Abstract
PurposeQuantitative easing (QE) allowed the US economy to stabilize and return to slow growth. Oil prices increased to $100 during 2010–2013. Then in June 2014, they plunged again dramatically to $40. The purpose of this paper is to develop and test a model that describes the price of oil as depending on six inputs: Federal assets accumulated by the Federal Reserve during the period of QE, the 10-Year Treasury note rate, the price of copper, the trade-weighted dollar, the S&P 500 Index and the US high yield rate for bonds rated CCC or below.Design/methodology/approachWe use 771 overlapping 52-week regressions to capture short-run oil price dynamics.FindingsWe find that QE was statistically significant only during 2009–2010, while the US high yield rate played a more significant role, both during and after the crisis.Research limitations/implicationsThis paper does not explain the behavior of oil prices prior to 2003.Practical implicationsThis paper emphasizes the role of the high yield rate on fracking technology in financing the extraction and production of oil.Originality/valueThe paper has both the theoretical value for researchers in the area of energy, as well as practical application for the oil industry.
Highlights
Global oil prices were stable from 1986 to 2002, fluctuating around $20
This paper carefully examines the influence of crude oil price shocks on the macroeconomy with a focus on U.S recessions
The independent variables we plan to use in equation (1) are: Fed Assets accumulated by the 3 rounds of Quantitative Easing (QE) by the Fed, the 10-Year Treasury Note rate, the Price of Copper, the Trade Weighted Dollar Index, the S&P 500 Index and the U.S High Yield Rate
Summary
Global oil prices were stable from 1986 to 2002, fluctuating around $20. the price of oil from 2003 to 2018 varied enormously. In this paper we focus on weekly crude oil spot prices during this volatile period from 2003 to 2018 and propose a financial model to explore these swings. We ask, which of our financial variables can explain the behavior of oil prices during this period of high volatility. Can an economic hypothesis be proposed to explain such notable price changes? Since this period includes the Global Financial Crisis of 2007-09 and the dramatic response of the Federal Reserve with its unconventional monetary policy, these monetary policies are pivotal in the formulation of our financial model. To offer an explanation for these dramatic price changes in oil during the last 18 years, we motivate the discussion of our financial model with a brief literature review . A summary of our findings is given in the last section
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