Oil price fluctuations and Its effect on GDP growth

Abstract: During the year of 2008, the world has experienced historically high oil prices reaching an all time high of 147 USD per barrel in midsummer. The extreme volatility of what is consider the number one source of energy reopened discussions about energy sustainability and the plausible effects of an oil shock in the global economy.   How reliable oil price is as an economic variable predicting fluctuations in GDP growth remains controversial. Several models have been developed by scholars targeting different relations between oil price and GDP growth, from its effects on stock markets to its effect to unemployment. The authors extended the model of Mork & Olson (1994) since it focuses on the consequences that an oil shock effect on GDP growth. The model is extended from 1993 to the third quarter of the year 2008 in order to draw conclusions and test crude oil prices fluctuations affect GDP growth in the modern economy.   The U.S.A and Sweden were chosen to compare their GDP sensitiveness to oil price volatility. The reason is that the U.S.A remains as the largest economy and consumes 25% of the oil produced in the world and is the most oil dependent among developed countries according to the EIA. Sweden on the contrary energy efficient and consumes relatively less oil per capita than many developed countries, it is also believed to be one of the most progressive countries in developing and using renewable energy resources and therefore less sensitive. The bivariate results does not show a pattern of negative correlations for Sweden between GDP growth and real oil price increases, however the U.S.A showed to be more sensitive to oil price increases.