Impact Of Oil Price Volatility Research Articles

The Impact of Oil Price Volatility on Welfare in the Kingdom of Saudi Arabia: Implications for Public Investment Decision-making

Since real oil price is positively correlated with real consumption and domestic income in Saudi Arabia, a risk premium needs to be considered when assessing the net present value of oil-related public investment projects. For projects generating additional oil exports, this risk premium quantifies the cost of increased dependence on oil revenues. For projects transforming oil into products whose prices are less correlated with the Saudi economy, it quantifies the benefit from reducing the aggregate risk. The value of this risk premium depends on expectations about future consumption and oil price. By considering alternative assumptions, we show that over a one-year horizon this risk premium could range between 1.3% and 5% of the expected oil-related cash flow, with higher premia for longer planning horizons. We discuss the implications of these calculations for energy-related public projects in Saudi Arabia and, more generally, for public decision-making in resource-rich countries.

Does Oil Price Uncertainty Transmit to the Thai Stock Market?

This study investigates the impact of oil price volatility (uncertainty) on the Stock Exchange of Thailand. Monthly data from May 1987 to December 2013 are applied to the two-stage procedure. In the first step, a bivariate generalized autoregressive conditional heteroskedastic (GARCH) model is estimated to obtain the volatility series of stock market index and oil price. In the second step, the pairwise Granger causality tests are performed to .determine the direction of volatility transmission between oil to stock markets. It is found that movement in real oil price does not adversely affect real stock market return, but stock price volatility does affect real stock return. In addition, there exists a positive one-directional volatility transmission running from oil to stock market. It is also found that oil price movement and its uncertainty adversely affect two main sub-index returns. These important findings give some implications for risk management and policy measures.

국제유가의 변동성이 한국 거시경제에 미치는 영향 분석 : EGARCH 및 VECM 모형의 응용

국제유가의 변동성이 한국 거시경제에 미치는 영향 분석 : EGARCH 및 VECM 모형의 응용

A Study on the Impact of Oil Price Volatility on Korean Macro Economic Activities : An EGARCH and VECM Approach

A Study on the Impact of Oil Price Volatility on Korean Macro Economic Activities : An EGARCH and VECM Approach

Oil Price Volatility and its Impact on Economic Growth in Pakistan

The main objective of this research is to analyze the impact of oil price volatility on the economic growth of Pakistan. Secondary data from 1973 to 2011 were used to estimate the coefficients. Linear Regression analysis is used to analyze the dependency among the dependant and independent variables. All variable Oil price, Oil supply, oil demand, Gross Domestic production, Public sector investment, private sector investment and Trade balance is stationary at 1st Difference through ADF test. Trade Balance, Private sector investments have a significant effect on Gross domestic production and Public sector investment, Oil price volatility has insignificant impact on Gross domestic production. Government should make a proper plan and procedure according to Pakistan’s economic growth and requirement which would help to maintain the equilibrium of oil demand and supply and decreased the impact of oil price volatility on the economic growth. Meanwhile, the government of Pakistan also focused on its trade balance and also tries to increase private sector investment to increase its economic growth.

Macroeconomic Impact of Oil Price Levels and Volatility in Nigeria

This study investigates the time-series relationship on the impact of oil price volatility on macroeconomic activity in Nigeria using exponential generalized autoregressive conditional heteroskedasticity (EGARCH), impulse response function and lag-augmented VAR (LA-VAR) models. We found evidence that there is a unidirectional relationship exists between the interest rate, exchange rate and oil prices, with the direction from oil prices to both exchange rate and the interest rate. However, a significant relationship between oil prices and real GDP was not found. Our results suggest a potentially important role for energy prices in future research on exchange rate modelling.

Targets to promote energy savings in the Gulf Cooperation Council states

Several Gulf Cooperation Council (GCC) countries are adopting strategies to rationalize domestic energy consumption and thereby save resources vital to their economic sustainability. This paper considers whether national target setting - particularly in terms of energy use against outputs - could help. Intensity targets have proved a popular choice amongst emerging economies. GDP based targets may be more politically acceptable than absolute energy because they allow for periods of high economic growth. Drawbacks for the GCC countries include poor data and the impact of oil price volatility on GDP. Acknowledging the expedient nature of targeting where market reforms will be slow, the paper recommends that GCC countries consider adopting fossil fuels or CO2 intensity targets. For Qatar and Kuwait per capita goals might work best. Saudi Arabia, the United Arab Emirates and Oman could adopt a GDP based goal within a range of percentages to allow for changes in the terms of trade. Contributing to this would be sectoral energy intensity targets -particularly in power generation, space cooling, vehicles and industrial production, for which there is ample potential to set regional benchmarks.

