Oil Price Shocks Research Articles

Analysing Oil Prices Fluctuations, Carbon Emissions and Renewable Energy Trends in Uncovering the Eco‐Economic Interplay in China's Trade Liberalization

ABSTRACTThis study evaluates the factors contributing to carbon emissions in China between 2002 and 2021, considering the impact of GDP growth, shocks in oil prices, trade liberalization and energy use. Using the dynamic simulated ARDL (SARDL) model, we indicate a long‐term link between trade liberalization, oil prices (WTI) shocks, GDP growth, energy use and CO2. The novel SARDL revealed a direct relationship between trade liberalization and CO2 in China in the long term. However, the results show a negative impact of WTI shocks on CO2 emissions. The study suggests that renewable energy (RE) significantly and negatively affects China's CO2 emissions. In addition, the findings conclude that, in the case of China, GDP has an insignificant long‐run relationship with CO2 emissions. The outcomes provide valuable insights for policymakers, researchers and industry stakeholders to enhance RE and promote sustainable energy practices.

Measuring Business Cycle Stylized Facts in Selected Oil-Producing Economies: A Comparative Study

AbstractWe document the stylized facts relating to the contemporary business cycle in eleven oil-producing economies that account for over 65% of global oil production using a set of macroeconomic aggregates covering the period 1981 to 2021. In the context of Nigeria, a vector autoregression analysis is used to measure a one standard deviation oil price shock on time series such as trade balance, real GDP, inter alia. Our study is unique in that we compared four different detrending techniques, including Hodrick–Prescott (HP), Baxter-King, Christiano–Fitzgerald, and Butterworth filters. This is a departure from the conventional method of relying on the HP filter, which has been known to have limitations, particularly in the context of oil-producing economies. Our findings indicate that the selected oil-producing economies with countercyclical inflation patterns suggest that supply shocks drive the business cycles. Conversely, the oil-producing economies with inflation in sync (procyclical) with the business cycle suggest that demand shocks may be the primary driver of business cycle variations. Additionally, our study shows that oil price innovations lead to higher inflation in Nigeria.

Risk spillovers and diversification benefits between crude oil and agricultural commodity futures markets

This study examines the dependence structure and risk spillovers between crude oil and eight major agricultural futures (wheat, corn, soybean coffee, cotton, lumber, cocoa, and live cattle) markets. It also analyzes the potential conditional diversification benefits using a variety of copula functions and Conditional Value at Risk (CoVaR) measure. The results show significant crisis-sensitive and temporal dependence between oil and agricultural markets. Moreover, crude oil shows a symmetric tail dependence with both wheat, corn, soybeans, and cotton futures, whereas oil exhibits an average dependence with coffee. A strong dependence is observed between oil and cocoa (lumber) during bearish (bullish) market conditions. Oil and Live cattle have a symmetric dependence during bearish and bullish market conditions. On the other hand, we find asymmetric and bidirectional risk spillovers from oil to agricultural markets. Furthermore, the wheat futures contract appears to be the most dominating and vulnerable asset to oil price shocks, followed by lumber and corn futures, respectively, while the live cattle contracts are the least. Finally, an equally weighted portfolio offers the highest diversification benefits at a 5 % expected shortfall.

The response of oil-importing and oil-exporting countries’ macroeconomic aggregates to crude oil price shocks: some international evidence

The response of oil-importing and oil-exporting countries’ macroeconomic aggregates to crude oil price shocks: some international evidence

Regulating Carry Trades: Evidence from Foreign Currency Borrowing of Corporations in India

Abstract We establish that macroprudential controls limiting capital flows can curb risks arising from foreign currency borrowing by corporates in emerging markets. Firm-level data show that Indian firms tend to issue more foreign currency debt when the interest rate differential between India and the United States is higher. This “carry trade” relationship, however, breaks down once regulators institute more stringent interest rate caps on borrowing; in response, riskier borrowers cut issuance most. Prior to adoption of this macroprudential measure, stock price exposure of issuers to currency risk rises after issuance, as witnessed during the “taper tantrum” episode of 2013; this source of vulnerability is nullified by the measure, as confirmed during the October 2018 oil price shock and the COVID-19 outbreak. We find no evidence of the policy’s efficacy being undermined by leakage or regulatory arbitrage.

Impact of Oil Price Shocks on Islamic and Conventional Bank Performance: Empirical Evidence from Saudi Arabia

This paper aims to investigate and compare the effect of oil price shocks on the bank performance at the aggregate level as well as the level of conventional and Islamic banks. The Autoregressive Distributed Lag (ARDL) methodology was adopted to analyze a panel of 10 Saudi banks, including 6 conventional and 4 Islamic banks, between 2006 Q1 and 2022 Q4. The results revealed that oil price shocks have a direct impact on banking performance. A rise (fall) in oil prices led to an increase (decrease) in bank performance through the channel of price-induced bank deposits. Additionally, oil price shocks have asymmetric effects, with positive oil shocks having a greater impact on bank performance than negative shocks. The findings highlighted that conventional banks tend to benefit more from oil price shocks, especially during oil price booms, as they experience higher positive impacts. However, during oil price busts, Islamic banks were more adversely impacted by oil shocks.

Effects of oil shocks on markets in G7 countries

This paper aims to assess the effects of oil price shocks on the stock markets of the G7 countries. We develop an oil sentiment indicator that measures the volatility of oil prices. We analyze oil shocks on the stock market of the G7 countries, using a structural VAR and Local Projection approach. Our results suggest that oil shocks explain 8% of the US stock market, 10% in Germany, and 7% in the UK. These results point out the possibility of using this sentiment variable for forecasting the stock market’s volatility.

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.

