How Oil Prices Impact the Taiwanese Economy: Evidence from the stock market

Oil provides 54% of the energy used in final consumption in Taiwan. Industry is the largest user of energy in Taiwan, consuming 34% of total energy. Oil prices have also been high and volatile over the last 20 years (see Figure 1). How do oil price changes impact Taiwan’s industries?

To investigate this question this paper examines how oil prices affect sectoral stock prices in Taiwan. Black (1987, pp. 113) said that “The sector-by-sector behavior of stocks is useful in predicting sector-by-sector changes in output, profits, or investment. When stocks in a given sector go up, more often than not that sector will show a rise in sales, earnings, and outlays for plant and equipment.”

Fernald and Trehan (2005) observed that oil price increases function like a tax on oil importers. Since stocks as ownership claims on corporations represent a primary store of net wealth, oil price increases should decrease stock prices for oil importers (see IMF, 2014).

This paper uses the approach developed by Hamilton's (2014) to divide crude oil price changes into the portion driven by global aggregate demand and the portion driven by oil supply and other influences. The results indicate that oil price increases driven by increases in global aggregate demand benefit both aggregate equity prices and also the prices of iron and steel, textile, and industrial material stocks. They also lower the prices of technology hardware, telecommunications equipment, and semiconductor stocks. Oil price increases driven by oil supply shocks harm semiconductor stocks. Further results show that only one semiconductor company, Taiwan Semiconductor Manufacturing Company (TSMC), is harmed by supply-driven oil price increases. TSMC is the largest and most important company in Taiwan. Since it produces the world’s most advanced chips, its energy requirement is high relative not only to semiconductor companies but also relative to all companies. In 2023 for instance TSMC used 25,000 gigawatt hours of energy. This is more than twice as much as General Motors used in 2023.

TSMC should seek to reduce its use of fossil fuels within its supply chain. This would not only reduce its exposure to oil price shocks but also make it more attractive to customers and reduce the carbon footprint of electronic devices. Gupta et al. (2021) reported that most of the carbon output of electronic goods comes from manufacturing the chips inside of the devices. TSMC should prioritize reducing its carbon footprint. It can do this by reducing Scopes 1, 2, and 3 emissions. Scope 1 emissions could be reduced by decreasing the share of process gases with high global-warming potential (McKinsey, 2020). Scope 2 emissions could be reduced by using innovation to improve the energy efficiency of clean rooms, furnaces, and other capital equipment. Scope 3 emissions could be reduced by employing ecologically-friendly ways to transport chips to final customers.

Taiwan should also develop more renewable energy options. It could promote wind farms off of the west coast. It could carefully study whether nuclear power might now be safe and feasible. If so, it could try to convince its citizens of this. It could facilitate the import of ammonia and the use of hydrogen power. It could also explore cooperation with Northeast Asian neighbors. Europe, Southeast Asia and other regions engage in extensive cross border trade in energy. Because of geopolitical constraints, Northeast Asian economies do not. If political constraints could be overcome, the possibilities for economic gains from obtaining more extensive and reliable access to renewable energy is great.

TSMC, Taiwan’s largest and most famous company, is harmed by oil price increases. It also consumes the most energy of any company in the world. To reduce its exposure to oil price increases, remain attractive to customers, and prevent global warming, TSMC should expeditiously transition from relying on fossil fuels to employing renewable energy.

Source: Federal Reserve Bank of St. Louis FRED database.