Oil Demand Shocks Research Articles

The asymmetric and dynamic effects of oil price shocks and geopolitical risks on carbon prices in China

ABSTRACT This paper investigates the asymmetric and dynamic effects of oil price shocks and geopolitical risks (GPR) on carbon prices in China. We address this issue using a quantile framework, incorporating the quantile autoregressive distributed lag (QARDL) approach, rolling window QARDL and the quantile Granger causality test. Empirical findings indicate that in the long term, oil risk and supply shocks positively impact carbon prices in bullish markets, while oil demand shocks affect normal and bearish markets. GPR significantly drives carbon prices across all quantiles, except the 0.8 quantile, with the strongest effect observed in extremely bullish markets. In the short term, oil shocks and GPR have a similar but stronger influence. Additionally, both the short- and long-term effects of oil price shocks and GPR vary over time. The ‘camel-hump’ shape of the causality further validates the asymmetric causal effects of oil price shocks and GPR on carbon prices. These findings provide valuable insights for portfolio managers and policymakers, emphasizing the importance of adopting a quantile-based approach to risk management, rather than focusing solely on average effects.

Asymmetric impact of oil structural shocks on non-ferrous metals supply chains: A groundbreaking multidimensional quantile-on-quantile regression

This paper examines the predictability of various oil price shocks on the returns of non-ferrous metals from the supply and demand sides in the US, UK, and China under different market conditions. An innovative multidimensional quantile-on-quantile (MD-QQ) regression approach is proposed to address this topic, which extends traditional univariate QQ regression to multivariate cases, addressing the limitation of omitted variables in the benchmark QQ method. The findings reveal that the forecasting of oil supply shocks on the non-ferrous metal supply chain is generally insignificant. Nevertheless, oil supply shocks will transmit negative (positive) actions when the non-ferrous metal supply-side (demand-side) is in a bear (bull) market. The implication of oil demand shocks on the non-ferrous metal supply chain is generally positive, while the supply-side market of Chinese non-ferrous metals displays mutability in response to oil demand shocks under certain extreme market conditions. Conversely, oil risk shocks have a negative impact across the entire non-ferrous metal supply chain. Their effects are more pronounced when the non-ferrous metal demand market is bearish, exhibiting asymmetric characteristics. Oil demand shocks and risk shocks have a stronger impact on non-ferrous metal supply chains in the US and UK than in China. Our research not only confirms the estimation bias caused by missing variables in traditional baseline models but also provides new insights into the connection between the non-ferrous metals and oil markets by adopting the fresh method.

Time-varying effects of structural oil price shocks on financial market uncertainty

This study employed the structural oil price decomposition method proposed by Ready (2018) to decompose oil price shocks into oil risk shocks, demand shocks, and supply shocks. By using the Diebold and Yilmaz (DY) spillover index and rolling window methods, the static and dynamic spillovers of structural oil price shocks on financial market uncertainty were examined. The findings suggest that oil risk shocks exhibited the strongest spillover effects on financial market uncertainty (except for South Africa), followed by oil demand shocks, while oil supply shocks had virtually no impact. Second, the effects of structural oil price shocks on financial market uncertainty were time-varying. Third, significant differences in the spillover effects of structural oil price shocks on financial market uncertainty were found across countries, and the spillover effect of oil risk shocks on the financial market uncertainty in the United States was the largest in all periods. Fourth, the spillover effects of oil demand shocks on financial market uncertainty were larger in the high than in the low oil price period (except for Japan). Finally, during the COVID-19 (coronavirus disease) pandemic compared with the pre-epidemic period, the spillover effects of oil risk shocks on the financial market uncertainty in China significantly decreased, while simultaneously, the spillover effects of oil supply shocks on the financial market uncertainty in Australia substantially increased.

Statistical Identification of Independent Shocks with Kernel-based Maximum Likelihood Estimation and an Application to the Global Crude Oil Market

Independent component analysis has emerged as a promising approach for revealing structural relationships in multivariate dynamic systems, particularly in scenarios with limited knowledge of causal patterns. This article introduces a robust kernel-based maximum likelihood (KML) estimation method that accommodates the distributional characteristics of the structural sources of data variation. Our Monte Carlo study demonstrates the superior performance of the KML estimator compared to existing approaches for independence-based identification. Moreover, the proposed method enables partial identification and dimension reduction even in the presence of dependent shocks. We illustrate the benefits of our approach by applying it to the global oil market model of Kilian, highlighting its ability to capture unmodeled higher-order dependence between oil supply and speculative oil demand shocks.

