Analysis On The Transmission Mechanism Of The Impact Of The Price Fluctuation Of International Crude Oil On China’s Domestic Price Level

As a resource commodity, oil has the character of non-renewable and unbalanced on geographical distribution. Although oil price have soared after the twice oil crisis in the1970’s,oil consumption didn’t reduce.Since the second world war, oil and natural gasexploitation and consumption have begun to increase greatly. According to the research conducted by Institute of Energy Economics Japan (IEEJ)(2004), it suggests that oil accounts for two-fifth of the world energy consumption structure and expects that oil will be the global primary energy before2020. Therefore, the shock of future oil price has significant influence on the world economy.In this context, this article studies the influence of international crude oil price on the domestic price level based on the research on the correlation between them. Then, It puts forward the main question that the way the international crude oil prices will impact domestic price level and which way has the biggest impact. Finally, the paper proposes the countermeasures to the shock of international crude oil price.This study contains two aspects:traditional price transmission mechanism theory and eight price indexes included in the CPI. The research assumes that the international crude oil price influences the Chinese price level through three channels which are main channels, this is the innovation of this paper. Three channels are transmission of upstream and downstream industry, price change of substitute and price change of other commodity. Through data selection and cointegration test based on VAR model.It obtains the long-term relationship and the best lag phase among variables. Then after the test of Granger causality, it concludes that the size and direction of price transmission, the process mentioned above is complicated and involves hard work on data processing. By empirical analysis test on the feasibility of the three channels, it obtains the influence of three channels on the indexes of CPI. At last, with the regression method, we can get the impact of international crude oil on CPI by three channels.The empirical analysis shows that the international oil price could influence Chinese price level by assumed three channels. The analysis above arrives at the conclusion that international crude oil price has the biggest influence coefficient by the price variation of primary energy coal; the shock of international food price has the second influence coefficient; and the shock of domestic crude oil price has the smallest influence coefficient. This is mainly because of our country’s primary energy consumption structure (coal consumption percentage is around70%, oil consumption percentage is about20%).At the same time, as a developing country, consumption ratio of life material is large, so the shock of the food price index has important influence on CPI. From the empirical analysis on each transmission channel, it is known that the linear coefficient is large in the first transmission, the relationship is almost parity. The coefficient of elasticity between PPI and CPI is close to one which is because the life material producer price index in PPI is reflected in CPI, and domestic crude oil price influence the CPI mainly through traffic cost. The result of empirical analysis on the second transmission shows that international food price influence CPI by impacting domestic food price index; the result of empirical analysis on the third transmission indicates that the shock of coal price will be the main source to influence the building materials prices. That is mainly because the building raw material is coal.Through the theory and empirical study, it is found that international crude oil price can influence Chinese price level through three approaches. The third transmission approach has the biggest influence; the second transmission approach comes next; for the main primary energy consumption is coal in China and oil consumption only accounts for one fifth. The first transmission approach has the smallest impact. According to the analysis on each approach, take the state intervention effect.into consideration, the paper puts forward corresponding countermeasures to deal with the impact of international oil prices for providing the facts for price level control and country’s economic health, steady development.