The trade consequences of pricey oil

ABSTRACT

This paper examines the trade and trade-induced welfare effects of oil prices. Using a gravity model of trade we find that the distance elasticity of trade significantly increases with the oil price. This suggests that high oil prices make trade less global, as they affect longer shipping routes more. We estimate that an increase in the oil price from 100$ to 200$ (in 2014 US$) would have similar trade effects as an import tariff around 17% for two countries 10,000 km away. This is akin to a 55% increase in shipping distance. This trade reduction would lower welfare by 0.03% in the average non-oil-exporting country.