtained by Lee et al.
(1995), which focused on oil prices shocks (volatility), which are defined as significant
changes in price in a given time period. They confirmed in the period from 1950 to
1992 that price shocks had higher implications on the economy of a country if they
occur in a less volatile period. Moreover Lee et al. (1995) estimated that four quarters
after an oil price shock the lowest output growth and rising unemployment rates can
be expected, which will recover in six to eight quarters after the shock, respectively.
20
Building on the volatility research of Lee et al. (1995), Ferderer (1996) examined the
asymmetry in effects in the time period from 1970 to 1990. Given this time frame
Ferderer (1996), found evidence that volatility and oil price changes had a stronger
impact on the economy of a country than monetary policy variables.
Furthermore volatility in oil price, negatively impacted output growth, immediately
and again eleven months after the shock, while oil price changes influenced the
output growth after one year.
Rotemberg & Woodford (1996) developed a model, which determined that an
increase of 1% in oil price will reduce the production output by -0.25% and a 10% rise
will decrease real wages by 1% after five to six quarters, in relation to the time period
from 1948 to 1980. The consequences of this increase in oil price will have even
stronger implications in the second year.
Based on the model by Rotemberg & Woodford (1996), Hooker (1996) argued that
the patter of influence changed between the 1948 – 1972 and 1973 – 1994; he could
not find any evidence that in the second time period oil price levels had any
influence on unemployment rates nor the GDP growth. Although according to his
research the volatility in oil prices had a statistically significant impact on economic
activity. In comparison to other studies Hooker (1996) rejected the linear relationship
by Hamilton (1983) and the asymmetric relationship by Mork (1989).
Due to aforementioned research by Hooker (1996), Hamilton (1996) illustrated in the
Journal of Monetary Economics, that the linear - (1983), as well as the asymmetric
model by Mork (1989), need to be changed in order to display the link between oil
prices and economic activities.
Hooker (1996) suggested an alternative model, which combines the asymmetric with the nonlinearity model, using the net oil price increase specification, which
considers the amount by which oil prices have gone up over the previous year.
During the period from 1948 to 1994 the link between U.S. GDP growth and the net oil
price increase specification remained significant.
The working paper “What is an oil shock?” published by Hamilton (2000) contrasted
the use of a linear- versus a nonlinear model. He found out that a nonlinear model
would be superior if the research aims to forecast GDP growth, using data of oil price
changes. Moreover, Hamilton stated that an increase is much more important than a
decrease in oil price, to predict the GDP growth. Furthermore, the working paper
supported the finding from Lee et al. (1995) that “price shocks have higher
implications on the economy of a country if they occur in a less volatile period”.
Lastly, Hamilton concluded that the historic data until 2000 was insufficient, to
develop a “particular form with is unambiguously over anther one”. Moreover he
suggested filtering out historical events, which contribute to a peak in oil prices, in
order to increase the reliability of the nonlinear model.
In the period 1973 to 1996, Chaudhuri (2000) was able to prove that real oil prices
affected the production of other commodities, even if it was not directly used in the
process.
21
Davis & Haltiwanger (2001), discussed the effects of oil shock in
manufacturing jobs in the time from 1972 to 1988 and found
“employment growth responds asymmetrically to oil price” (Davis &
465, 2001) These shocks have a great impact on the unemployment
in capital- and energy intensive industries.
relation to U.S.
evidence that
Haltiwanger, p.
rate, especially
The European central bank paper by Jiménez-Rodríguez and Sánchez (2004) used
different specifications, including a “linear model and three leading non-linear
specifications” and found evidence of “non-linear effects of oil price on real
economic activity, having different impacts on real output when they increase than
when they fall.” (Jiménez-Rodríguez & Sánchez, p. 27, 2004) This relationship was
statistically significant in some of the OECD countries, however the exact effects of it
were different in each of the analysed countries.
It can be concluded that the literature has not yet found prove whether oil prices
influence the GDP growth or vice versa. (Adelman, 2004)
The relationship between oil prices and economic activity needs further research to
determine the exact link between those two variables.
L. Ghalayini (p. 129, 2011) from the Lebanese University stated; “A possible reason
why there are so many different results regarding the subject is the usage of several
different models. By using one model a certain solution is found and in another one
might find the opposite results.”
3.1.2 Models in relation to the stock market
Since the end 1990s, economists analysed the link between oil prices and the effects
on the stock market. One of the first authors, who dedicated themselves to this
thematic were Jones and Kaul (1996). Their article “Oil and the Stock Markets”
showed that oil price shocks had a significant impact on the worldwide stock market.
Therefrom Sadorsky (1999) used monthly data in contrast to quarterly data in the
study of Jones and Kaul (1996) and proved that increasing oil prices trigger a
downturn in real stock returns, which would happen instantly in an efficient stock
market. This is based on the assumption that higher oil prices will increase production
costs for the industry. Sadorsky (1999) separated the analysis into two time periods
1947 to 1986 and 1986 to 1996 and displayed that after 1986 oil price shocks had
higher consequences for the stock market.
Papapetrou (2001) confirmed Sadorsky’s (1999) study; additionally he investigated
the process after an oil price shock in relation to industrial production and
employment. As a result of an oil price shock the interest rate rose, and the industrial
production and employment decreased and resulted in a decrease in real stock
return.
22
3.1.3 Literature Summary
The aforementioned researches can be summarized by the following four main
findings:




