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Abstract
China’s oil imports have increased significantly and will play a bigger role in the future. We incorporate the “China factor” into oil price. The main findings are (1) long-run trends of oil price are determined by oil supply and demand; emergencies would cause oil price volatility in the short run; (2) macroeconomic effects of oil price increases depend on the underlying factors that drive oil price; (3) China’s oil import, which can only explain 4.6 percent of oil price change, has a relatively small influence on oil price volatility; but (4) China affects the long-run trends of oil price by changing the fundamentals of the oil market, especially after financial crisis.
Notes
1. One ton of oil equals 7.3 barrels.
2. Due to data unavailability, industrial output is employed as the proxy of GDP following Lin and Du (Citation2010).
3. Because is an unexpected impulse, this assumption is acceptable. Endogenous problem does not exist here, and thus we could get a consistent estimation of impulse response functions of Chinese growth rate and CPI.
4. We thank Peersman and Baumeister for providing the data.
5. Autocorrelations and partial autocorrelations reveal that ARMA(4,1) process is preferred.