Oil Consumption, Economic Growth, and Oil Futures: A Fundamental Alternative to Financialization

Abstract

I present new evidence on the relations between oil consumption, oil prices, and economic growth, and build on this evidence to develop a real business cycle model to study oil prices. The model features oil driven long-run productivity risk and recursive preferences, and an oil good which is used for both production and nal consumption. Calibrated model results can match the relations between oil prices and economic quantities, and can rationalize changes in oil futures markets from 2005 to 2012 as a consequence of a decrease in the responsiveness of the oil supply to prices. The results also suggest a link between increasing North American oil production and more recent changes in futures markets.