Economic activity & oil prices are linked and can be quantitatively measured.
An oil price increase has a significantly higher impact on the economy than a
decrease - depending on the scale of previous oil price volatility.
Price volatility creates uncertainty in investments and causes disruptions on
the labour market. Furthermore, the pattern of oil price volatility changed
after 1986; before this time oil price steadily increased, after 1986 large price
fluctuations reflected a rise in volatility of real oil price.
Oil price shocks, have a statistical significant impact on stock returns. Adverse
effects, for industrial production and employment, are immediately visible
after an oil price hike. The effects of asymmetry also apply to stock markets.
3.2 Correlation economy and oil prices
As described in the previous chapters oil prices have a significant influence on the
economic activity.
To measure economic activity, the gross domestic product is used as an “indicator of
the economic health of a country ... and the standard of living” according to the
International Monterey Fund. (http://www.imf.org/external/pubs/ft/fandd/basics
/gdp.htm.)
The formula for GDP includes; consumer spending (C), government spending (G),
investments by businesses (I) and the net export (NX) (Exports – Imports).
GDP = C + G + I + NX
Usually the GDP, Gross Domestic Product, is calculated on an annual basis and within
a country's borders in a specific time period.
The figure°15 displays the oil price behaviour and world economic growth for the
period 1969 to 2010. The world gross domestic product and the real oil price per
barrel show an upward trend. Visible on this chart the decline in GDP due to the
financial crisis in 2007-2009 and the decline in oil prices.
Worldwide GDP vs. Oil price (2010$)
100000.00
150
100
50000.00
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.00
50
GDP World (2010$)
0
Oil price in (2010$)
Figure°15 Worldwide GDP vs. Oil price per barrel in international real 2010$
23
The aggregate production function can be used to describe the how real gross
domestic
product
is
linked
to
available
inputs.
(http://catalog.flatworldknowledge.com/bookhub/reader/2498?e=coopermacroch16_s15.)
These inputs are physical capital, labour, human capital, social infrastructure and the
availability of natural resources in an economy.
An economic growth would increase the demand for these factors and therefore
increase according to the demand and supply theory the price of these factors.
Therefore fluctuations in oil price can be explained by economic growth.
Assuming increasing oil prices, a transfer of wealth would occur, from consuming- to
producing countries, vice versa if the prices decrease.
The global gross domestic product would depend in the case of an increase on the
amount of extra revenue, which would be reinvested in the global economy.
According to L. Ghalayini (2011) the “boost to economic growth in oil-exporting
countries provided by higher oil prices in the past has always been less than the loss
of economic growth in importing countries, such that the net effect has always been
negative.“
This means that a boost in GDP of the oil-producing nations, due to higher oil prices, is
lower than the decrease in GDP of the importing countries. For the aforementioned
reasons, higher oil prices result in a decrease in net global demand and GDP.
3.3 Oil Price Increase
Previous sections illustrated that an increase in oil price, results in asymmetric effects
for the economy, depending on the status of an oil exporting- or importing nation.
The following part presents the mechanisms, which will be triggered in such countries,
due to a rise in oil price.
3.3.1 Impact of an oil price increase on exporting countries
A net oil-exporting nation can expect a higher national income, due to an increase
in oil price, which would raise the GDP growth. On the other hand, the demand in
importing countries would be interrupted due to the price shock and might create a
global recession.
Too high prices, give importing nations incentives to search for new solutions. For
example price shocks led to the discovery of new oil fields in the North Sea in the
1970s or hydraulic fracking in the U.S. in 2008 (Hou et. al., 2014). The consequence
would be higher oil supply, which reduces the price of oil on the international market
and finally decrease the real national income of the exporting nations.
24
Short-Run: increases real
national income
International oil price
increase
Higher export earnings
Long-Run: GDP growth
of importing nations
decline
Higher GDP for
exporting Nations
Reducing the demand
and the price of oil.
Higher development of
fuel efficient solutions
and alternative fuels
Increases exploration
and finally supply
Higher supply
decreases GDP of
exporting nations
Figure°16 Oil price increase in relation to oil exporting nations
3.3.2 Impact of an oil price increase on importing countries
According to the literature an oil price increase would create a net income loss for
importing country. The degree of loss is correlated with the dependency on crude oil
and the impact on other commodities, such as gas or electricity.
The average private consumer, will reduce in the short run other expenditures on
goods, due to the issue that transportations is in general not substitutable and that
the oil price is inelastic in the short run. Reviewing the GDP function, the consumer
spending would decrease, and so the total GDP. Generally, higher price levels for a
long period of time have a bigger negative impact on the economy. (Qianqian,
2011)
Income losses
Consumers reduce
expenditures
Decrease of GDP
Recession
Restrictive monetary
policies
International oil
price increase
Decrease of GDP
growth
Banks decrease
money supply
Increase of
unemployment
Rise of Inflation
Decrease in profit
margins for
companies
Decrease of real
wages
Decrease in
investment
Increase in nominal
wages
Increase of
unemployment
Increase input costs
for the production
industry
Higher product
costs
Consumers reduce
their spendings
Figure°17 Oil price increase in relation to oil importing nations
An oil price increase, will affect the general price level of a country, which leads to a
rise in inflation, depending on whether the workers and employers can increase
wages, and the will to face income losses. Furthermore inflation encourages the
monetary authorities to apply restrictive monetary and fiscal policies, for instance by
raising the interest rate, which would make it for companies difficult to borrow money
from the banks.
25
On the other hand expansionary monetary and fiscal policies, particularly injecting
capital directly into the economy, would lag the reduction of real income, resulted
from the increase in oil prices and impact the economic activity, in the long run, due
to higher price levels / inflation. (Ghalayini, 2011)
Depending on the monetary policy, the adjustment of real wages to shocks, the
decline of output can disturb the labour reallocation process, which would trigger a
downturn in GDP growth.
The adjustment of real wages would increase production costs, which can either
passed on to consumers or the producers. In a competitive market, the literature
suggests that an oil price increase result in an upward pressure on nominal wage
levels. In the short run producers would be affected by falling profit margins and
lower return on capital. (Ghalayini, 2011) However if companies are able to push the
increase of input costs to the consumers, oil price shocks have smaller affects.
In the long run consumers and producers change their consumption behaviour, to
withstand future oil price shocks. Therefrom the income loss from the price shock can