An Econometrics Analysis of Oil Price Volatility

The main objectives of this research are firstly, to determined the variables which may cause the oil volatility. Secondly, to analyze that how much these variables cause the oil volatility. Secondary data from 1973 to 2011 were used to estimate the coefficients. GARCH (1, 1) model is used to analyze the volatility among the variable. Oil price, Oil supply and oil demand are stationary at 1st Difference through ADF test. It is found through Generalized Autoregressive Conditional Heteroskedasticity (GARCH1, 1) that oil demand has a significant effect on the oil price. Government should make a proper plan and procedure according to economic growth and requirement which would help to maintain the equilibrium of oil demand and supply and decreased the impact of oil price volatility on the economic growth. Exploration the oil alternatives that steadily decrease the impact of the oil price volatility, will make potential of the economy stronger to face volatility crisis.

Oil price volatility and the dynamic systematic risk in Kuwait's equity sector portfolio using the Kalman filter approach

The paper investigates the impact of oil price volatility on the dynamics of systematic risk in eight equity sectors for Kuwait. To achieve this goal, it uses the Kalman filter approach to estimate the time-variant systematic risk in those sectors. This approach enables us to study the dynamicity of systematic risk of a portfolio comprised of those sectors during the period 2000-2012. Additionally, the Kalman filter approach estimates the relative importance of the trend the random walk and cycle components of the sectors 'Betas'. The estimated time-variant coefficients (Alpha and Beta) allow for the estimation of the impact of oil price volatility and the financial crises on the systematic risk of the sectors over time.

Oil price shocks and macroeconomic activities: evidence from an oil dependent exporting economy

The upward trend in the global price of crude oil in recent years has led to increasing concerns about its macroeconomic implications especially in developing countries. While empirical research has concentrated on developed and oil importing countries, there is scant research on the impact of oil price volatility on oil-dependent exporting economies. Using quarterly time series data from 1970q1 to 2011q4, this paper analyses the impact of oil price shocks on output and some macroeconomic variables in Nigeria. The findings reveal that oil price shocks have substantial effects on output and other macroeconomic variables in Nigeria. The estimated elasticity of 0.164 suggests that when the real oil price increases by 100%, the real GDP would increase by 16.4%. In addition, real output in Nigeria is positively associated with public expenditure consumption, money supply and imports, and is negatively influenced by real depreciation of the domestic currency. The main policy implication is that in order to mitigate the effect of the continuous swings in oil prices on the Nigerian economy and disruption to development programmes, it is germane that government continues to maintain the national sovereign wealth fund (NSWF) account to stabilise government revenue.

The Impact of Oil Price Volatility on Welfare in the Kingdom of Saudi Arabia: Implications for Public Investment Decision-Making

The uncertainty surrounding the economic growth rate has a social cost, usually determined as the loss of welfare that a representative agent is willing to incur to get rid of fluctuations in his consumption. Though this cost may be negligible in certain economies, this may not be the case for countries whose domestic income depends significantly on the market price of an exported commodity. For public investment decision-making in such countries, this raises the question of the risk premium associated with the price of the exported commodity. In other words, when assessing a public project’s net present value, by which amount do the expected commodity-price-related cash flows need to be adjusted? This risk-premium quantifies the social cost - or benefit - generated by the correlation of these cash flows with economic growth. For projects generating additional commodity exports, the risk premium quantifies the cost of increased dependence on commodity revenues. For projects turning the commodity into products whose prices are less correlated with the economy, it quantifies the benefit from reducing the aggregate risk in the economy. Until now, no empirical assessment of such risk premia could be found in the literature. Our paper assesses the risk premium associated with crude oil price when evaluating public projects in Saudi Arabia. A significant part of the considerations and methodology presented here can be easily transferred to other resource-rich countries, like other OPEC members. Since Saudi Arabia is the world’s largest oil exporter, a considerable portion of its gross domestic income and government revenues depends on the crude oil price. We first examine how past Saudi aggregate consumption and domestic income have been volatile and correlated with crude oil price. In this respect, to become a measure of domestic income, the real GDP has to be adjusted for improvements (or deterioration) in the Kingdom’s terms of trade. A simple framework for public-investment decision making is used to derive the (standard) risk-premium formula. Practical issues for the assessment of the risk premium are discussed. In particular, the risk-premium value depends on expectations about future aggregate consumption and oil price. We show that over a one-year horizon this risk premium could range between 1.3% and 5% of the expected oil-related cash flow, with much higher premia for longer planning horizons. Even if profitable at current oil price levels, public investment opportunities in alternative forms of energy or energy efficiency may therefore be less profitable than might appear at first sight. The magnitude of this risk premium suggests that similar computations should be performed for other resource-rich nations. We discuss the implications of these calculations for energy-related public projects in Saudi Arabia and, more generally, for public decision-making in resource-rich countries.

