Effect of oil prices fluctuations on industrial productions in Iran

Abstract

Increase in oil price can affect industrial productions and price index of industries in oil exporting country such as Iran in two phases: increase in oil price causes increase in monetary base and this is an experience which has occurred in Iran’s economy in recent decades. Increase in liquidity and monetary base increases the price and industrial productions by increasing demand. On the other hand, increase of oil price influences price and production through production cost. Increase in oil revenues through importing raw materials causes decrease in production cost and supply of industries and leads to decrease of price and increase of production. In this study, considering close relationship between oil price and macro variables and industrial productions, we study the effects of oil price shocks among these variables by applying data of 19 different industries in Iran during 1994:1-2008:4 using Vector Auto Regression (VAR) method. In general, one can conclude that oil price shock increases supply for the industries whose share of oil cost is high, such as chemicals, medical tools, rubber & plastic manufacturing, radio and TV manufacturing, motor vehicles manufacturing and machinery manufacturing industries. On the contrary, oil price shock increases demand for other industries, such as clothing, food, paper production and metals manufacturing industries. The findings of VAR model indicate that according to effect of input cost, supply channel of a channel whose industries are affected by oil price shock is not important. Estimates show that the effect of oil price shock on demand is more important than that of supply in most industries.