Abstract
This study decomposed shocks of the global crude oil (GCO) market and Korean gasoline (KG) market into six types using the structural vector auto-regressive model. Breaking down the shocks into six, we analyzed how each shock affects the macroeconomy and gasoline market in Korea. Results of the analysis revealed that the oil supply shock did not cause a large fluctuation in gasoline prices, but it harmed the macroeconomy. By contrast, the two shocks on the demand side of the GCO market caused a large increase in domestic gasoline prices, but they did not negatively affect the macroeconomy. Meanwhile, in the KG market, gasoline-refining shock and gasoline demand shock caused a significant increase in gasoline prices. Both shocks had some negative effects on the Korean macroeconomy at a certain point, but the effects are not as strong as the oil supply shock. However, the gasoline distribution shock in Korea rarely caused negative consequences for major macroeconomic variables. Moreover, analyzing the KG prices through historical decomposition, we found that the two demand-side factors of the GCO market and the demand shock of the KG market have had the most important influence on the gasoline price since the 2000s. From the analysis, the increase in gasoline prices in Korea since the 2000s can be inferred to have no significant negative impact on the macroeconomy. Therefore, the essential factors of price fluctuations must be focused on in analyzing domestic gasoline price and their impact on the macroeconomy.
Highlights
Since the 1970s, when South Korea shifted to an industrial structure centered on the heavy and chemical industry and manufacturing, crude oil and extracted gasoline have become an important element that forms the basis of the Korean economy
The impact of structural oil price shock factors on the Korean gasoline (KG) market and the macroeconomy is analyzed using the structural vector auto-regressive (SVAR) model in which the KG market is combined with the global crude oil (GCO) market
Using the SVAR model constructed in this way, we examine how the six fundamental impact factors affect the international oil market and the domestic gasoline market, respectively
Summary
Since the 1970s, when South Korea shifted to an industrial structure centered on the heavy and chemical industry and manufacturing, crude oil and extracted gasoline have become an important element that forms the basis of the Korean economy. (2019) expanded the analysis by adding a policy uncertainty shock to Kilian (2010)’s model [12,15] These studies revealed that reactions in the GCO market and the US gasoline market may appear differently depending on the impact factors, the absence of the analysis of the effect on the macroeconomy remains a limitation. The impact of structural oil price shock factors on the Korean gasoline (KG) market and the macroeconomy is analyzed using the SVAR model in which the KG market is combined with the GCO market. The two demand factors are expected to be relatively more influential than the impact of oil supply on global crude oil prices, and the similar situation is expected to appear in Korean gasoline prices depending on the relationship between international oil prices and domestic gasoline prices (Kilian (2009, 2010), Kang et al (2019)) [12,14,15].
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