Abstract
Price fluctuations in crude oil and natural gas, as important sources of energy, have a remarkable influence on our economies and daily lives. Therefore, it is extremely important to react appropriately and to formulate appropriate policies or strategies to reduce the expected negative effects of fluctuations. However, as Kilian suggested, not all oil price shocks are similar; price increases can have diverse impacts on the real price of oil, depending on the underlying determinants of the price fluctuation. Therefore, economists, policymakers, and investors need to decompose real price shocks and evaluate the responses of macroeconomic aggregates to different types of shocks. In this study, we investigate and compare the different effects crude oil and natural gas price shocks have on US real GDP and CPI levels, utilizing a two-stage method based on a structural vector autoregression (SVAR) model proposed by Kilian. We found that a crude oil specific demand shock made larger contributions to the real price of oil than a natural gas specific demand shock did to the real price of gas, and that specific demand shocks in crude oil and natural gas markets had different effects on US CPI inflation and had similar effects on the real US GDP level.
Highlights
Researchers have studied crude oil for many years because it is of major interest as a significant but limited resource
By decomposing historic real prices to check the cumulative contribution from each demand and supply shock to the real price, we found that the cumulative effect of precautionary demand shocks was varying in degree between crude oil and natural gas; the cumulative contribution of an oil-specific demand shock to the real oil prices is larger than the cumulative contribution of a gas-specific demand shock to the real gas prices
By utilizing the regression model to investigate how oil and gas demand and supply shocks that underlie the real price of oil and gas influence US macroeconomic aggregates, we found that precautionary demand shocks on crude oil and natural gas have different effects on CPI inflation and had similar effects on real GDP growth
Summary
Researchers have studied crude oil for many years because it is of major interest as a significant but limited resource. As a relatively environmentally friendly resource and a key fuel for the electrical power and industry sectors, natural gas has attracted increasing attention. Evidence for this increasing attraction comes from the fact that the consumption of natural gas has risen to a share of 23% of total energy resources, and is the fastest-growing fossil fuel among energy resources [1]. Another fact is that the demand for natural gas increased by 4.6% in. It is not difficult to conclude that fluctuations in the prices of crude oil and natural gas greatly influence economic activity and daily life
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