The Impact of Oil Prices on Industrial Production in Developing Countries

This paper investigates the impact of oil prices and other key variables on industrial production by utilizing data from 52 developing countries for the period 1970 to 2012. Using a fixed effects model with instrumental variables, the paper finds that increase in oil prices has a negative and highly significant impact on industrial production. Among the other variables included in the model, the real exchange rate had the greatest impact on industrial production. Furthermore, the magnitude of the oil price coefficicen, which is considerably large and second only in magnitude to that of the real exchange rate, indicates the importance of oil prices in determining industrial production in developing countries. Considering both oil prices and the real exchange rate, the study shows that industrial production and the overall economic growth in developing countries are prone to negative oil price shocks mainly because they rely heavily on oil imports