be reversed by a lower dependence on oil.
Another impact of oil price fluctuations is the change in patterns of investment,
savings, and spending, due to higher perceived risks. Furthermore, the research by
Bernanke et. al. (1997) showed that companies postpone their investment
expenditures and plan no longer far ahead, resulting in a further reduction of GDP
growth.
To conclude, the literature agrees that the oil price has a significant impact on the
GDP growth; in the case of sharp increasing oil prices, it may cause even a recession.
The costs of input for the production will rise simultaneously with the inflation rate.
This will be followed by a decline in the net exports by oil importing countries, which
disrupts the international trade balance. Moreover consumer/government spending
and investments by businesses decrease, resulting finally in an overall decline in gross
domestic product growth.
3.3.3 Stock market and exchange rate
According to the Federal Reserve Bank of New York Staff Report (2006) by
Goldberg and Tille, a change in trade balance caused by an oil price shock, which
increases the general price level, would alter the exchange rate between the Dollar
and other currencies.
Due to the fact that most oil contracts settle in US dollar, oil exporters invest their
earnings in US dollar-dominated assets, higher oil prices would lead to an increase in
value of US dollar by increasing the transactions demand for it. The increase in value
of US dollar would also increase the costs of servicing the external debt of oilimporting countries, which is usually in US dollar, exacerbating the economic
damage caused by higher oil prices. (Moshiri & Banihashem, 2012)
26
To sum up, oil price fluctuations affect the economic activity, corporate earnings,
inflation, stock markets, equity values and exchange rates, based on the assuming
that there is no change in monetary policies.
From a global perspective, the change in oil price has a different impact on every
country. In this context, the following section, will analyse as a case study the
countries Germany and China, both have different economic backgrounds and
dependencies on oil.
4 Cases study Germany and China
The previous chapter illustrated the research and the mechanisms, which explain the
link between oil price fluctuations and GDP growth.
Therefrom this section displays the economic activity of Germany and China, in
relation to their dependence on oil.
Furthermore, it introduces the data used in the fifth chapter, which will statistically test
whether oil price fluctuations and GDP is correlated via the Spearman rank
correlation method.
The data for the following section is mainly obtained from the U.S. Energy Information
Administration, the United States Department of Agriculture and the International
Energy Agency, an autonomous intergovernmental organization from the OECD,
Organization for Economic Co-operation and Development.
4.1 Germany
In the year 2012 Germany was the largest energy consumer in Europe, the eighthlargest energy consumer- and the fourth-largest economy in the world, in terms of
nominal gross domestic product (GDP).
Moreover, Germany is the highest populated country in Europe and is due to its
central location Europe, the main transit country. Additionally Germany was in 2013
the worldwide third biggest exporting country, before China, Untied States of
America. (http://www.eia.gov/countries/index.cfm?topL=con.)
The Total Primary Energy Supply in 2010 was 328.71 Mtoe, which is defined as
“Megatonne Öleinheiten” – one “Megatonne” is equivalent to one million tones of oil.
(International Energy Agency, 2012)
Since the energy peak in 1979 with 367.9 Mtoe, the Total Primary Energy Supply is
decreasing, despite a GDP growth.
The International Energy Agency points out that the recent decline is caused by the
economic crisis in 2007-2008 and general efficiency gains.
27
Total Primary Energy Supply
Hydro/ Renewables / other
Coal
22%
Oil
Nuclear
Natural Gas
11%
24%
11%
32%
Figure°18 Total Primary Energy Supply of Germany in 2010 (Mtoe)
According to the EIA Germany, was ranked in 2013 the ninth biggest oil consumer
and sixth biggest oil importer in the world.
However, Germany has barely any domestic oil and natural gas production and
relies heavily on imports.
In 2013 Germany imported the oil mainly from Russia (33,8%), followed by Norway
(11.9%), Great Britain (10%), Nigeria (7.9%), Kazakhstan (7.6%), Libya (7.2%), Azerbaijan
(3.9%) and Algeria (2.8%), while the domestic production is 2.8%. (Rost, Norbert, BAFA,
2014)
As previously indicated, the Total Primary Energy Supply declined in recent decades,
including the oil consumption. It is expected that in the time period from 2010 till 2025
the oil consumption will further decrease by 14%, naming the promotion of biofuels /
alternative fuels, energy taxation levels, efficiency standards for buildings and cars as
critical factors which influence this process.
German Production vs. Comsumption
3500
3000
2500
2000
1500
1000
500
0
Total Oil Production
Total Oil Consumption
Figure°19 German Production vs. Consumption from 1991 to 2013
Due to Germany’s export capacitates the transportation sector accounts for the
majority of the petroleum product demand, which consumed in 2010 49% of total oil
supply. However, the government strives to decrease (International Energy Agency,
2012) the enormous dependence of the transportation sector on oil, by promoting
28
the use of electric vehicles. The industry sector and private consumption had in 2010
an oil product demand of 20% and 31%, respectively.
Moreover, with around 2.2 million barrels per day of crude refining capacity,
Germany is the second largest refiner in Europe and Eurasia after Russia. Most oil is
imported through four crude oil pipelines as well as the deep-water port at
Wilhelmshaven, Germany. Since Germany has neither a substantial domestic gas
production, most of the natural gas is imported from Russia, Norway, and the
Netherlands. The consumption peaked in 2003, which can be also explained by
efficiency improvements.
Nuclear plants account for 11% of the Total Primary Energy Supply, yet the
government decided in 2011, due to public pressure after the Japanese Fukushima
accident to shut down by 2022 all of their 17 nuclear reactors.
Germany’s only indigenous energy resource is coal, which accounted in 2010 for 24%
of the Total Primary Energy Supply, due to the closure of the nuclear facilities, the
consumption of coal, is predicted to increase. In the global scale, the country was
ranked the world's eighth-largest producer of coal in 2012. The Ruhr Coal Basin and
Saar Basin produces more than 75% of the country's hard coal. ( http://www.miningtechnology.com/features/featurecoal-giants-the-worlds-biggest-coal-producingcountries-4186363/.)
Renewable energy contributed with 11% to the Total Primary Energy Supply in 2010,
which ranks Germany as the largest European producer of non-hydro renewable
electricity. According to the Federal Government's energy concept of 2011,
renewable energy should substitute the nuclear power in the future.
To summarize, Germanys energy demand, especially crude oil decreased while the
GDP continues to increase. However irrespective of efficiency gains, Germanys
economy still relies heavily on inexpensive crude oil to fuel the transportation sector,
which is the backbone of the export.
The following chart illustrates the correlation between the GDP growth in real 2010
($billions) and the oil consumption in thousand barrels per day.
German GDP vs. Oil Consumption
4000
4000.00
3000
3000.00
2000
2000.00
1000
1000.00
0
0.00
Total Oil Consumption
GDP Germany
Figure°20 German GDP vs. Total Oil Consumption from 1991 to 2013
