Oil Price Regime Research Articles

THE EFFECT OF CRUDE OIL PRICE VOLATILITY ON INFLATION IN INDIA: EVIDENCE FROM ARDL APPROACH

India has been experiencing the issue of rising crude oil prices since 2017, after a low-price regime from 2014 to 2017. Inflation was also moderate during the low-crude oil price regime. It has been empirically seen that a rise in crude oil prices exerts a significant impact on the inflationary situation of the nation. Rising oil prices and their spillover into higher general price levels might exacerbate the crisis in a nation that is already struggling with the declining demand for investment and consumption. The domestic oil price needs to be controlled by the government to boost demand while controlling inflation without putting further stress on the populace. Against this background, the present research aims to investigate the relationship between the crude oil price and the inflation rate in the nation using the data from 1991 to 2020 (before Covid years). This paper also aims to investigate the effect of crude oil prices and inflation on economic growth in India. The paper has used an Autoregressive Distributed lag model to investigate the long-run and short-run association between them. Our analysis shows that the prices of crude oil have a statistically significant impact on India’s inflation rate over the long and short terms. KEYWORDS: Inflation, Crude oil price, India, Spillover, ARDL, Granger Causality, GDP

A Markov Switching Approach in Assessing Oil Price and Stock Market Nexus in the Last Decade: The Impact of the COVID-19 Pandemic.

We revisit the oil price and stock market nexus by considering the impact of major economic shocks in the post-global financial crisis (GFC) scenario. Our breakpoint unit root test and Markov switching regression (MRS) analyses using West Texas Intermediate (WTI) oil price and Standard & Poor's 500 (S&P 500) market index show that among the major economic events, the recent coronavirus (COVID-19) pandemic is the most significant contributor to market volatilities. Furthermore, our MRS results show that the relationship between oil price and the stock market is regime-dependent; the stock market experiences substantial and positive shocks in a volatile oil price regime. Our results provide valuable insights to investors and policymakers regarding risk management and financial market stability during economic crisis periods, specifically during the COVID-19 pandemic.

Energy market dynamics and the role of fiscal policy in oil‐exporting countries: a TVAR approach

AbstractWhile realising the macroeconomic significance of oil price fluctuations, this research examines the role of fiscal policy under changing dynamics of energy market for selected oil‐exporting countries. We specify a non‐linear threshold structural vector autoregression model which constitutes policy variables such as general government expenditures and primary fiscal balance and macroeconomic indicators such as real GDP growth and the inflation rate. To capture the energy market dynamics, this research selects Brent crude oil price as threshold variable and segregates the sample period 1991‐2019 as ‘high’ and ‘low’ oil price regimes. While using non‐linear generalised impulse response functions, we find that under higher oil price regime, an increase in government expenditures and reduction in fiscal deficit have larger multiplier effect to enhance output growth in most of the sampled countries. In addition, this research identifies larger inflationary effects of an increase in government expenditures and fiscal deficit under higher oil price regime for all countries except Canada. However, under a higher oil price regime, a fiscal deficit induced output growth, and under a lower oil price regime, a reduction in government expenditure brings inflation in Saudi Arabia. Furthermore, this research provides an alternative measure of threshold crude oil price for the sampled countries to their accounting‐based concept of fiscal break‐even price.

On the Nonlinear Impact of Oil Price Shocks on the World Food Prices Under Different Markets Conditions

This paper investigates the impact of oil price shocks on the world food prices. We use the structural VAR model to disentangle oil price shocks into supply, aggregate demand, and oil-specific demand-driven shocks. Moreover, we employ a new approach based on the Markov regime-switching quantile regression (MRS-QR) model to investigate the response of food prices to different oil price shocks. Based on monthly data from 1992 to 2018, results show that the reaction of food prices to different structural oil shocks depends on the oil price regimes and varies in significance, sign, and size throughout the food market conditions. Besides, the increases in regression coefficients and smoothed probability during food and oil crisis periods confirm the existence of contagion effects between oil and food markets. Moreover, we find that the supply and aggregate demand shocks do not show a strong contribution to the presence of this phenomenon. Conversely, oil-specific demand shocks represent the main factor that contributes to contagion between oil and food markets.

