Oil Price Volatility and Bilateral Trade

Abstract

This paper examines whether oil price volatility affects bilateral trade between two countries around the world. Using the gravity econometric model with 1,995 country-pairs covering 117 countries from 1984 to 2009, the empirical results suggest that oil price fluctuations significantly decrease bilateral trade volumes. The negative impact is more prominent the greater the distance between the two trading countries. As geographical distance is one of the measures of transport cost, our results also suggest that a potential channel through which oil price volatility hurts trade volumes is the uncertainty in transport cost. Keywords: Oil price volatility, International trade, Gravity model, Reverse globalization