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Understanding the Crude Oil Price: How Important Is the China Factor?

Abstract:
This paper employs monthly data on China's net oil import from January 1997 to June 2010 to assess the role of China's net import in the evolution of the crude oil price. Based on a vector autoregression (VAR) analysis, we find that the growth of China's net oil import has no significant impact on monthly oil price changes and there is no Granger causality between the two variables. The historical decomposition indicates that shocks to China's oil demand have only played a small role in the oil price run-up of 2002-2008. We also calculate the price changes implied by China's net oil import growth from a longer-term supply and demand shift perspective.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance

JEL Codes: Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, Q41: Energy: Demand and Supply; Prices, Q43: Energy and the Macroeconomy, Q35: Hydrocarbon Resources, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels

Keywords: China, Oil Price, VAR, historical decomposition, Granger causality

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No4-5


Published in Volume 32, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.