INTRODUCTION
Thischapterportraygeneralintroductionforthecurrentresearchwithwhichresearchproblem, researchobjectivesandresearchquestionsareprovidedastherationaleforthisresearch.Anint roductiont o t h e methodologytobeusedandthescopeoftheresearchisalsoaddressedinthisc hapter.Attheendofthechapter,structureoftheresearchis provided.The Outlineof this chapterisshowninfigure1.1
Att h e beginningo f they e a r 2 0 0 7 , domesticoilpricehadincreasingcontinuouslyfollowi ngthesharphikingoftheworldoilprice.Incessantfluctuationsofglobalcrudeoilpricealsolea dtochangeofoveralldomesticprices.Duringthesametime,indealingwiththeeffectsoffinanc ecrisisderivedfromAmericanmortgagec r i s i s i n 2008,Vietnamesegovernment’smonetar yp o l i c y a n d i t s m a c r o t a r g e t s h a v e beenadjusted fromtime totime.
Articlesrepeatedinmanynewspapersandmagazinesconcludethatincreasesinoil pricessuchasthoseseeninrecentyearspassedt h r o u g h t h e country’sinflation.Wheneveroi lpriceincreases,otherpricesalsoriselater.Itraisedlivingexpensehigherthanbefore,whilesala ryandwageshavebeenkeptstablestill.Asaresult,the residentiallifegetstougher,althoughVietnameseoilpriceissomehowstillsubsidizedbytheg overnment.From1995uptonow,domesticoilpriceisfloatingundergovernment’s acceptance.
Itiseasytorecognizethatrisingoilpricestendtoaffect theoverall consumerpriceind ex(CPI)directly andindirectly.
Rising energy costs, particularly those related to motor fuels, gas, and electricity, are directly influenced by fluctuations in crude oil prices Gasoline and fuel oil prices closely follow oil prices, meaning that an increase in oil prices can also drive up the costs of substitute energy sources, such as natural gas The impact of rising oil prices on overall inflation is contingent upon their persistence; if oil prices continue to rise, they may lead to sustained increases in the overall price level and contribute to a higher inflation rate.
Rising energy prices significantly impact the core Consumer Price Index (CPI) since they constitute a major part of production costs for various goods and services, including transportation When workers face higher energy costs, they may seek wage increases to compensate, further driving up production expenses reflected in the core CPI The degree to which escalating oil prices influence core inflation through increased production costs depends on their effect on inflation expectations among price and wage setters If higher oil prices lead to long-term inflation expectations, the resulting increases in energy and wage costs are likely to be passed on to consumers, potentially causing sustained growth in the core CPI and, consequently, core inflation.
However,thematterishowstrongtherelationshipbetweenchangesi n crudeoilpricesa ndininflationis.Intheory,thecausalrelationshipisclear.Asharpjumpinthepriceofcrudeoilca usesaninflationaryshockandtheimpactwillbegreatestwhena countryisa large- scaleimporterofoilandhasmanyindustriest h a t useoila s a n essential input in the production process.
Fromarticles onnewspaperormagazinesuchasVNexpress,SaigontimeandTuoiT r e news paperetc…itisgenerally concludedthatoil priceaffectstoinflation–CPI.
Thisresearch,therefore,putsaneffortontocheckingt h e relationshipbetweeno i l pricesandin flationtoanswerthefollowing question
Q1.Do oil prices affect to inflationrate?
Q2.How do oil prices affect to inflation rate?
Thisresearchmeasurestherelationshipo f o i l p r i c e fluctuationandinflationrate,specific allyconsumerprice index (CPI).
As noted above, the objective of this research is totest the hypothesisthat
- Oilprices affect to CPI or not
- OilpricesaffecttoCPIbymeasuringtherelationshipbetweenglobaloilprice,localoil price and CPIinlongterm.
Itprovidespecificpictureabouttheissuetomacroeconomista n d policymakeri n dealing with managinginflationduring the current financecrisis.
Thisresearchisonlyusingofficialdatathatannouncedonpublicinformationchannels.Witht heinflation,achiefmeasureofpriceinflationistheinflationrate,theannuallypercentagechang einageneralpriceindex.Theresearchisconcentratedonfluctuationoftheinflationratethrou ghthecoreinflation– consumerpriceindex(CPI)o f everymonthinVietnam.Whiletheoilpricebaseonthecrudeoil priceof internationaltrade.ThereasonofthisusingisthatVietnamisanoilimporter.AlthoughVietna misanexporterofcrudeoil,thefuelandgasolineinconsumingdomestictradingisimportedfro mSingaporeandothers.Therefore,oilpriceiscontrolled by thecrudeoil price ofinternationaltrade.
