Shocks to supply and demand in the oil market, the equilibrium oil price, and country responses in economic indicators

Abstract

We develop a model to forecast the equilibrium price in the oil market by balancing demand and supply at the level of interaction of the largest oil-consuming and -producing countries. Our model is based on the global vector autoregression methodology and allows us to make a medium-term forecast of the equilibrium oil price in dynamics analyzing the co-movement of oil demand and supply in various countries, in view of possible shocks from countries and companies. The proposed model allows us to reveal responses in economic indicators in various countries to changes in the equilibrium oil price. Our model covers 47 countries, including the member countries of the Organization of Petroleum Exporting Countries (OPEC), the Commonwealth of Independent States (CIS), and the largest oil-consuming countries. The majority of models analyze the only largest market players, but we consider the member countries of the CIS (Russia, Kazakhstan, and Azerbaijan) and OPEC member countries such as Iraq, the United Arab Emirates (UAE), Qatar, Venezuela, Algeria, Nigeria, and Angola. The test results on economic consequences of a shock to oil supplies from the largest producer (Saudi Arabia) and a shock to oil demand from the largest consumer (China) are of empirical interest.