Environmental and economic effects of high petroleum prices on transport sector

•The study investigates the impacts of high petroleum prices on transportation sector.•It analyzes the effects of this shock in both short-run and long-run periods.•The shock negatively influences the economy and encourages the reallocation of resources.•The shock was not beneficial for the transport sector because of fall in its output.•This shock leads to a decline in energy consumption and emission in the transport sectors.

Using Malaysia as a case study in comparison with other studies that apply aggregate models, this study employs a multi-sector CGE model (computable general equilibrium) to derive the short-run and long-run effects of sustained increase in world petroleum prices on the transport sector. Since the transport sector is the main consumer of petroleum products, the study highlights the transmission channels through which the rising cost of petroleum products affects this sector in particular. The simulation results suggest that in the short-run, the effects of the shock are negative towards the economy and the transportation sector, but it will eventually encourage the reallocation of resources and, therefore, induces inequality in sectoral adjustments. However, in the long-run, the shock will be beneficial for the transportation sector because it will contribute to an increase in domestic output and stimulate investment. In the whole of the economy and all transportation sectors, the shock will lead to an increase in the emissions of all air pollutants in the short-run while it decreases them in the long-run.