Global Impacts of Oil Price Shocks; The Trade Effect

Oil price shocks impact the global economy, but the effects are not alike across the countries. While higher oil prices are beneficial to oil-exporting countries, they are harmful to economic performance of oil-importing countries. The opposite is also true for the lower oil prices. Nonetheless, international trade may mitigate the direct impacts of oil price shocks on both groups of countries. While the literature on the direct impact of oil price shocks on either oil-exporting or oil-importing countries is rich, the studies on the indirect impacts are limited. In this paper, we set up an empirical model to estimate the direct and indirect effects of oil price shocks on 30 major net oil-exporting and net oil-importing countries that comprise more than 73 percent of the world’s economy. We use bilateral trade matrix to construct the spillover variables and estimate the indirect impact of oil price chocks. To control for institutional variations across the countries, we divide each group of the oil-exporting and oil-importing countries into two developed and developing groups. The estimation results for the period 1980-2015 show that all oil-importing countries are adversely affected by rising oil prices, but trade has mitigated the effect in developed countries. The impact of positive oil price shocks on developing oil-exporting countries is positive, but the trade has reduced the effect. However, the effect of the shocks on developed oil-exporting countries is not significant