Factor Decomposition of Responsiveness of the Domestic Price to Crude Oil Price

Cheng-Yih Hong, Chung-Huang Huang, Jian-Fa Li

Abstract


Taiwan is an economy that is highly dependent on energy imports. Changes in oil price affect not only the cost of production but also economic growth. Since 2000, the crude oil price has risen and become an unstable factor for economic development. Due to the rapid rise of emerging economies and the competitive international economic environment, Taiwan is facing a moment of industrial restructuring. Energy-saving technologies and improved efficiency may play an important role. Taiwan must improve its industrial productivity and production technology to contribute to the alleviation of the global warming problem. From the crude oil intensity and the change in spillover effects of the crude oil price, we may detect whether industrial production efficiency and adaptability to energy and production technology improves or not. Based on the input-output table during the period of 1981 to 2016, the present study employs the industry-related price model and factor decomposition model to investigate the change in Taiwan's reliance on crude oil through the oil intensity index. Although efforts have been made to advance technology and improve energy dependence, the results of this study indicate that imported crude oil intensity and price responsiveness have actually increased and that the negative effects of the structural efficiency of production and domestic market demand have substantially increased imported crude oil intensity and price responsiveness, again emphasizing the vulnerability of Taiwan’s production. Thus, the speed of improvement in energy technology is insufficient to keep up with economic growth.

Keywords: Factor Decomposition, Crude Oil Price, Industry-related Price Model

JEL Classifications :Q42,Q43,C6


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