OPEC+’s 'Reasonable Oil Price Level' Notion and the External Breakeven in Saudi Arabia, Russia and Canada: Accounting for Economic Cycles and Pipeline Politics

OPEC+ has set a goal of establishing a stable oil market and achieving a reasonable oil price that benefits all industry stakeholders and the global citizenry. But what price is reasonable? We examine the effect of the oil-price threshold on external balances with the aim of evaluating a country’s ability to finance its external deficits. The results would enable policy makers to gauge the outcome of Saudi-Russian led negotiations which affects the global economy and high cost oil producers. Building on Gnimassoun et al.’s (2017) work, we adopt a macroeconomic approach to explore the impacts of pipeline politics and geopolitics and account for cyclical movements using threshold analysis. Results show that a reasonable oil price is greater than USD 61–65/barrel for Saudi Arabia, USD 57–58/barrel for Russia, and USD 74–76/barrel for Canada. Russia has been able to weather the effects of Western sanctions and pipeline politics. In Canada, an increase in oil prices provides benefits that overcome “Dutch disease” under a high oil-price regime, but not under a low oil-price regime; the low oil-price regime accentuates challenges the oil sector faces; and the high oil-price regime reveals the need for policies to achieve macroeconomic energy security.

Modeling the relationship between oil and USD exchange rates: Evidence from a regime-switching-quantile regression approach

In this paper, we investigate the impact of oil price changes on exchange rates in some oil-related economies. Financial contagion effects during recent oil price shocks are also examined. We employ a novel approach based on the Markov regime switching -quantile regression model to allow oil prices to switch between different regimes. Our results show that the impact of oil price changes on exchange rate markets varies in significance, size, and sign through the distribution of exchange rate returns. Furthermore, the response of currency markets to oil price fluctuations changes among countries and oil price regimes, and are stronger during high volatility regimes. Moreover, financial contagion is detected during the oil price shock of 2007 by the dramatic increase of interdependence between oil and all currency markets, except for Japan. However, during the mid-2014 oil price collapse, contagion effects are detected only for the Australian currency market.

Oil price regimes and their role in price diversions from market fundamentals

Speculative bubbles, market governance and property rights are thought to affect oil prices, but their timing and magnitude are uncertain. Here, we quantify these effects using econometric techniques that identify periods between 1938:1 and 2018:3 (denoting year:quarter) when prices strayed from the levels implied by market fundamentals. We identify nine price regimes that are associated with the Organization of the Petroleum Exporting Countries gaining control over the marginal supply of crude oil, US energy legislation, a precautionary demand shock, the Arab Spring and speculative bubbles. These bubbles raised real oil prices by US$14.31 and US$4.65 per barrel in 2007:4–2008:3 and 2010:1–2011:1, respectively, which transferred US$42.8 billion from US consumers to US oil producers and US$87.4 billion from the US economy to oil exporting nations. Conversely, some sharp changes, such as the price decline associated with the Asian financial crisis, can be explained by market fundamentals. Oil prices are thought to be affected by speculation but the exact impact of speculation on price is not known. Kaufmann and Connelly quantify this effect and identify its beneficiaries by building a price model based on supply and demand, market fundamentals and associating deviations with historical geopolitical events.

Oil Price Dynamics and Currency-Hedging Behavior: Out-of-sample Appendix

In a recent paper, Agudze and Ibhagui (2019) showed that for Korea, a major crude oil importer, the dollar-won cross-currency basis tends to tighten when oil prices increase. They argued that this positive relation stems from importers’ increased propensity to currency-hedge, that is to buy the dollar forward, when oil prices are in a high regime. They estimated this high oil price regime to have a median lower bound of $55. Much below this bound, such as the sub $40 oil prices that are being observed in the market in recent times, they noted that this meant oil prices have transitioned to a low-price regime. Under this regime, they argued that the propensity for oil importers to currency-hedge becomes substantially diminished. As a result, the dollar-won basis no more bears a positive and significant relation with oil prices. Interestingly, under the low price regime, they found evidence that the relation turns negative, so that a rise in oil prices goes together with wider dollar-won basis rather than the tighter dollar-won basis documented under the high price regime.

Period specific volatility spillover based connectedness between oil and other commodity prices and their portfolio implications

This paper analyses the changing impact of oil price shocks on a bouquet of metal and agro prices and their implications for investment decisions, during different oil price regimes, separated by structural breaks. Endogenously identifying the structural breaks, we use network analysis to decipher the nature and extent of such shock transfer across different sub periods. We suggest optimal portfolios based on conditional variance estimates to hedge oil shocks during each period. This is the first study to analyse the portfolio decisions during specific oil price regimes. The results are of significant interest to investors and policy makers.