29
Germany currently struggles due to the weakness of the Eurozone, the skyrocketing
national debt at around 78% of the GDP in 2013, the slowly recovering banking
system
and
30%
higher
energy
costs
than
the
EU
average.
(http://www.marketwatch.com/story/germanys-economy-isnt-as-strong-as-europebelieves-2013-12-04.)
All in all these factors reduce competitiveness and increase vulnerability to oil price
shocks.
4.2 China
In 2015 nearly 19% of the world population lived in China, therefrom it is the world's
most populous country and the GDP quintupled from 2005 to 2014. (Heerman, 2014),
After the European Union and the Untied States, China is the third largest economy in
the world. Additionally China was in 2014, according to the Global Energy Statistical
Yearbook 2014, by far the biggest energy consumer in the world.
(https://yearbook.enerdata.net.).
The fast-growing economy led to a higher energy demand, especially for liquid fuels,
which “has made China extremely influential in world energy markets”. (U.S. Energy
Information Administration, 2014)
According to the analyse by U.S. Energy Information Administration, China’s
economy in 2011 was powered to a vast majority by coal (69%), oil 18%, hydroelectric
and other renewables (8%), natural gas (4%) and nuclear power (nearly 1%). (U.S.
Energy Information Administration, 2014)
The use of coal created in recent years massive air pollution; to tackle this problem
the Chinese government plans to decrease its use below 65% by 2017 and by 2040
below 55%, of the total energy mix. Moreover by 2020 15% of the Total Primary Energy
Supply should come from non-fossil fuels, such as hydroelectric and other renewables.
Total Primary Energy Supply
Hydro / Renewables / other
Coal
Oil
Nuclear
Natural Gas
1% 4%
8%
18%
69%
Figure°21 Total Primary Energy Supply of China in 2011
30
In the Total Primary Energy Supply from 2011, oil consumption only accounted for 18%,
yet China became in 2010 the second largest consumer behind the United States. In
March 2014, the U.S. Energy Information Administration, stated that China has
surpassed the United States as the largest net oil importer, moreover forecasting that
the net import will further increase while the U.S import decrease.
(http://www.eia.gov/todayinenergy/detail.cfm?id=15531.)
The China’s booming economy accounted for one-third of the world's oil
consumption growth in 2013. The domestic production only contributed for 39% and is
controlled mainly by government-owned oil companies, although in recent years
international oil companies received access to technically challenging onshore and
deep-water offshore fields.
The domestic oil production has already peaked; only complex techniques on- and
offshore, such has hydraulic fracking still increases the production output. Rising oil
prices and economic activity, made it necessary to import greater amounts of oil
from a wide range of sources. Since 2008 Chinese national oil companies acquired
worldwide sources of oil supply. Furthermore the government expended the domestic
oil pipeline network, refinery plants and crude oil storages, in order to withstand future
oil price shocks.
To fill the gap between production and consumption, China imports 62% of its oil
demand from OPEC members, mainly Saudi Arabia (19%), Angola (14%), Iraq (8%),
Iran (8%), Venezuela (6%), United Arab Emirates (4%) and Kuwait (3%). The remaining
38% comes from Russia, Brazil, Congo and others. (U.S. Energy Information
Administration, 2014)
Chinese Production vs. Consumption and Ratio
40%
10000
20%
8000
0%
6000
-20%
4000
-40%
2000
-60%
0
-80%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
12000
Total Oil Production
Total Oil Consumption
Ratio Production vs. Consumption
Figure°22 Chinese Production vs. Consumption and Ratio from 1987 to 2013
(*Excluding Hong Kong and Macau)
31
Natural gas only accounted for 4% of the energy mix in 2011. Due to explorations of
new domestic gas sources, such as shale gas, gas derived from coal seams and
deep-water fields, the production is predicted to increase. Investments in the gas
pipeline network to link production areas in the western and northern regions with the
consuming regions on the coastline will further increase demand.
According to the report from the Lawrence Berkeley National Laboratory in 2012
(Fridley et. al., 2012) China is the largest producer and consumer of coal worldwide.
In 2010 China consumed 46% of the entire worlds coal production, followed by
Germany with 15% on the second place.
Due to the excessive coal consumption, China became in 2010 the country with the
highest carbon dioxide emissions. The EIA named coal as the backbone of the GDP
growth (U.S. Energy Information Administration, 2014)
The hydroelectric and other renewables energy, contributed with more than 27% to
the total electricity supply in 2012, yet it is forecasted that this share will increase by
5% till 2040.
To conclude, China is the most populous country in the world and had a GDP growth
from 2000 - 2011 at around 10% every year, yet the economical activity slowed down
in 2012 and 2013, and the industrial production and exports decreased. Nevertheless
the country is the by far the biggest exporter in the world, even after the entire
European Union.
However the country struggles with an increase in inflation and local government
debt, both would be negatively affected by an oil price increase. It can be
expected that the seriousness of these issues increase, with the rising demand for
crude oil.
The following chart illustrates the correlation between the GDP growth in real 2010
($billions) and the oil consumption in thousand barrels per day.
Chinese GDP vs. Oil Consumption
Total Oil Consumption
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
GDP China
Figure°23 Chinese GDP vs. Oil Consumption from 1991 to 2013
32
The government strives to stabilize the economic activity, in order to create a more
balanced economic growth and increase the domestic consumption.
Moreover private investments in the energy sector, lower price controls, higher
competition among energy firms, improvements in the energy transmission network
and the shift from coal to renewable energy sources should help China to expand
the GDP growth.
5 Analysis
To test the relationship between the two variable sets, oil price change and GDP
growth, the Spearman correlation was chosen over the Pearson correlation, due to its
ability to compare two variables even if their relationship is not linear. Moreover the
Spearman rank correlation method, does not make any assumptions about the
distribution of the data, which makes it appropriate to use for samples with large
outliers
or
for
series,
which
are
not
normally
distributed.
(http://www.statstutor.ac.uk/resources/uploaded/spearmans.pdf.)
The section 5.2 tests for skewness and kurtosis, in order to support or reject the choice
of the correlation model. If the outcome of the descriptive statistic for the variables
sets - Change_Germany_GDP and Change_China_GDP, supports the choice of the
model, the Spearman's rank-order correlation test will be conducted.
Furthermore the analysis will take into account five time lags – each equivalent to
one quarters / three month, based on the assumption by Hamilton (1983) and Lee et.
al. (1995), that oil price fluctuations will have in general no immediate effect on GDP
growth. Contractual obligations may shift the effect of the oil price change. (Gujarati,
2005).
The Spearman rank correlation method (rs), statistical measures of the strength of a
monotonic relationship between paired ranked data. A monotonic function can
