Oil price affects the economies of oil-producing countries in many ways

The price of oil has fluctuated greatly in recent years. Gyrations in the prices of oil and other commodities have traditionally had major impacts on the economies of both the developed industrial countries and countries that produce commodities. According to Hamilton (2009), higher oil prices have made a significant contribution for example to the recent economic difficulties of the United States by reducing consumers’ disposable income. On the other hand, Blanchard and Galí (2007) suggested that the sensitivity of Western industrialised countries to oil price movements clearly diminished since the first oil crisis, due to both higher energy efficiency in those countries and better economic policy responses to oil shocks.

Most international research is focused on the impacts of oil prices in countries that must import most of their energy. The Institute for Economies in Transition has however conducted several studies on the impacts of changes in oil prices on the economies of oil-producing countries. Iikka Korhonen and Aaron Mehrotra (BOFIT DP 6/2009) look at the impacts of changes in real oil prices on the economies of Russia, Kazakhstan, Iran and Venezuela. For all these countries, oil and other energy products are clearly the largest single export category and source of government income. Naturally, higher oil prices lead to a higher level of gross domestic product. However, it must be noted that according to the structural vector autoregressive model used in the estimation, oil price explains surprisingly GDP changes in these countries – Russia in particular. Structural supply shocks, such as an increase in productivity, can much better explain output growth. Oil price has also had a surprisingly minor impact on the real exchange rates of Russia and Kazakhstan, the relationship between these two variables has been much clearer in Iran and Venezuela. It seems clear that Russia and Kazakhstan have successfully used fiscal policy to reduce the impact of oil revenues, which has prevented economic overheating. 

Scientific workshop on Chinese financial markets

On 12 June the Bank of Finland’s Institute for Economies in Transition hosted a scientific workshop on the Chinese financial markets. The workshop was arranged in cooperation with Westfälische Wilhelms University and Wilfrid Laurier University. Seven scientific studies were presented on the Chinese banking system and on the equity markets, and a total of about 20 interested researchers participated in the workshop. Some of the workshop studies will be published in the BOFIT Discussion Paper series.

References:

Blanchard, Olivier J., Galí, Jordi (2008) The macroeconomic effects of oil price shocks: Why are the 2000s so different from the 1970s? NBER Working Paper 13368.