Besidem a i n factorswerem e a s u r e d t h a t oilpriceaffecttoinflation,theresearchconsi dereffectofrelatingcomponentsofCPIorotherfactorsonoilpricessuchasinterestratepolicy and government’s monetary policy for controlling inflation.
Firstly,relevantpaperswerereviewedtostudytheirmodelofresearchandfindoutthemodelfo rmyresearch.Afterthat,Icollectdemandingdataandselectthemodellingforprocessingdat a.W i t h quantitativeanalysis,I c h o o s e monthlyd a t a f r o m 1 9 9 5 t o 2010,totaln1 months.ByusingMultipleLinearRegressionanalysis(MLR)ofSPSSsoftwarev e r s i o n 1 5 a n d E v i e w softwarev e r s i o n 6 0 , t h e r e s u l t willi n d i c a t e specificrelation shipbetweenoilpricea n d CPI.Chapter3 willdiscusst h e methodology forthisstudyinmore details.
The structureof this research is shown in figure 1.2
Figure 1.2–Structure of the Research
LITERATURE REVIEW
Thepreviouschapterintroducesanoverviewoftheresearchbackground,therationaleofthestu dy,theresearchobjective,andtheresearchquestion.Thischapterissearchedandreviewedrele vanttheoriesintheliterature.Theaimofthisreviewistodeterminethe relationshipbetween oil priceandinflationinVietnam.
2.2-Transmission channels of oil prices
Asdocumentedinmanystudies,thedramaticriseinoilpricesduringthe1970s hasb e e n a s s o c i a t e d withsubsequenteconomicdownturns(Hamiltona n d Herrera2 0 0 4 ) Altho ughthereissomedebateastowhetheroilshocksarethemaincauseofrecession(Bohi1989),itis widelyacceptedthatoilpriceshocksatleastpartiallypassthroughintoinflation.Understandin gtheempiricall i n k a g e betweenoilpricesandi n f l a t i o n ratesisthenimportantasmostmo netaryauthoritiestoconductpolicytoaccommodatetheseshocks(Bernanke 2007).
Internationaloilpricesarehighlyrelevanttounderstandfirmpricesettingbehaviour,given thatt hes har e of householdspendingdevotedtor e f i n e d o il productsis substantialandthat oilandrefinedoilproductsareaninputintheproductionofgoodsandservices.Oilpriceshocksa ffecttheeconomythroughdifferentchannels:thesupplyside,t h e demandsideandthetermsoft r a d e
(MartinSchneider,2007).Thetransmissionmechanismlinkingglobaloilpricestoconsu merpriceinflationisquitecomplexa n d t h e strengtha n d timingo f t h e differentc h a n n e l s dependonnumerous factors,soitisconceptuallyusefulbutbreakdownthelinkageintofirst-round(directand indirect) and second-roundeffects.(MarkA Hooker,2002)
Itmeansthatthefirst- roundeffectistheeffectofsupplyside(direct)andtheeffectofdemandside(indirect)andsec ond-roundeffectisthetermoftrade)
(T.Abeysinghe,2001).Inotherword,intermsofpriceeffects,theimpactisoftenbrokend ownintodirectandindirect-first-round and second-roundeffects.
Thefirst-roundeffectofhigheroilpricesonconsumerpriceindexcanbe brokendown intoadirect and an indirect effect.