The Impact of Oil Price Volatility on China’s Economy: An Empirical Investigation Based on VAR Model

China has been in rapid economic growth and industrial structure reform for recent years, and oil, as a most important raw material for industrial production, its price fluctuations have direct impact on energy-intensive industries as well as non-energy-intensive industries and their associated industries’ overall demands. Under the price transmission mechanism, oil price volatility imposes significant influences on economic growth rate, price level, unemployment rate and monetary policy as well. This paper established VAR model among oil prices and economic indicators such as economic growth rate, price level, unemployment rate and monetary policy, and by data processing , stability test and cointegration test, we found that there existed long term stable cointegration relations among these sequences; through Granger Causality test we found that oil price volatility was the Granger cause of the fluctuations of economic growth rate, price level and monetary policy, and meanwhile, changes in economic growth rate is the Granger cause of that in price level. The result of our empirical study indicated that, oil price volatility has a profound influence on China’s economy, and thus, China should improve the establishment of the oil futures market to avoid risks of oil price volatility and secure long-term stability of its economic growth.

The impact of oil price volatility on the macroeconomy in Russia

Since the beginning of the 1980s a large number of studies using a vector autoregressive (VAR) model have been made on the macroeconomic effects of oil price changes. However, surprisingly few studies have so far focused on Russia, the world’s second largest oil exporter. The purpose of this paper is to empirically examine the impact of oil prices on the levels of inflation, real effective exchange rate and real GDP for Russia using the VAR model. The time span covered by the series is from 1995:Q1 to 2009:Q3, giving 59 observations. The analysis leads to the finding that a 1% increase (decrease) in oil prices contributes to the growth (decline) in real GDP by 0.44% in the long run. Likewise, we find that in the short run (4 quarters) rising oil prices not only stimulate inflation and economic growth negatively and positively, respectively, but also induce real effective exchange rate appreciation.

The macroeconomic effects of oil price fluctuations on a small open oil-producing country: The case of Trinidad and Tobago

Using vector autoregressive (VAR) methodology, this paper empirically investigates the macroeconomic effects of oil price fluctuations on Trinidad and Tobago. Overall, we find that the price of oil is a major determinant of economic activity of the country. Our impulse response functions suggest that following a positive oil price shock, output falls within the first two years followed by positive and growing response. We also investigate the macroeconomic impact of oil price volatility. Results suggest that an unanticipated shock to oil price volatility brings about random swings in the macroeconomy; however, only government revenue and the price level exhibit significant responses. With regard to the magnitude of the responses, shocks to oil price volatility tend to yield smaller macroeconomic impacts in comparison to shocks to oil prices. Variance decompositions suggest that the price of oil is a major component of forecast variation for most macroeconomic variables. Finally, Granger-causality tests indicate causality from oil prices to output and oil prices to government revenue.

Interview with Neal Gillenwater

HR Discussion Neal Gillenwater, Senior Vice President, Human Resources, Weatherford International, discusses the impact of oil-price volatility, the economic downturn, and motivation of employees in an uncertain business climate.