Are All Shocks Alike? Evidence From the Effects of Oil Shocks on Military Expenditure in Nigeria

This study investigated the asymmetric effects of oil shocks–oil price, oil demand and oil supply shocks–on military expenditure in Nigeria. Our study confirmed the presence of short-run and long-run asymmetries in all the three models used. Generally, positive oil price and demand shocks positively influence military expenditure and vice versa for negative shocks. However, a positive oil supply shock is detrimental to military expenditure.

Not all oil shocks are alike and symmetric for economic growth: evidence from Korea

ABSTRACT This study’s primary contribution lies in conducting a comprehensive evaluation of how oil supply and demand shocks affect Korea’s economic growth, particularly emphasizing the role of uncertainty in global trade policies. Our research is primarily motivated by the desire to comprehend how various oil-related shocks impact a highly oil-import-dependent advanced economy like Korea, especially amid the fluctuating landscape of global trade policies. Employing a multi-step methodology that includes Structural Vector Autoregression (SVAR), Autoregressive Distributed Lag (ARDL), and Nonlinear ARDL models, we delve into an extensive analysis spanning from 1998:Q1 to 2021:Q4. Our findings reveal that Korea’s economic growth is primarily influenced by aggregate and oil-specific demand shocks rather than oil supply shocks in the short and long term. Additionally, we observe an asymmetric influence of aggregate demand and oil-specific demand shocks on Korea’s long-term growth. However, such asymmetry is not evident across these three shock types in the short term. Lastly, we underscore the significant role of global trade policy uncertainty in assessing the impact of oil prices on Korea’s economic expansion. Our study’s unique focus on oil supply and demand shocks alongside policy uncertainty distinguishes it, emphasizing its distinct contribution to the field.

Do demand and supply shocks in the global crude oil market exhibit asymmetric effects on exchange rates in 13 Asian economies?

ABSTRACT This article investigates whether there are asymmetric effects of oil supply, aggregate demand, and oil-specific demand shocks on exchange rates in 13 Asian economies. We also take into consideration the impact of uncertainty in world trade policy. We provide compelling evidence that supports the presence of long-term asymmetry in at least one of the oil supply and oil demand shocks for the currencies of selected Asian economies. However, we do not find any evidence of short-term asymmetry effects for any of the three oil shocks. Hence, the observed asymmetries in oil supply and demand shocks are considered a phenomenon that occurs over the long term for Asian currencies. Lastly, our findings emphasize the significant role of uncertainty in world trade policy in explaining both long-term and short-term fluctuations in Asian currencies.

Examining the nexus between oil shocks and sovereign credit risk: Multidimensional insights from major oil exporters

This paper investigates the frequency and quantile connectedness between oil market shocks and sovereign credit risk of seven major oil exporting countries: Saudi Arabia, Russia, the United Arab Emirates, Norway, the United States, Brazil, and Mexico. We apply the time-domain approach of Diebold & Yılmaz (2012), the frequency-domain approach of Baruník & Křehlík (2018), and the quantile-based connectedness approach of Ando et al. (2018). Empirical results indicate that (i) spillover effects vary significantly across different investment horizons, with Mexico, Brazil, and Saudi Arabia emerging as key transmitters of credit risk volatility, (ii) the United Arab Emirates consistently appears as a major net receiver of these risks, highlighting its vulnerability to external shocks, (iii) in both short-term and long-term horizon, demand shocks stand out as the most influential determinants of volatility in sovereign credit risks, and (iv) during periods of heightened credit risk perception, the exacerbating role of oil demand shocks becomes more pronounced..

