Impacts of oil price uncertainty on energy efficiency, economy, and environment of Malaysia: stochastic approach and CGE model

Abstract

Uncertainty in global oil prices significantly influences the economic performance of Malaysia as a net oil–exporting country. This study uses an integrated approach, in which a stochastic method is integrated with a computable general equilibrium (CGE) model to examine the impacts of likely change in global oil price on energy efficiency and, consequently, on key economic, energy, and environmental variables of Malaysia. The stochastic method, which is related to the Monte Carlo assessment, is based on historical data of global oil price, during 1980–2017, provides probable changes in oil price and their probability of occurrence. Simulation results show that likely changes in global oil price, with a 90% probability, change energy efficiency in Malaysia between − 0.08 and + 0.06% within which the economic performance of Malaysia changes between − 5.22 and 3.00% and household welfare changes between − 4.81 and 2.92%. Furthermore, the energy demand changes between 1.51 and − 2.93% and CO2 emission changes between 4.21 and − 2.03%. However, the emission of other air pollutants changes between − 2.45 and 2.21%. These economic and environmental changes generate a double dividend effect on the Malaysian economy. The value of the rebound effect also changes between 103.21 and 95.79%. Therefore, the paper highlights a strong interconnection among oil price fluctuation, energy efficiency, energy consumption, CO2 emission, and economic growth and thus the necessity for an integrated policymaking method.