Impact of crude oil price volatility on economic activities: An empirical investigation in the Thai economy

This paper empirically examines the impact of oil price volatility on key macroeconomic indicators of Thailand. Following Andersen et al. [2004. Analytical evaluation of volatility forecasts. International Economic Review 45(4), 1079–1110], quarterly oil price volatility is measured by using the realized volatility (RV). The impact of the oil price volatility is investigated using the vector auto-regression (VAR) system. The Granger causality test, impulse response functions, and variance decomposition show that oil price volatility has significant impact on macroeconomic indicators, such as unemployment and investment, over the period from 1993Q1 to 2006Q4. Perron's [1997. Further evidence on breaking trend functions in macroeconomic variables. Journal of Econometrics 80(2), 355–385] test identifies structural breaks in all the concerned variables during the time of the Asian Financial Crisis (1997–1998). A VAR for the post-crisis period shows that the impact of oil price volatility is transmitted to budget deficit. The floating exchange rate regime introduced after the crisis may be the key contributor to this new channel of impact.

Impact of oil price volatility on Gulf Cooperation Council stock markets' return

AbstractThis paper investigates the short and long‐term determinants of Gulf Cooperation Council (GCC) stock markets' volatility. Since GCC countries are major suppliers of oil in world energy markets, their stock markets are likely to be susceptible to change in oil prices. Given that change in oil prices influence observable factors in GCC economies, we show in this paper that unobservable speculative factors drive short term stock market returns. The influence of oil price change on GCC stock markets returns is evidenced in the long‐term.1Long term is defined here as the period of time required for the effect of oil price changes to work out its way to influence major macroeconomic indicators that influence profitability of firms traded in GCC stock markets.

06/00575 The asymmetry of the impact of oil price shocks on economic activities: An application of the multivariate threshold model: Huang, B.-N. et al. Energy Economics, 2005, 27, (3), 455–476.

Using vector autoregressive (VAR) methodology, this paper empirically investigates the macroeconomic effects of oil price fluctuations on Trinidad and Tobago. Overall, we find that the price of oil is a major determinant of economic activity of the country. Our impulse response functions suggest that following a positive oil price shock, output falls within the first two years followed by positive and growing response. We also investigate the macroeconomic impact of oil price volatility. Results suggest that an unanticipated shock to oil price volatility brings about random swings in the macroeconomy; however, only government revenue and the price level exhibit significant responses. With regard to the magnitude of the responses, shocks to oil price volatility tend to yield smaller macroeconomic impacts in comparison to shocks to oil prices. Variance decompositions suggest that the price of oil is a major component of forecast variation for most macroeconomic variables. Finally, Granger-causality tests indicate causality from oil prices to output and oil prices to government revenue.

The Impact of Oil Price Volatility on the Future of the U.S. Economy

This paper examines the impact of a foreign oil price shock on domestic energy markets as well as the U.S. economy as a whole. The analytical approach employed in the analysis consisted of a dynamic CGE model composed of eight production sectors, eight consumption sectors, three household categories classified by income, foreign sector, and the government. The results show that oil price shocks will have, as expected, a significantly positive effect on crude oil production. We also find that such price shocks negatively affect the refinery sector as input costs rise there. A decline in per-well productivity has the effect of dampening the rise in crude oil extraction and causing a further decline in refinery output. Economy-wide, the impact of a new series of oil price shocks is quite limited with overall welfare falling, but nowhere near the levels experienced in the 1970s and early 1980s.

A duration model of irreversible oil investment: Theory and empirical evidence

The aim of this paper is to analyse the implications of the theory of irreversible investment under uncertainty for investment in oil fields on the United Kingdom Continental Shelf (UKCS). We consider the problem of an operator who owns a licence to develop and extract oil from a field of known capacity. An intertemporal optimization model in discrete time is developed to derive decision rules for the timing of the irreversible development investment and for the optimal rate of extraction. Model simulation is then used to describe the properties of the numerical solutions. The predictions of the theory on the determinants of the irreversible investment decision are then examined using statistical duration analysis. Data on the length of the time period between discovery and development are available for individual fields on the UKCS. We measure the duration of the irreversible investment gestation lag for each field and test the model by assessing the significance of the theoretical variables in explaining the significance of such a lag. Both our theoretical model and our empirical results suggest the importance of a nonlinear interaction of the level of oil prices and the volatility of oil prices in determining the development lag. The simulation of our theoretical model shows a nonlinear impact of oil price volatility on the trigger level of oil prices. Our empirical results suggest that the effect of price volatility is a function of the expected price level, with increased price volatility having a positive impact on the duration of investment appraisal when expected prices are low and a negative impact when they are high.