Does the source of oil price shock matter for Indian sectoral stock returns? A time-frequency approach to analyse dynamic connectedness and spillovers

ABSTRACT This paper examines the connectedness and spillovers between decomposed oil shocks and Indian sectoral equities in a time-frequency domain using the most recent Barunik and Krehlik (2018) approach. Our empirical results show that the oil demand shock is the major spillover transmitter across all time horizons followed by the risk shocks; while oil supply shock appears to be a net receiver in all the frequency bands indicating the differential impact of oil shocks. Among the sectors, Basic Materials and Finance receive the highest spillovers from oil shocks in the short-term; while Consumer Discretionary Goods & Services and Industrials join the list in the medium- and long-term. FMCG, Health, Telecom and IT sectors receive the least spillovers in all the bands, making them apt for investments during periods of high volatility. Our empirical results are robust to the application of the alternative TVP-VAR time-frequency parameter framework. The portfolio analysis shows that inclusion of stocks in Oil and sectors like Metal and Telecom significantly reduces the portfolio risk. Dynamic connectedness analysis reveals that the spillovers dramatically increase during times of extreme turmoil, especially during the Global Financial Crisis (2008–2009) and the COVID-19 pandemic. Policy implications of our empirical results are also discussed.

Extreme co-movements between decomposed oil price shocks and sustainable investments

This paper investigates the extreme co-movements between three types of decomposed oil price shocks, e.g., supply shock, demand shock, and risk shock, and sustainable investments, using the generalized extreme value - autoregressive conditional Fréchet - tail quotient correlation coefficient (GEV-AcF-TQCC) analytical framework. The empirical results have identified that there are regular extreme co-movements between the three types of oil shocks and sustainable investments under extreme market conditions, especially, during the 2014–2016 oil crisis, the COVID-19 pandemic and the event of negative oil prices in 2020, according to the dynamic tail quotient correlation coefficient (TQCC) method. Specifically, the upside and downside trends of supply shocks, the downside trend of demand shocks, and the upside trend of risk shocks act as transmitters of the tail risks between oil prices and sustainable investments. The results also have demonstrated that the tail risk indexes for both the upside and downside trends of decomposed oil price shocks and sustainable investments have time-varying and asymmetric characteristics. Additionally, the static TQCC results have validated that among the three types of oil shocks, demand shocks exhibit the most pronounced tail risk spillover effects on sustainable investments, followed by supply and risk shocks, whose tail risk spillovers are close to each other. A series of alternative analyses ensure the robustness of the findings presented in this paper, which can offer valuable guidance and insights to policymakers and financial investors.

Understanding the Dynamics of Oil Price Shocks and Stock Market Volatility in Pakistan: A Non-Linear Approach during COVID-19

Purpose: This article examines the complex relationship between oil price shocks and stock market volatility in Pakistan during the COVID-19 outbreak. Design/Methodology/Approach: The study used a Non-Linear Autoregressive Distributed Lag (NARDL) model to meticulously explore how oil price fluctuations, specifically supply and demand shocks, affect Pakistan's stock market. Monthly data sets from 2020 to 2022 were utilized for the analysis. Research Findings: The study's significant findings reveal that oil price shocks, except for a demand shock specific to the oil industry, have varying long- and short-term effects on stock market volatility, leading to asymmetry. This asymmetrical impact of oil supply and demand shocks on stock market volatility is confirmed, with no asymmetry observed from oil-specific demand shocks in the short term. These findings hold crucial implications for policymakers and investors in understanding and managing the economic dynamics of Pakistan post-COVID-19. Theoretical Contribution/Originality: This research stands out for its originality in understanding Pakistan's economic dynamics post-COVID-19. It provides unique insights for policymakers and investors to navigate future uncertainties related to oil price changes and market volatility, thereby sparking new avenues of thought and action in the field. Implications/Originality/Value: The practical implications of this study's findings empower policymakers and investors to make informed decisions to stabilize Pakistan’s economy after the pandemic. Specifically, the research provides guidance on managing the behaviour of stakeholders and banks in response to oil shocks, thereby contributing to the economic resilience of the country.

