How oil prices impact the Indonesian economy: Evidence from the stock market

Oil prices have been high and volatile. This paper investigates how oil prices affect Indonesian 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 and iron and steel 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. 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 should reduce its exposure to oil by switching to sustainable energy sources.