EFFECT OF INCREASING CHINA OIL DEMAND ON WORLD OIL PRICES

The explosive growth in China’s oil consumption in the last two decades has triggered series of researches into its likely impact on the level of oil availability to other regions and to world oil price. This study assesses the impact of China’s ever increasing demand for oil on world oil price. The result we got after estimating through Vector Error correction Modeling (VECM) reveals that increase in China’s oil demand has the tendency to significantly push up world oil price, and that China’s oil imports have insignificant relationship with the world oil prices. The 10-period horizon variance decomposition shows that aside shock caused by oil price itself in previous period, China’s oil import and total oil demand account for more variations in oil price. The impulse response analysis corroborates the findings of the variance decomposition that a shock to China’s oil import and its total oil demand has a high tendency to increase world oil price. Therefore, China’s policy makers are encouraged to draft measures that will ensure energy security, as over-reliance on other nations for oil may trigger both price and demand shocks.