Does the China factor matter: What drives the surge of world crude oil prices?

Abstract

This paper employs a structural VAR model using five endogenous variables, including world crude oil prices, China's oil imports and share of world consumption, speculation, and OPEC supply. Monthly data from January 1997 to January 2012 is used to investigate the impacts of different factors on world crude oil prices. The empirical results suggest that OPEC supply is the main factor and China's oil consumption share is the second most important factor with an immediate effect on world oil prices between 1997 and 2012. During the third oil crisis from 2003 to 2008, speculation became the most important factor, and OPEC supply had a secondary short run and long run influence on oil prices. However, since 2009, OPEC supply has become the key factor, with China's oil consumption share the second most important factor determining oil prices. The China factor appears to be secondary to other factors in all three time frames and to act via the share of world consumption rather than via import volumes.

Keywords:

• China factor
• Speculation
• OPEC supply
• World crude oil prices
• SVAR

Acknowledgements

The authors are grateful to the editor of The Social Science Journal, Scott Alan Carson, and four anonymous reviewers for their constructive and helpful comments on the earlier version of this research. Yufeng Chen is grateful for the financial support provided by the National Natural Science Foundation of China (No. 71103159), New Century Excellent Talents in University (NCET-13-0996), China Postdoctoral Science Foundation (No. 20090460464), and Special Grants of China Postdoctoral Science Foundation (No. 201104202). Jian Yu is grateful for the financial support provided by the National Social Science Foundation of China (Grant No. 11AZD037) and MOE Major Project of Key Research Institute of Humanities and Social Sciences in Universities (14JJD770019).

Notes

1 Address: No. 149, Road Jiaogong, Hangzhou, Zhejiang 310012, China.

2 Address: Room 953, Mingde Main Building, No. 59, Zhongguancun Street, Haidian District, Beijing 100872, China.

3 This paper defines oil price decreases of at least 40% from peak to trough as significant. The first significant decline during 1997–1998 was triggered by the Asian financial crisis. The bursting of the Internet bubble and a terrorist attack caused the second decline in 2001. The third oil price decline in 2008 was triggered by the 2008 financial crisis.