The cyclicality of the demand for crude oil: evidence from the OECD

Abstract

Purpose – The purpose of this paper is to analyse the cyclical relationship between the demand for crude oil and real output for the OECD. Design/methodology/approach – The paper employs Harvey's structural time series model to analyse the contemporaneous and non-contemporaneous cyclical co-movement of the demand for crude oil with real output, using quarterly observations for the period 1984:1-2010:4. Findings – The empirical evidence suggests that a strong and positive cyclical relationship between the two variables exists, with the demand for crude oil being procyclically contemporaneous. Practical implications – The implication of this finding suggests that consuming countries cannot stockpile oil reserves to guard against the cyclical nature of demand, while producing countries face weak and bearish oil markets during economic recessions, because oil consuming countries cannot smooth out their demand for oil on an intertemporal basis. Originality/value – The paper provides further evidence supporting the procyclically contemporaneous relationship between the demand for crude oil and real output for the OECD.