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Oil Price Volatility and Bilateral Trade

Abstract:
This paper examines whether oil price volatility affects bilateral trade between two countries around the world. Using the gravity econometric model with 1,995 country-pairs covering 117 countries from 1984 to 2009, the empirical results suggest that oil price fluctuations significantly decrease bilateral trade volumes. The negative impact is more prominent the greater the distance between the two trading countries. As geographical distance is one of the measures of transport cost, our results also suggest that a potential channel through which oil price volatility hurts trade volumes is the uncertainty in transport cost.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q37: Nonrenewable Resources and Conservation: Issues in International Trade, Q43: Energy and the Macroeconomy, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, F18: Trade and Environment

Keywords: Oil price volatility, International trade, Gravity model, Reverse globalization

DOI: 10.5547/01956574.34.1.9

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Published in Volume 34, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.