Nexus of Oil Price Pass-Through and Exchange Rate: Evidence from US and China

Due to technological innovation and energy consumption growth in recent years, US and China become increasingly important players in the world crude oil market and are growingly exposed to not only supply and demand shocks but also foreign exchange risks. To better understand the nexus of crude oil prices and exchange rate, we construct a nonlinear vector autoregressive model to investigate the nonlinear and asymmetric relationships among the US and China’s crude oil prices and the RMB-dollar exchange rate. This study finds that the interactions between US and China’s crude oil prices and the effect of exchange rate on oil prices are time-varying and, more importantly, dependent on oil price regimes. The reform of China’s exchange rate system has significantly impacted the dynamic relationship by enhancing China’s influence on the oil pricing in the world market.

The impacts of oil price shocks on small oil-importing economies: Time series evidence for Liberia

This study reviews the relevant literature on oil price impacts and then applies both asymptotic and bootstrap distribution techniques to model various oil price shocks and to subsequently evaluate their impacts on key macroeconomic variables in Liberia.First, we find that different oil shock measures yield different effects. Second, asymmetries in oil price exist and can be explained by Liberia's lack of structured financial markets and tight monetary policy controls. Third, the impact of oil shocks on all variables is limited to the short-run. Fourth, unlike most developed economies, falling oil price regimes yield no benefits to economic growth in the short-run, but rising oil prices appear to stimulate the Liberian economy.Therefore, we argue that when oil price increases in Liberia, the high costs of reallocating resources from oil-intensive sectors lead to labor intensiveness; whose contribution to Liberian GDP by far exceeds that of oil. Hence, a general insight from the study is that where substitution possibilities exist, rising oil prices lead to high labor and capital intensity and could have off-setting effects depending on the contribution of these factors to GDP. Thus, falling oil price regimes in Liberia should witness policy measures aimed at boosting the service sector.

Optimal Subsurface Appraisal: A Key Link to the Success of Development Projects-Few Examples

During exploration and production phases, the life of a hydrocarbon field can be distinguished by five main stages: Exploration, appraisal, development, production and abandonment. Of particular interest is the appraisal stage, where billions of dollars are spent across the oil and gas industry on data gathering activities with a view to reducing subsurface uncertainties towards optimizing reservoir development and management. However, very limited attention is often paid to assessing the Value of Information (VOI) during data acquisition requirement planning, before requesting for such information. Appraisal, when conducted optimally, leads to informed sequential decisions resulting in a development plan that optimizes cost, hydrocarbon recovery and attempts to maximize Net Present Value (NPV). On the contrary, suboptimal appraisal, either in the form of under, or over appraisal, impacts project economics. Individual oil and gas companies use their own strategies, procedures and metrics to optimize subsurface appraisals and safeguard profitability and hence there are no industry standards. The capital intensiveness of the industry and emerging low oil price regime has necessitated scrutiny on every dollar spent on data gathering in the current business terrain. Appraisal should be optimized by way of case specific activity of data acquisition to ensure project deliverability under maximum residual uncertainties achieved by minimum appraisal cost. To ensure that the appraisal strategy is value driven, an effort has been made to briefly recapitulate the different components of appraisal strategy necessary for appraisal framing and evaluation workflow. The appraisal locations selection and their sequencing combines uncertainty reduction, probability of success with VOI technique to determine the number of appraisal wells, their sequence of drilling and their justification that is based on economic merit. The effectiveness of this systematic approach has been illustrated through some real field examples. This workflow along with periodic look-back analysis, during appraisal to development phases, has proven to be highly useful for (1) improving the understanding of geological model; (2) assess VOI from appraisal; (3) reduce subsurface uncertainties and (4) improve decision quality and whole cycle project economics.

Hedging Gone Wild: Was Delta Air Liness Purchase of Trainer Refinery a Sound Risk Management Strategy?

In April 2012, Delta Air Lines announced it would purchase the mothballed Trainer oil refinery in eastern Pennsylvania in order to secure access to a local supply of jet fuel and more broadly to incorporate the refinery’s output into Delta’s fuel hedging and risk management strategy. This unique vertical integration experiment was widely derided at the time, but we assess whether the policy has been value-enhancing over the four years since, and conclude it generally has been so. In particular, we find that: (1) the purchase announcement generated positive abnormal returns in stock and bond markets, (2) given the dynamics of jet and crude oil prices, Trainer has a significant potential to reduce Delta’s fuel cost variability, (3) Delta has significantly less equity exposure to the jet fuel crack spread than other airlines’ in the post-acquisition period, (4) Delta’s bond yield spreads and new loan spreads fell relative to its peers in the post-acquisition period. Given the very small price Delta paid for the Trainer refinery–$150 million plus $270 million in subsequent capital investment – and the fact that the benefits detailed above have accrued to Delta in both high and low oil-price regimes, we conclude this policy has proven beneficial.