- Supplysuffersasproductioncostriseinthewakeofanoil price shock.Givensubstitut ionbetweenproductionfactors,relativepricechanges resultinareallocationoft h e meansofproduction.This,inturn,cushionst h e negativeeffects.The longtermef fectsonproductioncapacityarethuslesspronouncedthantheshorttermeffects,whic haredominatedbyfrictionarisingasaresultofresourcereallocationandbyuncertainti esaboutthesubsequentdevelopmentofoil prices However,these intersectoral reallocations also generate costs
(trainingexpenses,irreversibleinvestment,etc.).Theactualimpactoninvestmentessen tiallydependsontheexpectationsaboutthestabilityofoilpricechanges,whichtendto varyovertime.Inshort,thedirecteffectsreflectstheimpactofchangesi n o i l p r i c e s o n consumerl i q u i d fueloroilenergyp r i c e s , whicha r e consumedbyhouseholds
Oil price shocks lead to increased overall prices, reducing real disposable incomes and consequently lowering demand The indirect effects of these shocks are more complex, as they influence consumer prices through changes in producer costs Oil and refined oil products significantly impact the production of various services, particularly transportation The indirect effect reflects the increased costs of producing goods and services that rely on petroleum products, which ultimately affects final prices Industries that utilize oil-intensive technologies are particularly vulnerable to fluctuations in oil prices, as their marginal costs are more sensitive to these changes This transmission process is slower than the direct impact and is influenced by factors such as market competition, economic cycles, and whether the price shock is perceived as temporary or permanent.
Consumer prices can be influenced by second-round effects, where initial price changes lead to revised inflation expectations These expectations can trigger adjustments in final prices through the wage-bargaining process, as firms aim to maintain real profit levels For instance, if nominal wages are adjusted due to an oil price shock, unit labor costs may vary, potentially affecting final pricing Ultimately, the stability of inflation expectations among households and firms hinges on the credibility of the monetary policy framework, which can help anchor medium-term inflation expectations even after an oil price shock.
Intheothersword,apartfromtheirdirecteffectsonthegeneralpricelevel,oilpricealsohav esecondroundeffects,asrigidnominalwagesandpriceandwageindexationaddtoinfla tion.Higherwagepressuresandweakerdemanddampenemployment.Inadditiontot hat,adeteriorationofconfidenceandstockmarketreactionscanamplifytheimpactof ashock.Furthermore,economicsarehitbychangesintheinternationalenvironmentbro ughtaboutbyo i l p r i c e shocks.Climbingimportpricest r i g g e r a deteriorationo f t h e t e r m o f t r a d e a n d thusprecipitatewelfarelosses.Inbrief,secondroundeffectsariseshouldoil price changesimpactonwagesspecificallyandinflationexpectationsandpricesettingmoreg enerally.Oilpricesmayalsoimpactonrealsideofeconomyviapurchasingpowerand termsoftradeeffects, etc.
Therehavebeenmanypublishedresearchesontherelationshipbetweenoilpricesandi n f l a t i o n intheworld.Theystudiedthisrelationshipinmanydifferentcountries,fromdevelope d countriestodeveloping countries.
Martin Schneider's 2004 paper examines how fluctuations in oil prices influence economic growth and inflation Oil price shocks impact the economy through supply-side factors, such as increased production costs and resource reallocation, as well as demand-side effects, including income changes and uncertainties Over time, the intensity of these shocks has diminished due to technological advancements and cost-effective adaptations Notably, an increase in oil prices tends to drive GDP growth more significantly than a decrease, which can be linked to adjustment costs from sectoral reallocations and the effects of uncertainty on consumer spending and investment, alongside nominal wage rigidities Additionally, the element of surprise associated with oil price hikes plays a crucial role; a price increase following a long period of stability tends to have a greater impact than one that comes after previous decreases.
ImadA.Moosa(1993)addressesanissuethathasbeenthesubjectofdebateinthemediaandinac ademiccircles.ThepaperconcernstheeffectofoilpricesinitiatedbyOPEConeconomicactiv ityinOECDcountries.Resultsofcointegrationtestindicatedthatthereisnolong- runrelationshipbetweenoilpricesandmacroeconomicvariablesinOECDcountries.Howe ver,causalitytestingindicatestheexistenceofunidirectionalcausalityfromoil pricestodomesticpricesandoutput.
WhileApinyaWanaseto f S c h o o l o f Economicso f SukhothaiThammatiratOpenUniv ersity(Thailand)aimedt o examinet h e pass- throughe f f e c t s ofkeymacroeconomicvariablesontheexchangerateinThailandbyusingaVector
The autoregressive VAR analysis examines the impact of key macroeconomic variables—exchange rate, GDP, CPI, money supply, and oil price—over the period from Q1 1993 to Q4 2008 The findings indicate that all these variables significantly influence exchange rate volatility, particularly highlighted by impulse response analysis Additionally, variance decomposition analysis reveals that shocks to the CPI have the most substantial effect on exchange rate fluctuations Causality tests further demonstrate that GDP absorbs the effects of exchange rate changes, money supply, CPI, and oil price, while also influencing money supply itself Overall, these results suggest that fluctuations in essential macroeconomic variables are closely linked to exchange rate volatility.
