Dalton Garis and Albert Wijeweera[1]
Abstract: We test the extent to which petroleum demanded quantities from world crude markets are associated with China’s income as measured by its GDP. The direction of Granger causality between oil demand and China’s GDP was tested and found to be significant, that the null that changes in GDP did not cause changes in oil demand cannot be rejected; while its inverse can be rejected. Results indicate that oil is income elastic at lower levels of GDP but not at higher levels, such as exist today (2009). Having done this we project that China will continue to be an increasingly aggressive demander of world crude oil stocks, and by implication, of other basic resources as time goes on. We discuss the implications of this result on expected market prices, not just on world resource markets, but also on how this will push up food costs throughout world food markets, stressing the capacity of weak economies to obtain essential food stores for their citizens.
Objectives: To empirically test and establish China’s income elasticity of demand for crude oil imports and discuss its implications for world commodity and food prices in future.
Methodology: Time series econometrics on China GDP and oil import data from 1997-2008.
Results: The direction of Granger causality between oil demand and China’s GDP was tested and found to be significant, that the null that changes in GDP did not cause changes in oil demand cannot be rejected; while its inverse can be rejected. Results indicate that oil is income elastic at lower levels of GDP but not at higher levels, such as exist today (2009).
Implications: It is expected, implied by these empirical results, that China’s increasing presence in oil markets and other basic commodities will result in their prices rising. Also, this leads directly to the conclusion that world food prices must also rise in future, stressing the capacity of poorer nations to feed their populations.
[1] Dalton Garis is Associate Professor of Economics at the Petroleum Industry, Abu Dhabi, UAE; Albert Wijeweera is Associate Professor of Economics, the Petroleum Institute, Abu Dhabi, UAE.