Oil import diversification and the macroeconomic transmission of oil supply shocks in the Eurozone

Abstract

This paper investigates the role of oil import diversification in shaping the macroeconomic transmission of oil supply shocks in Eurozone countries between 2001 and 2023. Using a proxy structural vector autoregressive (SVAR) model with high-frequency identification of oil supply news shocks and a nonlinear local projections estimator, we examine the impact of shocks on inflation, industrial production, and unemployment. Our results show that the inflationary effects of oil supply shocks are significantly stronger in countries with low import diversification, both for headline and core inflation, while the unemployment response is also more pronounced. In contrast, industrial production exhibits no clear heterogeneity across diversification regimes. These findings highlight that oil import diversification serves as an important buffer against the adverse macroeconomic consequences of energy supply disruptions. The results are robust to alternative specifications and identification strategies, including controls for country-specific transmission channels, alternative measures of the oil supply news shock, different lag structures for the diversification index, alternative summary statistics, and leave-one-out exercises. Policy implications suggest that Eurozone economies can enhance their resilience to global energy shocks by broadening the range of oil suppliers and increasing their transition toward alternative energy sources.