With“Thepassthroughofoilpricesintoeuroareaconsumerliquidfuelpricesinanenviron mentofhighandvolatileoilprice”byAidanMeylerconsidersthepasst h r o u g h ofoilpricesin toconsumerliquid(i.e.petrol,dieselandheating)fuelpricesinsuchanenvironment.Themain contributionofthispaperisa comprehensivecombinationofmanyfeaturest h a t havebeen consideredbeforebutrarelyj o i n t l y Thesefeaturesinclude:
(1)theanalysisoftheeuroareaasanaggregateanda largenumberofcountries(theinitial 12m emberstates);(2)theconsiderationofdifferenttimeperiods;
( 4 ) t h e u s e o f h i g h frequency(weekly)data,which,asresultswillsuggest,arethelowestfre quencyoneshouldconsider;
(5)theinvestigationo f t h e d i f f e r e n t stagesoft h e productionc h a i n fromcrudeoilpric est o retaildistribution- refiningcostsa n d margins,distributionandretailingcostsandmargins;
The article addresses the issue of asymmetries in price passthrough, highlighting key findings: First, distribution and retailing costs have remained stable, impacting the relationship between consumer prices and upstream prices, particularly when oil prices rise significantly Second, using spot prices for refined products enhances model accuracy compared to crude oil prices, yielding more meaningful insights into the extent of passthrough Third, oil price passthrough occurs rapidly, with 90% happening within three to five weeks Fourth, while the analysis allows for asymmetry in passthrough, there is little evidence of statistically significant asymmetries, and even when found, they are generally not economically significant These results are consistent across most Euro area countries, with few exceptions.
Ghorbelistostudytheoilprices– macroeconomyrelationshipbytheanalysisoftheroleofsubsidypolicy.T h e vectorautoregre ssion(VAR)methodwasemployedt o a n a l y s e thedataove r theperiod1993Q1-
2007Q3.Theresultsofthemodelusingbothlinearandnon- linearspecificationsindicatethatthereisnodirectimpactofoilpriceshockontheeconomicacti vity.Theshockofoilpricesaffectseconomicactivityindirectly.Themostsignificantchannel bywhichtheeffectsoftheshockaretransmittedi s t h e government’s spending.
Thischapterprovidestheoreticalframeworkfortheresearch.However,withthereasonregardi ngtherelationshipofoilpriceandinflation aspectasdiscussedabove suchasfirstroun deffectandsecondroundeffectordirectandindirect,a researchmodel will be studied moredetailsinchapter 3.
METHODOLOGY
Global oil price
MonthlydataofglobaloilpricewascollectedfromthesourceofThomsonReutersa n d used Cushing,OKWTISpotPriceFOB(DollarsperBarrel)intheperiod1995
JANNOVSEP JUL MAYMARJANN O V SEP JUL MAYMARJANNOVSEP JUL MAYMARJANNOV
Globaloilprice,namesWOvariable,ismonthlydatainappendix1fromJan1995t o Nov2 010.Thepeakofpriceis133.88$/barrelinJun2008,andthelowestpriceis 11.35 $/barrel in Dec 1998.
Domestic oil price in Vietnam
TheretailgasolinepriceofVietnamthatwascollectedfromthedecreesordecisionsofauthor ity,whicharedemonstratedinappendix2,onlyhavefigurefrom1998t o n o w T h e assu mptiono f unchangingoilpriceintheprevioustimearei n d i c a t e d t h a n k s t o t h e a u s p i c e s ofgovernment.T h e fluctuationofdomesticoilpricei s mentionedinc h a p t e r 2.A ndt h e descriptiono f domestico i l p r i c e , whichnames DO, is as below.
D om es tic oi lp ric e C o n su m er p ri ce in d ex
JANNOVSEP JUL MAYMARJANNOVSEP JUL MAYMARJANNOVSEP JUL MAYMARJ A N NOV
SPSS15: Sequencechartof Domestic Oil Price(DO)
Consumer price index
Calculationofconsumerpriceindex(CPI)inVietnamisresponsiblebytheGeneralStatistic sOffice.TheCPIweightsaredeterminedin2000andbegantoapplyfromJuly2001.Thisch angeoftheweightsissuitablewiththerealsituationofVietnam.AndthefiguresofVietnam
’sconsumerpriceindex,whichnamesCPI,mentionedin chapter2are show inappendix3. Its descriptionisshownasbelow.
