Oil Market Shocks and Energy Transition: The Mediating Roles of Research Development and Environmental Regulation Stringency

The literature shows that oil shocks have heterogeneous effects on economic activities, energy markets and transition to renewable energy (RE) which are also determined by aggregate factors. The transition from non-RE to RE is only one part of the comprehensive energy transition (ET) framework. Our study provides the first empirical examination of how differing oil market shock types affect this comprehensive ET and considers the mediation effects of key aggregate factors including economic growth, financial development, stringency of environmental regulation, and research and development (R&D) expenditure. Using the Panel Structure Vector Autoregression modeling approach for OECD countries over the period from 1991 to 2020, our results provide several important findings. First, the impacts of oil market shocks on the ET are heterogeneous across the shock types and time horizons. Short-run oil price and aggregate demand shocks encourage more ET (on-impact by 0.05% and 0.01% respectively), and these effects converge in the long run. Oil supply shocks while encouraging ET (by 0.06%) in the long run discourage ET in the short run (on impact by 0.02%). R&D expenditure is the most effective factor in reducing the impact of the oil price shock on ET (from 60 percent in the baseline model to 10 percent when R&D is introduced). The distinct role of the R&D expenditure becomes less dominant for oil supply and aggregate demand shocks.