either entirely non-increasing or non-decreasing. (https://statistics.laerd.com/spsstutorials/spearmans-rank-order-correlation-using-spss-statistics.php.) This correlation
method calculates the Pearson’s correlation between the ranked values; these
values are assigned to a rank, ranging from the lowest to the highest. Due to the rank
order the actual size of the value has no effect. However, due to the conversion to
ranks the data loses some precision.
The Spearman rank coefficient has a single value between -1 and +1 and determines
the strength of the correlation. An absolute value close to one indicates a strong
correlation while a coefficient of zero indicates that there is no relationship between
the variables. Additionally the mathematic symbol of the correlation coefficient
determines if the relationship is positive (both variables sets increase) or negative (one
variable set increases, while the other decreases)
Moreover if the value of the significance level for the two-tailed test is higher than
0.05 it can be stated that there is no statistically significant correlation between the
two variables, an increase (decrease) in one variable is not significant related to the
increase (decrease) in the second variable.
33
If the value is less than or equal than 0.05 it can be concluded that there is a
statistically significant correlation between the two variables, an increase (decrease)
in one variable is significant related to the increase (decrease) in the second
variable.
5.1 Data background
The data for the Gross Domestic Product is provided by the Levy Economics Institute
of Bard College (2013); cited from the OECD Quarterly National accounts database
and the International Monetary Fund.
To illustrate oil price fluctuations, the oil pricing benchmark West Texas Intermediate
(WTI – Cushing) was chosen, which also serves as marker for other crude streams. The
data was obtained from the Federal Reserve Bank of St. Louis (2015) and displays the
change in spot price in nominal dollar per barrel, aggregated by the moving
average method into quarterly prices.
5.2 Descriptive Analysis
The figure°24 displays the frequency test of the variable sets; change GDP growth in
Germany and China from 2000, 1st quarter to 2015, 1st quarter.
Figure°24 Frequency Test Germany and China
The value for skewness indicates asymmetry and deviation from a normal distribution
while the kurtosis is used as a sign for a sharp or flat distribution. (DeCarlo, 1997)
A skewness value bigger than zero means that the distribution is right-skewed, most
values are concentrated on left of the mean, with extreme values to the right.
Values smaller than zero indicate left-skewness, most values are concentrated on the
right of the mean, with extreme values to the left, which is the case for Germany
(-1.949<0) and China (-0.466<0).
If the skewness is equal to zero then the distribution is symmetrical around the mean.
The value of the kurtosis, for Germany, is 7.895 (>3), which means that the distribution
is sharper than a normal distribution, with values concentrated around the mean and
with thicker tails. This means high probability for extreme values. However, the kurtosis
for China is 0.669 (<3), indicates that the distribution is flatter than a normal one and
34
has a wider peak. The probability for extreme values is less than for a normal
distribution, and the values are wider spread around the mean. (DeCarlo, 1997)
The kurtosis equal to 3 is a normal distribution.
The outcome of this frequency test is also visualized in the appendix III / IV.
5.3 Spearman's rank-order correlation
Figure°25 Spearman's rank-order correlation
The figure illustrates that the increase in German’s GDP corresponds positively to the
increase of China’s GDP, which is indicated by the positive correlation coefficient
(rs=0.396 / Sig (2-tailed) = 0.002).
Furthermore the German GDP growth and change in WTI oil price, are significant
negative correlated at a 0.05 significance level toward each in the third lag (r =-0.270
/ Sig (2-tailed) = 0.041. Meaning that the relationship is visible three quarters, after the
oil price change.
The Chinese GDP growth and change in the WTI oil prices are significant positive
correlated at a 0.05 significance level toward each other with any lag. (rs=0.353 / Sig
(2-tailed) = 0.005)
6 Conclusion
It can be concluded that oil prices significantly influence the GDP growth or vice
verse, the impact depends on the magnitude of fluctuation, the share of crude oil in
the Total Primary Energy Supply and external factors, such as historic events.
As indicated in the section Oil price and economical activity, oil prices influence a
variety of economic factors, such as corporate earnings, stock markets, equity values,
inflation, unemployment and exchange rates. On the other hand, negative (positive)
GDP growth affects the input factors for the production, which decrease (increases)
the demand and price for crude oil.
The Spearman's rank-order correlation method could not conclude that there is not a
clear relationship between oil price and world economic growth for both countries.
The analysis indicates that GDP growth and oil price fluctuations are significant
negative correlated for Germany while the relationship for China is vice versa.
This result might be explainable in the case for Germany due to the decline in oil
consumption and efficiency gains, which decreases the impact of oil price
35
fluctuations on the GDP. In the case of China the positive relationship might indicate
that the WTI spot price rise simultaneously with the GDP growth of China.
It can be presumed that Germany GDP is far less affected by oil price fluctuations
than other countries, due to efficiency gains and alternative fuels. However due to
the high dependence on Russia (Westphal, 2014) and Libya, in terms of oil supply and
the further destabilization of these countries, can cause shortages. In the long run
Germany will still rely on inexpensive fossil fuel, due the petroleum product demand of
the transportation sector.
Chinas’ GDP growth is positively correlated to the oil price increase, which is
explainable by the issue that China accounted for one-third of the world's oil
consumption growth in 2013. Furthermore, due to the marginal domestic production
the country is highly dependent on imports mainly for OPEC members, crisis in the
Middle East might cause supply shortages. Moreover, the country already struggles
under a high inflation rate; further oil price increase would have negative impact on
GDP growth. In the long run it is expected that the fuel consumption will increase, due
to a growing middle class, which have the finical recourses to purchase a vehicle.
(Barton, 2013) Without efficiency gains and rising oil intensity, oil price fluctuations will
have a highly negative impact on China’s GDP growth.
In both countries higher domestic production, in form of shale oil, would decrease the
dependence on imports and would lower the vulnerability by oil price fluctuations.
To sum up, research needs to take into account efficiency gains, in order to model
the relationship between growing GDP and declining oil consumption.
Furthermore, as illustrated in the second chapter, historical events might cause oil
supply disruption and price shocks. However, most of the studies in this field are
conducted in relation to the U.S. economy. Researchers could analyse the impact of
the Crimea Crisis in 2014 and the following sanctions, on the oil price and GDP growth
for Germany.
Another interesting case study would be to investigate, which impact the shale oil
and gas production has in China, in relation to oil prices and GDP growth.
7 References
Adelman, Morris A. . (2004). The Real Oil Problem. Massachusetts Institute of