Exchange rate in Vietnam
Intheearly1990s,Vietnambegantoovercometheproblems,whicharetriple- digitinflation,multipleexchangeratesandarapidlydepreciatingcurrencyintheparallelm arket,bycontaininginflationandstabilizingitscurrency.Internationalintegrationwitht heWestbeganinearnestaround1993.Sincethen,Vietnam’sexchangeratemanagementha sevolved significantlyascapitalliberalization proceededandnewexternal circumstancesarose.
Inflationwasbroughtdowntoasingledigitby1993.Butpricestabilitywasfragileanddomes ticinflationisstillremainedhighrelativetotheinternationallevel.Inthefinal stageofdisinf lation,theSBVkeptVND/
From late 1991 to early 1997, the USD exchange rate remained around 11,000 VND, with a fixed rate from early 1994 to late 1996 This "11,000 VND policy" aimed to achieve lasting price stability through a dollar peg, which successfully reduced inflation to a low level However, this policy led to a gradual overvaluation of the VND Starting in the summer of 1996, the State Bank of Vietnam began to effectively depreciate the VND by widening the bandwidth around the official central rate, with the actual rate consistently staying near the highest end of the band.
From1997t o 1998,Vietnamhadt o c o p e withtheimpactoftheAsianfinancialcrisis.Th erefore, regulation lawno.016/1997/
QHXdate Dec1997issued byNationalAssemblystipulatedinarticle19t h a t “theexc hangerateoft h e Vietnamesecurrencyissetuponthebasisofforeigncurrencysupplyan ddemandinthemarket,andisregulatedbytheState.AndSBVdefinesandpromulgatesthee xchangerateoftheVietnamesecurrency”.BecauseVietnamwasnotdirectlyattackedbyspe culators,VNDbecameovervaluedrelativetoregionalcurrencieswhichfellsharply.Theex change ratebandwasfurther broadenedto±5%in Feb1997a n d to± 1 0 % i n Oct1 9
9 7 I n Feb1998,t h e officialc e n t r a l ratei t s e l f wasdevaluedfrom1 1 , 1 7 5 to11,800VND/
E xc ha ng er at e
In 1999, the State Bank of Vietnam (SBV) introduced a new exchange rate mechanism, setting the central rate daily based on the average interbank exchange rates from the previous transaction day, with a narrow band of ±0.1% This led to a gradual depreciation of the Vietnamese Dong (VND), reaching approximately 15,600 VND per USD by December 2003 Since then, the exchange rate has been adjusted multiple times, currently standing at 18,932 VND per USD, influenced by both global and domestic economic factors Detailed exchange rate data can be found in Appendix 4.
Itwasproposedi n c h a p t e r 3 t h a t t h e modeli n c l u d e s 3 hypotheses.T o t e s t t h o s e hypotheses,thefirststepwastotestthecorrelationsbetweendependentvariableandtheind ependentvariablesandamongindependentvariablesaswell.Thenmultiplelinearregression swereruntoconfirmtherelationshipsamongthem.Resultofcorrelation a n a l y s i s sho wni n t a b l e 4.1temporarilyallowust o exceptt h a t t h e r e ispositive relationships between
(1) Globaloil price and domestic oil price
(3) Globaloil priceandinflation(CPI) of Vietnam
Fromt h i s figureintable4.1,weo b s e r v e thegreatestcorrelationbetweenconsumerp r i c e i ndex–
CPIanddomesticoilprice.Whilethereislessgreatcorrelationbetweenworldo i l p r i c e a n dCPI,c o r r e l a t i o n b e t w e e n exchangeratea n d t h e othersi s l o w e s t except CPI, as far astheexchangerateisconcerned. þ
WO DO CPI EX WOEX
Regardingt h e a b o v e c a p t i o n , weh a v e generalviewaboutvariablesdescription.F urthermore,stationaritytestthroughthetoolthatDickey-
Fullerunitroottestisemployedtothreevariables(globaloilpriceWO,domesticoilpriceD O,consumerpriceindexCPI).Thestationaryanalysisresultsshowninappendix5andcolle ctedi n table4.2allowusaview of suchdatabefore comingtothenext step.