Impact of Energy Consumption, GDP & Fiscal Deficit on Public Health Expenditure in India: An ARDL Bounds Testing Approach

The purpose of this paper is to explore the impact of energy consumption (EC), fiscal deficit (FD) & gross domestic product (GDP) on public health expenditure (PHE) in the country. The data for this study is taken for the time period 1971-2011. Autoregressive distributed lag (ARDL) has been used to test for presence of cointegration among the variables while vector error correction model (VECM) has been employed to determine the direction of causality. The results reveal the presence of long run causal relationship between EC, FD & GDP and PHE while in the short run; only GDP was found to be significantly causally related to health expenditure. There are clear policy implications of our results. There has to be a reduction in the energy that we import from abroad as lot of our revenue goes into these imports. Similarly, the government will have to move towards deregulating the oil price regime and better targeting of subsidies to reduce the burden on the fiscal situation of the country. Also, the indigenous non-renewable resources should be developed as substitutes for oil. These steps will save government finances that can be invested in improving the situation of healthcare in the country.

Impact of Energy Consumption, GDP & Fiscal Deficit on Public Health Expenditure in India: An ARDL Bounds Testing Approach

The purpose of this paper is to explore the impact of energy consumption (EC), fiscal deficit (FD) & gross domestic product (GDP) on public health expenditure (PHE) in the country. The data for this study is taken for the time period 1971-2011. Autoregressive distributed lag (ARDL) has been used to test for presence of cointegration among the variables while vector error correction model (VECM) has been employed to determine the direction of causality. The results reveal the presence of long run causal relationship between EC, FD & GDP and PHE while in the short run, only GDP was found to be significantly causally related to health expenditure. There are clear policy implications of our results. There has to be a reduction in the energy that we import from abroad as lot of our revenue goes into these imports. Similarly, the government will have to move towards deregulating the oil price regime and better targeting of subsidies to reduce the burden on the fiscal situation of the country. Also, the indigenous non-renewable resources should be developed as substitutes for oil. These steps will save government finances that can be invested in improving the situation of healthcare in the country.

The impact of oil price regimes on construction cost in Nigeria

Construction costs in Nigeria are often high and unpredictable. The pattern of variability is not explained by inflationary indices of common goods and services, but rather it is reactive to boom‐and‐burst shocks that are triggered by oil price regimes. Pearson’s correlation analysis is deployed to examine the relationships between the dynamics of crude oil price regimes (volume of crude oil export and price), selected indices of macrovariability—lending rate (prime), inflation rate and aggregate GDP growth, and supply deficit (demand–output gap) of local cement production. Analysis shows that construction cost is high because of high cost of finance and wild volatility that are stimulated by frictions in oil price regimes. Moreover, while the Nigerian construction industry shows positive growth and significant contribution to aggregate GDP growth in the past decade, the oil industry has persistently failed to trigger positive GDP growth. Furthermore, the variables under examination (as listed above) are also subjected to regression analysis to develop a mathematical model for predicting construction costs, relative to crude oil shock and defined macrovariability indices. Recommendations are made on how to avoid multicollinearity in similar studies and for areas of further studies.

Energy intensities and the impact of high energy prices on producing and consuming sectors in Malaysia

The increase in oil prices has put pressure on the global economy. Even economies that have a high degree of self-sufficiency concerning oil products are experiencing rising production costs and price increases for households energy use. Therefore, changes in energy policies are under consideration for countries highly dependent on imported energy as well as countries with a high degree of self-sufficiency. Examination of dependence on cheap energy sources for economic growth in different economic sectors is becoming more important as countries are trying to promote activities that are less energy intense. Among the policy changes under consideration, the adjustment of domestic energy subsidies is of particular interest. The effect of high energy prices on a fast growing economy, such as in Malaysia, is considerable, as the country will shift from being a net exporter of energy to a net importer in less than 10 years. Malaysia until recently has experienced increasing overall energy intensity and the growth up to 2,000 was quite high, especially for electricity intensity. A continued rise in energy intensity will be quite problematic in this new high oil price regime. This paper investigates the impact of rising energy prices on production costs for the different sectors of the Malaysian economy. Input–output (I–O) calculations demonstrate that the impact on the exporting component of the manufacturing sectors is less than for the average production. Therefore the production cost increase caused by, for example, an adjustment in electricity prices of 25% will result in less than 1/2% increase. As the competing countries in world markets are experiencing the same rise in energy costs, including electricity based on fossil fuels, there is no vital argument for not allowing domestic energy prices to adjust to the international price changes.