Impact of Oil Price on Economic Growth of OECD Countries: A Dynamic Panel Data Analysis

Crude oil usage in (Organization for Economic Co-operation and Development) OECD countries has been significantly higher since the early 1970s and therefore, oil can be considered as one of the driving forces of the OECD economies. Moreover, oil prices have been frequently fluctuating over time, creating adverse economic and social impacts. The study examines the impact of oil price on the economic growth of 38 OECD countries over the period 2000-2020, through four channel variables such as real interest rate, exchange rate, government expenditure and investment. A dynamic panel data analysis based on Generalized Method of Moment (GMM) is employed to accomplish the objective of the study. The study confirms that there is a mixed impact of oil price on economic growth. More specifically, an increase in oil price positively affects economic growth only through interest rates while the oil price hike negatively affects economic growth through all other channel variables such as exchange rate, government expenditure and investment. Since the total negative effect of oil price on economic growth outnumbers the positive effect, the net impact of an oil price hike on economic growth is negative. Hence, the study strongly recommends applying appropriate polices to reduce oil price fluctuations while encouraging the use of country-specific renewable energy sources.

Automated summary

Crude oil usage in OECD countries has been significantly higher since the early 1970s, making oil one of the driving forces of the OECD economies. However, fluctuating oil prices have created adverse economic and social impacts. This study examines the impact of oil price on economic growth of 38 OECD countries from 2000 to 2020, finding a mixed impact where an increase in oil price positively affects economic growth only through interest rates, while negatively affecting it through other channel variables such as exchange rate, government expenditure, and investment. The study recommends reducing oil price fluctuations and promoting the use of country-specific renewable energy sources.