No Variable Prob* Significant at the 5% level Meaning
Allvariablesaremeasuredinnaturallevel.Inobserveddatadescription,therecognitionist hatvariableshavetrend.Therefore,variablesaretestedwithtrendinnaturallevelandtheirf irstdifferences.Theresultsshowninappendix6arecollected in table 4.3 as below
Table 4.3–Testing variable of first difference
No Variable Prob* Theorder1of integration
Ina d d i t i o n , baseonresultsi n a b o v e tables,allofthevariablesaresaidtobeintegra tedoforder1 exceptCPI.Itmeanst h a t t h e r e i s nocointegrationbetweenCPIandtworem ainvariablesWO(globaloilprice)andDO(domesticoilprice)ino r d e r 1 o f i n t e g r a t i o n However,C P I cointegratewithW O a n d DOi n order2 o f integration.Theresultsoftes tingtheminthe2nddifference byDickey-Fullerunitroottestagainiscollectedintable4.4
Model Name Series Name Transformation
Non-Seasonal Differencing Seasonal Differencing Length of Seasonal Period Maximum Number of Lags Process Assumed for Calculating the
MOD_3 Consumer price index CPI None
Standard Errors of the Autocorrelations
Display and Plot Independence(white noise) a
Table 4.4–Testing variable of seconddifference
No Variable Prob* Theorder2of integration
ToreviewalldetailsofthisCPIvariable,itsparticularityisseasonalsuchasit’sthesameswin ginmonthlyofayear.So,theseasonalanalysisisemployedforthisdatav a r i a b l e through
The result is in table 4.5 as below.
Applying the modelspecifications fromMOD_3 a Not applicableforcalculatingthestandarderrorsof the partial autocorrelations.Asthebelowresult,wecanconcludethattheCPIisstationarity,becauset heACF/PACFnearly comes to zeroafter the fourth lag.
4.5.1 -Relationship between global oil price and domestic oil priceHypothesesasmentioninchapter3 assumethatdomesticoilpricerelatedtoglobal oilpricea n d thec o r r e l a t i o n analysisresultspreliminarilyareawareof theserelationships.Hence,linearregressionwasruntoweighttheirrelationship withdependentvariableisdomesticoilpriceandindependentvariableisglobaloil price.
Thelinearregressionresultsarepresentedi n t a b l e 4.6aandt a b l e 4.6b.T h e regres sioncoefficientRsquare(adjusted)is0.844whichishighvalue.ANOVAresultshowedt hatthismodelhada n F valueof1032.3a t sig.= 0 0 0 T h e s e resultmeanstorejectthe nullhypothesisthatalltheregressioncoefficientsequalzero (H0:βi=0).
(Constant),GlobaloilpricebD e p e n d e n t Va riable:Domesticoilprice
Usingt h i s methodtot e s t t h e relationshipofglobaloilpricea n d domesticoilprice, the result of equation is
Itmeanswhetherglobaloilpriceincrease1USD/ barrel,domesticoilpricewillincrease1934 VND/litre.
Next,wedot h e secondt e s t a s mentionedi n c h a p t e r 3.Hence,whenwerunregress ionofCPIandglobaloilprice,wetaketheresidualtoteststationarybyDickey-
Fullerunitroottest.TheresultisProb*=.0122< α = 05showninappendix8.Theresidu alRES1isstationary.Insummary,therelationshipbetweenglobaloilpriceanddomesti c oilpriceiscointegration inlong-run.
Asfara s c o n c e r n , Vietnami s a n oilimporter.Butgovernmenta l w a y s uset h e mone tarypolicytocontroleconomybyexchangeratetool.So,testingther e l a t i o n s h i p ofg lobaloilpriceanddomesticoilpricehastheeffectofexchangerate.AnewvariableisWO EX(globaloilpricemultiplyexchangerateineachtime) Usingthesame methodhastheresultintable4.7aandtable4.7basbelow
Model R RSquare AdjustedRSquare Std.ErroroftheEstimate
Thatm ea n s wheneverglobaloilpriceare1USD/ barrel,domesticoilpricewilldeterminethroughexchangerateasaboveequation.Then,t hetestofresidualRES2givestheresultProb*=.0015