Technology (MIT) - Department of Economics Regulations. 27 (1), pp. 16-21.
Alkhathlan, Khalid & Gately, Dermot & Javid, Muhammad. (2013). Analysis of Saudi
Arabia’s Behavior within OPEC and the World Oil Market. Energy Policy, aculty of Arts
and Sciences, New York University. pp. 2-31.
Baroni, Marco . ( 2013). Directorate of Global Energy Economics International Energy
Agency. The World Energy Model 2012.
36
Barsky, Robert & Kilian, Lutz. (2004). Oil and the Macroeconomy Since the 1970s.
Journal of Economic Perspectives. 18 (4), pp. 115-134.
Barton, Dominic . (2013). The Rise of the Middle Class in China and Its Impact on the
Chinese and World Economies. McKinsey Report. 7.
Bernanke, Ben S. & Gertler, Mark & Watson, Mark . (1997). Systematic Monetary Policy
and the Effiects of Oil Price Shock. Brookings Papers on Economic Activity. 1.
British Petroleum. (2014). BP Statistical Review of World Energy June 2014. BP Statistical
Review. 63.
British Petroleum. (2014 ). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energy-economics/statisticalreview-of-world-energy.html. Last accessed 1st April 2015.
Brune, Dr. Nancy E.. (2010). 50 Years Later: OPEC's Continuing Threat to American
Security. Journal of Energy Security. 1.
Callen, Tim . (2012). Gross Domestic Product: An Economy’s All. Available:
http://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm. Last accessed 11th April
2015.
Chaudhuri, Kausik . (2000). Long Run Prices of Primary Commodities and Oil Prices.
Working Papers, The University of Sydney. 33 (4), pp. 531-538.
Ciner, Cetin . (2001). Energy Shocks and Financial Markets: Nonlinear Linkages. Studies
in Nonlinear Dynamics and Econometrics. 5 (3), pp. 203-212.
Colgan, Jeff D. . (2014). The Emperor Has No Clothes: The Limits of OPEC in the Global
Oil Market. International Organization. 68 (3), pp. 599-632.
Cooper, Russell & John, A. Andrew . (2015). Macroeconomics: Theory through
Applications. Available: http://catalog.flatworldknowledge.com/bookhub/
reader/2498?e=coopermacro-ch16_s15. Last accessed 12th April 2015.
Darbouche, Hakim & Fattouh, Bassam . (2011). The Implications of the Arab Uprisings
for Oil and Gas Markets. Oxford Institute for Energy Studies Review. pp. 1-39.
Das, Satyajit. (2013). Germany’s economy isn’t as strong as Europe believes.
Available: http://www.marketwatch.com/story/germanys-economy-isnt-as-strong-aseurope-believes-2013-12-04. Last accessed 16th April 2015.
Davis, Steven J. & Haltiwanger, John. (2001). Sectoral job creation and destruction
responses to oil price changes. Journal of Monetary Economics. 48 (.), pp. 465–512.
DeCarlo, Lawrence T. . (1997). On the Meaning and Use of Kurtosis. In: . Psychological
Methods. 2nd ed. .: American Psychological Methods. pp. 292-307.
37
Ditté, Pascal & Roell, Dr Peter . (2006). Past oil price shocks: Political background and
economic impact Evidence from three cases. Institut für Strategie- Politik- Sicherheitsund Wirtschaftsberatung (ISPSW). pp. 1-13.
Dos Santos, Claudio H. & Shaikh, Anwar & Zezza, Gennaro . (2003). Measures of the
Real GDP of U.S. Trading Partners: Methodology and Results. Levy Economics Institute
of Bard College Working Paper . 387.
Dunn, Candace . (2014). China is now the world’s largest net importer of petroleum
and other liquid fuels. Available: http://www.eia.gov/todayinenergy/detail.
cfm?id=15531. Last accessed 16th April 2015.
El Gamal, Rania . (2014). Saudis setzen Fracking-Anbieter mit Billig-Öl unter Druck
(Austrian - German). Available: http://www.format.at/wirtschaft/preisverfall-oelsaudis-5191403. Last accessed 8th April 2015.
Federal ministry for environment nature conservation and nuclear safety. (2011). The
Federal Government's energy concept of 2010 and the transformation of the energy
system of 2011. Energy Concept. p. 1.
Ferderer, J. Peter . (1996). Oil Price Volatility and the Macroeconomy. Journal of
Macroeconomics . 18 (1), pp. 1-26.
Forbes. (2014). Global 500 2014. Available: http://fortune.com/global500/. Last
accessed 10th April 2015.
Fridley, David & Levine, Mark & Lu, Hongyou & Fino-Chen, Cecilia. (2012). Key China
Energy Statistics 2012. Lawrence Berkeley National Laboratory. pp. 3-12.
George, Rebecca & Breul, Hannah. (2014). Benchmarks play an important role in
pricing crude oil. U.S. Energy Information Administration.
Ghalayini, Latife . (2011). The Interaction between Oil Price and Economic Growth.
Middle Eastern Finance and Economics, EuroJournals. 3.
Gisser, Micha & Goodwin, Thomas H.. (1986). Crude oil and the macroeconomy: Tests
of some popular notions. J. Money Credit Banking. 18 (1), pp. 95-103.
Goldberg, Linda & Tille, Cédric . (2006). The International Role of the Dollar and Trade
Balance Adjustment. Occasional Paper, Federal Reserve Bank of New York Staff
Reports . 71, pp. 5-9.
Grenning, Wayne. (1991). History of the Otto - Langen engine. Gas Engine Magazine.
pp. 1-7.
Guo, Hui & Kliesen, Kevin L. . (2005). Oil Price Volatility and U.S. Macroeconomic
Activity. Federal Reserve Bank of St. Louis Review. 87 (6), pp. 669-83.
Gujarati, Damodar N. (2005). “Basic Econometrics” 4th edition, McGraw-Hill
38
Hall, Robert E.. (1993). Macro Theory and the Recession of 1990—1991. Stanford AEA
papers and proceeding . 83 (2), pp. 275-279.
Hamilton, James D. . (1983). Oil and the Macroeconomy since World War II. Journal of
Political Economy. 91(2), pp. 228-248.
Hamilton, James D. . (1996). This is what happened to the oil price-macroeconomy
relationship. Journal of Monetary Economics. 38 (.), pp. 215-220.
Hamilton, James D. . (2000). What is an Oil Shock?. National Bureau of Economic
Research Working paper. 7755, pp. 2-35.
Hamilton, James D. . (2005). Oil and the Macroeconomy. Department of Economics.
University of California, San Diego.
Hamilton, James D. . (2009). Causes and Consequences of the Oil Shock of 2007–08.
National Bureau of Economic Research Working paper. 15002 (1), pp. 1-16.
Hamilton, James D. . (2011). Historical Oil Shocks. National Bureau of Economic
Research Working paper. 16790, pp. 2-29.
Hamilton, James D. . (2014). The Changing Face of World Oil Markets. Department of
Economics. University of California, San Diego. pp. 2-14.
Heerman, Dr. Kari . (2014). Real Historical Gross Domestic Product (GDP). Available:
https://www.google.de/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uac
t=8&ved=0CDAQFjAB&url=http%3A%2F%2Fwww.ers.usda.gov%2Fdatafiles%2FInternati
onal_Macroeconomic_Data%2FHistorical_Data_Files%2FH. Last accessed 12th April
2015.
Hooker, Mark A. . (1996). What happened to the oil price-macroeconomy
relationship?. Journal of Monetary Economics. 38, pp. 195-213.
Hou, Zhenbo & Granoff, Dean & Granoff, Ilmi & Keane, Jodie & Kennan, Jane &
Norton, Andrew & te Velde, Dirk Willem . (2014). The development implications of the
fracking revolution. Shockwatch - Trade, investment, finance and growth. pp. 19-26.
International Energy Agency. (2012). Germany. Oil & Gas Security, Emergency
Response of IEA countries. pp. 1-13.
Jackson, Olivia A.. (2008). The Impact of the 9/11 Terrorist Attacks on the US Economy.
Journal of 9/11 Studies. (1), pp. 2-11.
Jiménez-Rodríguez, Rebeca & Sánchez, Marcelo . (2004). Oil price shocks and real
GDP growth: empirical evidence for some OECD countries. European Central Bank
Working paper series. 362
Jones, Charles M. & Kaul, Gautam. (1996). Oil and the Stock Markets. The Journal of
Finance. 51 (2).
39
Kemp, John . (2014). Kemp: Forecasts For Higher Oil Prices Misjudge The Shale Boom.
Available: http://www.rigzone.com/news/oil_gas/a/134256/Kemp_Forecasts_for_
Higher_Oil_Prices_Misjudge_the_Shale_Boom/?all=HG2. Last accessed 1st April 2015.
Kilian, Lutz & Vigfusson, Robert J. . (2014). The Role of Oil Price Shocks in Causing U.S.
