Global Oil Prices and the Impact of China

Abstract

This paper assesses the externality impact of China's excessive growth as a China factor on the world economy via examining the effect of Chinese GDP growth on oil prices as a case for the issue. Our assessment starts, firstly, by estimating a country-level demand model to determine the GDP influences of an individual country on oil demand. Secondly, it estimates the impact of world aggregate demand on oil prices. This two-stage approach enables us to estimate the effect of the GDP growth of an individual nation on oil demand globally and the global price of oil. The estimated demand model is applied to quantify the effect of the Chinese GDP growth on the price of oil through simulations of a range of scenarios for each year over the period 2009 to 2030. We find that China's excessive growth adds a premium to the price of oil which increases over time. The results have policy implications in terms of the sustainability of the Chinese faster growth rate from the perspective of its negative externalities to the world.