Can a boost in oil prices suspend the evolution of the green transportation market? Relationships between green indices and Brent oil

The research aims to answer whether the increases in oil prices can hinder the development of the alternative fuels market and green transportation modes. On the one hand, the growing oil prices encourage individuals to choose alternative transport modes. Conversely, the boosts in oil prices attract investors to the oil market instead of alternative fuels. We analyse the relationships between oil and green indices related to widely-understood transport during the period from 2018 to 2022. We investigate factors that affect these relationships, distinguishing between fundamentals and speculation. We discover that the fundamental factors are crucial in shaping the correlation between Brent and green indices. In two of the three analysed cases, the correlation was constantly positive during the studied period, which means that the indices grew together with Brent prices. We show that the effect of increasing oil prices can be twofold — depending on the origin of the change. It can contribute to the interest in alternative transport growth if it results from oil demand shocks driven by economic activity. However, a boost in oil prices following positive oil consumption demand shocks or expectations about the increases of future oil prices can cause capital outflow from the alternative transportation market.

Unraveling the structural sources of oil production and their impact on CO2 emissions

In this study, we examine the structural short- and long-run effects of oil supply and demand shocks on the production of crude oil. Among these, oil supply shocks are the major determinant of oil production. Furthermore, we adopt local projections to elicit that oil supply and aggregate demand shocks are significant drivers of CO2 emissions, whereas oil-specific demand shocks have only limited impact on overall emissions in the short-, mid-, and long-term. These findings underscore the limitations of current demand-side policies within a selected group of countries, emphasizing the necessity for global support and binding commitments to effectively reduce emissions from oil production and meet the climate targets set by the Paris Agreement in 2015.

The asymmetric impact of oil market shocks on the time-varying connectedness and spillover of financial stress

ABSTRACT Applying a novel time-varying parameter VAR (TVP-VAR) extended joint connectedness approach this study first examines the connectedness and spillover of financial stress among twelve large Asian economies. The finding shows that the usually high connectedness of the financial stress among these economies was further elevated during the Asian financial crisis and global financial crisis but not significantly during COVID-19 pandemic. The direction of spillover depends on the level of economic development. Developed economies such as South Korea, Singapore and Hong Kong are significantly net transmitters of financial stress to other Asian economies whereas countries such as Pakistan and Indonesia are significantly net receivers. Applying linear and non-linear Markov-switching models this study further examines the impact of oil-supply, and consumption- and speculation-led oil-demand shocks on the dynamic connectedness of financial stress indexes. In the linear model only a speculation-led increase in demand for oil increases the connectedness. However, the Markov-switching model reveals that in the high-volatility regime all types of oil shocks influence the connectedness of the financial stress among these economies. This emphasizes the elevated role of oil market in transmitting financial stress across economies during the time of economic turmoil.

Does Crude Oil Production Respond Differently to Oil Supply and Demand Shocks? Evidence from Alaska

The paper conducts extensive research on how Alaska’s oil production is affected by shocks in oil supply, aggregate demand, and oil-specific demand under both symmetric and asymmetric scenarios. We demonstrate that employing an empirical model with the inclusion of an asymmetric assumption provides a more suitable approach for comprehensively understanding the short and long-term impacts of various oil shocks on Alaska’s oil production. We also find that Alaska’s oil production is significantly affected by oil supply and aggregate demand shocks over both short and long periods, whereas oil-specific demand shocks have a minimal impact. Finally, our research identifies asymmetric effects in the long term, particularly concerning the influence of aggregate demand and oil-specific demand shocks on Alaska’s oil production. However, no asymmetric effects are observed for the three oil shocks in the short term.

Oil shocks and financial stability in MENA countries

We examine the link between financial stress and three sources of commodity fluctuations in MENA countries, namely: (i) oil demand shocks; (ii) oil supply shocks; and (iii) (financial) risk shocks. To do so, we use a novel quantile coherency approach and daily data for 11 MENA countries, thus, improving upon the existing studies that typically rely on single-frequency and time-frequency dependence. As a result, we are able to capture both varied market conditions and different investment horizons. We find that financial stress is particularly acute during extreme oil demand and oil supply shocks, especially at longer horizons and for oil rich/exporting countries. By contrast, (financial) risk shocks appear to be more prominent in generating financial stress at relatively shorter horizons, regardless of the quantiles of the distribution, and for economies with deep and globally integrated financial markets. This empirical evidence can have strong implications for policymakers in the region, as well as portfolio managers.