Recessions. Board of Governors of the Federal Reserve System, International Finance
Discussion Papers. 1114.
Kraay, Aart & Ventura, Jaume . (2007). The Dot-Com Bubble, the Bush Deficits, and
the U.S. Current Account. G7 Current Account Imbalances: Sustainability and
Adjustment. 1 (11), pp. 457-495.
Kuuskraa, Vello A. & Stevens, Scott H. . (2013). Technically Recoverable Shale Oil and
Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside
the United States. U.S. Energy Information Administration. 2
Lawler, Alex & Sheppard, David & El Gamal, Rania. (2014). Saudis block OPEC output
cut, sending oil price plunging. Available: http://www.reuters.com/article/2014/11/
27/us-opec-meeting-idUSKCN0JA0O320141127. Last accessed 8th April 2015.
Leard
Statistics.
(2014).
Spearman's
Rank-Order
Correlation.
Available:
https://statistics.laerd.com/statistical-guides/spearmans-rank-order-correlationstatistical-guide.php. Last accessed 20th April 2015.
Lee, Kiseok & Ni, Shawn & Ratti Ronald A. . (1995). Oil Shocks and the
Macroeconomy: The Role of Price Variability. Energy Journal. 16 (.), pp. 39-56.
Levy
Economics
Institute.
(2013).
GDP
database.
www.levyinstitute.org/pubs/gdp_ustp.xls. Last accessed 18th April 2015.
Available:
Locke, John (1691). Some Considerations of the Consequences of the Lowering of
Interest and the Raising the Value of Money. McMaster University, Canada: Archive
for the History of Economic Thought.
Looney, Robert . (2003). Oil Prices and the Iraq War: Market Interpretations of Military
Developments. Strategic Insights. 2 (4), pp. 3-6.
Loungani, Prakash . (1986). Oil price shocks and the dispersion hypothesis. The Review
of Economics and Statistics. 68 (3), pp. 536-539.
Manning, Tom. (1998). Asian financial crisis to slow growth in global oil demand. Purvin
& Gertz Inc. Review. 98 (18).
Marrin, Albert. (2012). Black Gold: The Story of Oil in Our Lives. Knopf Books for Young
Readers.
Miller, K. D. & Chevalier, M. T. & Leavens J. . (2010). The role of WTI as a crude oil
benchmark. CME Group. 1 (1), pp. 1-114.
40
Mining Technology. (2014). Coal giants: the world’s biggest coal producing countries.
Available:
http://www.mining-technology.com/features/featurecoal-giants-theworlds-biggest-coal-producing-countries-4186363/. Last accessed 16th April 2015.
Mohr, Patricia . (2014). Commodity Price Index. Global Economics Scotiabank.
British Petroleum. (2013). Statistical Review of World Energy 2013. Available:
http://www.bp.com/en/global/corporate/about-bp/energy-economics/statisticalreview-of-world-energy/2013-in-review.html. Last accessed 5th April 2015.
Moshiri, Saeed & Banihashem, Arezoo . (2012). Asymmetric Effects of Oil Price Shocks
on Economic Growth of Oil-Exporting Countries.
Mork, Knut Anton. (1989). Oil and the Macroeconomy. When Prices Go Up and Down:
An Extension of Hamilton’s Results. Journal of Political Economy. 97(51).
Mork, Knut Anton & Olsen, Øystein & Mysen, Hans Terje. (1994). Macroeconomic
responses to oil price increases and decreases in seven OECD countries. Energy
Journal . 15 (4), pp. 19-35.
Mussa, Michael. (1994). Monetary Policy, American Economic Policy in the 1980s.
National Bureau of Economic Research Working paper. 1, pp. 81-87.
Organization of the Petroleum Exporting Countries (OPEC). (2015). Member Countries.
Available: http://www.opec.org/opec_web/en/about_us/25.htm. Last accessed 6th
April 2015.
Qianqian, Zhang . (2011). The Impact of International Oil Price Fluctuation on China’s
Economy. In: . Energy Procedia. pp. 1360–1364.
Ricardo, David. (1821). On the Influence of Demand and Supply on Price. In: On the
Principles of Political Economy and Taxation.
Robelius, Fredrik . (2007). Giant Oil Fields – The Highway to Oil. Uppsala Dissertations
from the Faculty of Science and Technology. pp. 51-112.
Rost, Norbert, BAFA. (2014). Öllieferungen nach Deutschland 2012 - 2013 (German).
Available:
http://www.peak-oil.com/wp-content/uploads/2014/03/Oellieferungennach-Deutschland-2012-und-2013.jpg. Last accessed 14th April 2015.
Rotemberg, Julio & Woodford, Michael . (1996). Imperfect Competition and the
Effects of Energy Price Increases on Economic Activity. Journal of Money, Credit, and
Banking. 28 (1), pp. 550-577.
Roubini, Nouriel & Setser, Brad. (2004). The effects of the recent oil price shock on the
U.S. and global economy. Stern School of Business Publications, New York University.
Sadorsky, Perry . (1999). Oil price shocks and stock market activity. Energy Economics
. 2, pp. 449-469.
41
Sauter, Raphael & Awerbuch, Shimon. (2003). Oil price volatility and economic
activity: A survey and literature review. IEA Research Paper. pp. 2-12.
Schlink, Bruce (2012). Americans Held Hostage by the Environmentalist Movement. .:
Rosedog Pr. pp. 112-114.
Shankar, Besta. (2015). Strong Recovery in Crude Oil Prices Unlikely, Says Analysts.
Available:
http://www.ibtimes.co.in/strong-recovery-crude-oil-prices-unlikely-saysanalysts-629858. Last accessed 8th April 2015.
Taymiyyah, Ibn . (2010). Islamic Economic Thought. Available: http://www.islamicbanking.com/early-muslim-thinkers.aspx. Last accessed 4th April 2015.
The Economist. (2005). Katrina and oil prices: No safety net. The Economist: Special
report.
Trott, Ashley & Holmberg, Sam & Wong, Sarah . (2009). Organization of Organization
of Petroleum Exporting Petroleum Exporting Countries. Lecture, Department of
Agriculture & Resource Economics, University of Berkeley. 5.
U.S. Energy Information Administration. (2013). International Energy Statistics.
Available: http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=53&aid
=1. Last accessed 6th April 2015.
U.S.
Energy
Information
Administration.
(2013).
Countries.
Available:
http://www.eia.gov/countries/index.cfm?topL=con. Last accessed 13th April 2015.
U.S. Energy Information Administration. (2014). China. Country Overview. pp. 1-35
Enerdata. (2013). Global Energy Statistical Yearbook 2014.
Available:
https://yearbook.enerdata.net. Last accessed 16th April 2015.
U.S. Energy Information Administration. (2014). Country Analysis Note Germany.
Available: http://www.eia.gov/countries/country-data.cfm?fips=GM. Last accessed
13th April 2015.
U.S. Energy Information Administration. (2015). Bakken Region Drilling Productivity
Report. U.S. Energy Information Administration.
U.S. Energy Information Administration. (2015). Crude Oil Prices: West Texas
Intermediate
(WTI)
Cushing,
Oklahoma
(DCOILWTICO).
Available:
https://research.stlouisfed.org/fred2/series/DCOILWTICO/downloaddata.
Last
accessed 18th April 2015.
U.S. Energy Information Administration. (2015). Definitions, Sources and Explanatory
Notes. Available: http://www.eia.gov/dnav/ng/TblDefs/ng_enr_deep_tbldef2.asp.
Last accessed 4th April 2015.
U.S. Energy Information Administration. (2015). Demand: Non-OECD. Available:
http://www.eia.gov/finance/markets/demand-nonoecd.cfm. Last accessed 27th
March 2015.
42
U.S. Energy
Information
Administration. (2015). Spot
Prices.
Available:
http://www.eia.gov/dnav/pet/pet_pri_spt_s1_m.htm. Last accessed 18th April.
Westphal, Kirsten . (2014). Russian Energy Supplies to Europe. Stiftung Wissenschaft und
Politik. 16.
Weir,
Dr
Iain
.
(2013).
Spearman’s
correlation.
Available:
http://www.statstutor.ac.uk/resources/uploaded/spearmans.pdf. Last accessed 18th
April 2015.
Williams, James L. . (2011). Oil Price History and Analysis. Available: http://www.wtrg.
com/prices.htm. Last accessed 6th April 2015.
Wintershall
Holding
GmbH.
(2015).
Oil
can
do
more.
Available:
http://www.wintershall.com/en/company/oil-and-gas/oil-can-do-more.html.
Last
accessed 27th March 2015.
7.1 Summary Figures Reference
(*References used for the following figures and relating calculations, are already
inside the main list)

