Oil Prices and Economic Activity in Pakistan

Abstract

Oil price shocks have raised serious concerns among the policy makers around the world because of its adverse impacts for the net oil-importing economies. This article, based on the data from 1979–80 Q1 to 2007–08 Q2, analyzes the impact of rising oil prices along with the changing macro conditions on output. Oil prices and output are found to be strongly related, and to a great extent this relationship is non-linear. In addition, lower debt-GDP ratio, lower deficit spending, lower real effective exchange rate, and the existence of foreign exchange reserves and capital investment would cause output to rise. In Pakistan, besides making adjustments at the macro level, what is required is to make rational choices about the development of energy mix for the future to reduce the risk of oil price fluctuations in the global energy market.