How Oil Prices Impact the Indonesian and South Korean Economies: Evidence from the stock market

Oil prices have been high and volatile. This paper investigates how oil prices affect Indonesian and South Korean stocks. Using Hamilton’s (2014) method to decompose oil prices into portions driven by shocks to aggregate demand and to oil supply, the results indicate that demand-driven oil price increases benefit sectors such as coal, iron and steel, and shipbuilding that compete in global markets. They harm sectors such as food and consumer goods that use oil for production and depend on consumer purchasing power. Supply-driven oil price increases benefit the resource sector in Indonesia and harm the airlines, electricity, and industrial transport sectors in Korea. The finding that several sectors benefit from oil price increases indicates that blanket fuel subsidies are suboptimal. The finding that many sectors suffer from oil price increases indicates that Indonesia and Korea should reduce their exposure to oil by switching to sustainable energy sources.