Figure°1
BP
Review:
World
(http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html.)
consumption

Figure°5 Average Historic Oil prices per barrel from 1861 to 2013
(British Petroleum. (2014). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.)

Figure°6 Average Oil prices per barrel from 1946 to 1972
(British Petroleum. (2014). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.)

Figure°7 Average Oil prices per barrel from 1972 to 1983
(British Petroleum. (2014). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.)

Figure°8 Average Oil prices per barrel from 1980 to 2000
(British Petroleum. (2014). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.)
43

Figure°9 Total Oil Supply (Thousand Barrels Per Day) from 1980 to 2004
(British Petroleum. (2014). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.)

Figure°10 Average Oil prices per barrel from 1999 to 2013
(British Petroleum. (2014). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.)

Figure°11 Total Oil Supply (Thousand Barrels Per Day) from 1999 to 2013
(British Petroleum. (2014). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.)

Figure°12 Oil prices per barrel – Benchmark WTI & Brent from 2011 to 2015
(U.S. Energy Information Administration. (2015). Spot Prices. Available:
http://www.eia.gov/dnav/pet/pet_pri_spt_s1_m.htm. Last accessed 18th
April.)

Figure°13 Recessions in the U.S. from 1970 to 2012
(British Petroleum. (2014). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.)

Figure°15 Worldwide GDP vs. Oil price per barrel in international real 2010$
(British Petroleum. (2014). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.
Heerman, Dr. Kari . (2014). Real Historical Gross Domestic Product (GDP).
Available:https://www.google.de/url?sa=t&rct=j&q=&esrc=s&source=web&c
d=2&cad=rja&uact=8&ved=0CDAQFjAB&url=http%3A%2F%2Fwww.ers.usda.g
ov%2Fdatafiles%2FInternational_Macroeconomic_Data%2FHistorical_Data_File
s%2FH. Last accessed 12th April 2015.)

Figure°18 Total Primary Energy Supply of Germany in 2010 (Mtoe)
(International Energy Agency. (2012). Germany. Oil & Gas Security,
Emergency Response of IEA countries. pp. 1-13.)

Figure°19 German Production vs. Consumption from 1991 to 2013
(U.S. Energy Information Administration. (2013). International Energy Statistics.
Available: http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid
=53&aid=1. Last accessed 6th April 2015.)
44

Figure°20 German GDP vs. Total Oil Consumption from 1991 to 2013
(U.S. Energy Information Administration. (2013). International Energy Statistics.
Available: http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid
=53&aid=1. Last accessed 6th April 2015.
Heerman, Dr. Kari . (2014). Real Historical Gross Domestic Product (GDP).
Available: https://www.google.de/url?sa=t&rct=j&q=&esrc=s&source=web&
cd=2&cad=rja&uact=8&ved=0CDAQFjAB&url=http%3A%2F%2Fwww.ers.usda.
gov%2Fdatafiles%2FInternational_Macroeconomic_Data%2FHistorical_Data_Fil
es%2FH. Last accessed 12th April 2015.)

Figure°21 Total Primary Energy Supply of China in 2011
(U.S. Energy Information Administration. (2014). China. Country Overview. pp.
1-35)

Figure°22 Chinese Production vs. Consumption and Ratio from 1987 to 2013
(*Excluding Hong Kong and Macau) (British Petroleum. (2014 ). Statistical
Review of World Energy 2014. Available: http://www.bp.com/en/global/
corporate/about-bp/energy-economics/statistical-review-of-worldenergy.html. Last accessed 1st April 2015.
Heerman, Dr. Kari . (2014). Real Historical Gross Domestic Product (GDP).
Available: https://www.google.de/url?sa=t&rct=j&q=&esrc=s&source=web&
cd=2&cad=rja&uact=8&ved=0CDAQFjAB&url=http%3A%2F%2Fwww.ers.usda.
gov%2Fdatafiles%2FInternational_Macroeconomic_Data%2FHistorical_Data_Fil
es%2FH. Last accessed 12th April 2015.)

Figure°23 Chinese GDP vs. Oil Consumption from 1991 to 2013
(British Petroleum. (2014 ). Statistical Review of World Energy 2014. Available:
http://www.bp.com/en/global/corporate/about-bp/energyeconomics/statistical-review-of-world-energy.html. Last accessed 1st April
2015.
Heerman, Dr. Kari . (2014). Real Historical Gross Domestic Product (GDP).
Available: https://www.google.de/url?sa=t&rct=j&q=&esrc=s&source=web&
cd=2&cad=rja&uact=8&ved=0CDAQFjAB&url=http%3A%2F%2Fwww.ers.usda.
gov%2Fdatafiles%2FInternational_Macroeconomic_Data%2FHistorical_Data_Fil
es%2FH. Last accessed 12th April 2015.)

Figure°24 Frequency Test Germany and China
(Levy
Economics
Institute.
(2013).
GDP
database.
Available:
www.levyinstitute.org/pubs/gdp_ustp.xls. Last accessed 18th April 2015.)

Figure°25 Spearman's rank-order correlation
(Levy
Economics
Institute.
(2013).
GDP
database.
Available:
www.levyinstitute.org/pubs/gdp_ustp.xls. Last accessed 18th April 2015.
U.S. Energy Information Administration. (2015). Crude Oil Prices: West Texas
Intermediate (WTI) - Cushing, Oklahoma (DCOILWTICO). Available:
45
https://research.stlouisfed.org/fred2/series/DCOILWTICO/downloaddata. Last
accessed 18th April 2015.)
7.2 Summary Appendix Reference
(*References used for the appendix, are already inside the main list)

Appendix I: Production & Consumption by region
(British Petroleum. (2014). BP Statistical Review of World Energy June 2014. BP
Statistical Review. 63.)

Appendix II: World consumption by energy source
(British Petroleum. (2014). BP Statistical Review of World Energy June 2014. BP
Statistical Review. 63.)

Appendix III: Histogram German_GDP_Growth
(Levy
Economics
Institute.
(2013).
GDP
database.
Available:
www.levyinstitute.org/pubs/gdp_ustp.xls. Last accessed 18th April 2015.)

Appendix IV: Histogram China_GDP_Growth
(Levy
Economics
Institute.
(2013).
GDP
database.
Available:
www.levyinstitute.org/pubs/gdp_ustp.xls. Last accessed 18th April 2015.)

Appendix V: Descriptive Statistics Germany
(Levy
Economics
Institute.
(2013).
GDP
database.
Available:
www.levyinstitute.org/pubs/gdp_ustp.xls. Last accessed 18th April 2015.)

Appendix VI: Descriptive Statistics China
(Levy
Economics
Institute.
(2013).
GDP
database.
Available:
www.levyinstitute.org/pubs/gdp_ustp.xls. Last accessed 18th April 2015.)

Appendix VII: Descriptive Statistics WTI Spot Price
(U.S. Energy Information Administration. (2015). Crude Oil Prices: West Texas
Intermediate (WTI) - Cushing, Oklahoma (DCOILWTICO). Available:
https://research.stlouisfed.org/fred2/series/DCOILWTICO/downloaddata. Last
accessed 18th April 2015.)
46
8 Appendix
Appendix I: Production & Consumption by region
Appendix II: World consumption by energy source
47
Appendix III: Histogram German_GDP_Growth
Appendix IV: Histogram China_GDP_Growth
48
Appendix V: Descriptive Statistics Germany
Appendix VI: Descriptive Statistics China
Appendix VII: Descriptive Statistics WTI Spot Price
49