Inflationary oil shocks, fiscal policy, and debt dynamics: New evidence from oil-importing OECD economies

Appropriate fiscal and monetary policies are essential for mitigating the surging inflation caused by post-Covid 19 commodity price shocks, whilst minimizing real output losses. Considerable attention, however, has focused on the implications for monetary policy but somewhat neglected the fiscal dimension. By estimating Proxy-VARs we study the impact of inflationary oil supply and demand shocks on the dynamics of the fiscal balance and public debt in seven oil-importing OECD economies and the Eurozone bloc. The results indicate that fiscal balances actually increase in the medium-term following an inflationary oil shock, and public debt-to-GDP ratios fall. A key implication is that policy makers have more fiscal space than typically assumed, and will run the risk of an excessively contractionary macroeconomic policy stance if they do not account for this increase in the fiscal balance following inflationary oil shocks.

Frequency spillovers between oil shocks and stock markets of top oil-producing and -consuming economies

Motivated by large oil price swings, high economic and geopolitical uncertainties, and the financialization of oil, this paper examines the frequency spillovers and co-movements between oil shocks (risk and demand) and the stock markets of top oil-producer and consumer countries, namely, Canada, China, Russia, Saudi Arabia, and the US. The analysis uses the time-domain spillover index of [1], the frequency-domain spillover of [2]; and the wavelet coherence approach. The findings reveal that spillovers run from the U.S., Canada, and, to a lesser extent, Russia to oil shocks. On the other hand, oil shocks, Saudi Arabia, and China constitute net receivers of shocks. The intensity of spillovers is heavier in the short-term frequency than in the intermediate- and long-term. Furthermore, the direction of spillovers is more defined in the long-term. The U.S. stock market exerts a strong impact on oil risk in general, but the impact is stronger in the short-term. Conversely, an oil demand shock is susceptible to innovations from Canada and Russia that are stronger in the long-term. This means that oil risk shock stemming from innovations in financial markets is short-lived and dissipates quickly due to quick reactions from market participants. On the contrary, long-term links characterize the relationship between oil demand shock and financial markets, mirroring the macroeconomic nature of the linkages. Finally, while the 2008 crisis, EDC, oil price crash, and the COVID-19 pandemic coincided with strong spillovers in the short-term, the COVID-19 era was marked by higher spillovers in the long term. The findings provide important information for investors and policymakers in terms of diversification, risk management, and efforts to mitigate contagion.

The Impact of International Oil Price Shock on China's Economic Growth

This article takes the impact of international oil price shocks on China's economic growth as the research object, and studies the impact mechanism of international oil price shocks on China's economic development status, providing practical value for the formulation of relevant policies in China. This article selects monthly data from January 2007 to December 2023 as the research interval, and uses the SVAR model to decompose the changes in international oil prices into three different sources of structural oil supply and demand shocks, namely oil supply shocks, oil total demand shocks, and oil specific demand shocks. The research results show that overall, the impact of international oil price shocks on China's economic growth is relatively low. International oil price shocks will have a negative impact on China's economic growth, and the average contribution of the three structural oil supply and demand shocks to China's economic growth does not exceed 13.1%. The impact of specific oil demand shocks on China's economic growth is the greatest, followed by oil supply shocks and total oil demand shocks, which indirectly reflect that China's economic growth is mainly influenced by its own factors.

Identifying oil price shocks with global, developed, and emerging latent real economy activity factors

SummaryThis paper proposes an identification strategy for international oil price shocks while accounting for the heterogeneous sources of oil demand from global, developed, and emerging economies. Unlike existing works, we isolate global oil demand shocks, associated with a global real economic activity factor, from oil demand shocks originating specifically from developed and emerging economies, associated with real economic activity factors within these two groups of economies. The paper uses a structural factor‐augmented vector autoregression (FAVAR) model with latent global and specific factors to model crude oil demand and supply. To identify the shocks, we extract real economic activity factors from a large panel of emerging and developed economies' real activity variables using a two‐level factor model. The paper shows how structural shocks can be identified by solving equations that arise from economically meaningful zero restrictions on the impact matrix of the reduced‐form FAVAR model innovations. The empirical application shows that identifying the international oil demand shocks based on the global and specific latent factors is essential to appropriately quantify their heterogeneous impacts on these factors, the crude oil production, and the real oil price.