The effect of global activities and warming on oil price

ABSTRACT

In this article, we have attempted to examine the relationships among the crude oil price, global activities index, and global temperature, as well as the exchange rate over the period from January 1982 to December 2009, using the empirical mode decomposition, autoregressive-distributed lag and threshold regression approach. The results indicate that the long-run elasticity of the oil price in relation to global activities is found to be 0.559, which is lower than the finding of He et al. (2010). These results are possibly due to recent improvements in technology that have led to a reduction in demand for crude oil as global activities increase. Furthermore, we have found that global warming will help to reduce the oil price as the global temperature remains below the threshold value. However, after it exceeds the threshold value, as the global temperature continues to rise, it will have no effect in terms of reducing the oil price.

KEYWORDS:

• Autorgressive distributed lag model
• crude oil price
• empirical mode decomposition
• global activities
• global temperature
• threshold regression

Notes

¹ We examine the relationships among world oil production (this variable was obtained from the Energy Information Administration), the oil price, and global temperature as well as oil investment using the Granger causality test. The Schwarz Bayesian criteria are applied to select the optimal lag periods. Through the use of Akaike information criterion and Schwartz information criterion and Granger causality, the optimal lag period is 6, and the results of Granger causality provide evidence of global temperature causing the world oil supply. Thus, in this article we also incorporate global temperature into the oil supply equationas a regressor.