Economic activities, dry bulk freight, and economic policy uncertainties as drivers of oil prices: A tail-behaviour time-varying causality perspective

This paper examines the dynamic impact of economic activity, Baltic dry bulk and economic policy uncertainty on oil prices. Drawing on demand-side economic theory, we focus on how economic activity and economic policy uncertainty drive oil prices and subsequently contribute to the formation of market equilibrium. In this context, we first introduce a unidirectional quantile and time-varying Granger-causality mechanism for the drivers of oil prices. Our novel rolling window quantile Granger causality approach reveals that economic activity drives crude oil price fluctuations and highlights their important role in market imbalances. In particular, economic activity and the Baltic exchange rate index emerge as essential drivers of oil prices, confirming our hypothesis of a demand-side effect. Moreover, our robustness wavelet quantile correlation (WQC) analyses reveal that economic activity promotes oil price fluctuations along both long-term equilibrium trends and short-term dynamics. In contrast, economic policy uncertainty has a dampening effect on oil prices. More broadly, economic activity is positively correlated with the Baltic exchange dry index, highlighting its broader impact on global trade indicators. Moreover, we use a bivariate Quantile on Quantile regression method to identify the equilibrium searches of different thresholds and estimate the robustness of the validity of the WQC findings. Analyzing the quantile and frequency connectedness spillovers, we observe that shocks from economic activity are particularly pronounced in the tail quantiles, reinforcing the demand-side narrative. Overall, the increased risk in extreme tails underscores the increased interaction between economic activity, oil prices and economic policy uncertainties. Our findings have important implications for policymakers and highlight the need for adaptive strategies to manage potential oil price shocks. Thus, by adopting a demand-side perspective, policymakers can better anticipate and respond to oil price fluctuations, promoting more resilient economic policies.

The Impact of Oil Price Shocks on Oil and Gas Production Amidst Geopolitical Risk in OPEC: Insights from Method of Moments Quantile Regression

The Impact of Oil Price Shocks on Oil and Gas Production Amidst Geopolitical Risk in OPEC: Insights from Method of Moments Quantile Regression

Impact of Oil Price Shocks on Russian Macroeconomic Performance

Impact of Oil Price Shocks on Russian Macroeconomic Performance

Forecasting and unveiling the impeded factors of total export of Bangladesh using nonlinear autoregressive distributed lag and machine learning algorithms

Rising global oil prices are a major challenge for an emerging oil-importing nation such as Bangladesh. The majority of prior research on the economic effects of an oil price shock has concentrated on developed countries, with emerging economies receiving comparatively less attention. Bangladesh is vulnerable to price shocks due to its rising oil consumption over the past decade. This study aims to investigate how changes in oil prices would affect Bangladesh's total export earnings and to forecast the overall export volume. This study utilized a nonlinear autoregressive distributed lag (NARDL) approach to account for the asymmetric behavior of oil prices from 1991 to 2021. To assess the accuracy of predictions, the study employed the Prophet forecasting model and the Long Short-Term Memory (LSTM) method. Additionally, the symmetry test revealed a nonlinear relationship between export volume and oil price but a linear relationship between inflation and export volume. According to the NARDL assessment, both positive and negative oil shocks increase export earnings over the long run. The short run summary clarifies that both positive and negative changes in oil prices exert a significant negative effect on exports. Also, Inflation influences export earnings negatively in the short run but positively over the long term. Moreover, using machine learning methods, it was found that the LSTM method outperforms the prophet model in prediction performance with a low root mean square error (RMSE) of 1.88. Also, the analysis revealed policymakers that the export sector requires diversification to reduce its exposure to oil price shocks.

Decomposition of oil price shock, changes in market conditions and systemic risk transmission – an analysis from the Chinese perspective

ABSTRACT This research aims to investigate the heterogeneous responses of each specific risk variable across different states in the context of varying levels of crude oil price shocks. Using data period from 27 December 2007 to 28 October 2022, we construct proxy variables for systemic financial risks based on the considerations of four specific perspectives. The results of the empirical analysis indicate that oil price fluctuation observed in short, medium, and long-term time periods has an obvious impact on each risk variable. From the evaluation of conditional value-at-risk difference as well as the marginal expected shortfall, both short-term and long-term shocks have an apparent amplifying effect on market risk when it is at a high level. When evaluated from the angle of liquidity, oil price shocks generally exhibit positive effects on market liquidity, where this effect is more significant in the long term rather than terms. When considering the effect of volatility specifically, oil price shocks are found to cause sharp shocks to the market, whether the market itself is in a stable or volatile state.

Fluctuations oil prices in the world and their impact on Indonesian macroeconomics

Abstract Changes in international crude oil prices can significantly impact economic outcomes. This study tested the impact of oil price fluctuations on macroeconomic variables in Indonesia. The data used is annual data from 1990 to 2021 with the specific purpose of solving the current research deficiency about swings in oil prices. study adds five macroeconomic variables as explanatory factors to accomplish this purpose. We use five macroeconomic variables: economic growth, inflation, interest rates, industrial production, and exchange rates. The impact of oil price fluctuations on GDP, inflation, exchange rates, interest rates, and industrial production indices in Indonesia is examined within a structural vector autoregressive (SVAR) framework. Research shows that oil price shocks significantly impact GDP, inflation, and exchange rate. The results also show that oil price shocks hurt two other variables: the interest rate variable and the industrial production index. The findings derived from the analysis of the impulse response function indicate a detrimental effect on the growth of production, while exerting a favourable influence on inflation. However, the impact on industrial production, interest rates, and exchange rates is very modest and characterised by a degree of uncertainty.

Islamic and conventional stocks: Impact of Russia-Ukraine saga on global commodities

Purpose – This study intends to scrutinize the relationship between oil and gold prices on Indonesia’s Islamic stock market before and during the war between Russia and Ukraine, and compare the nature of sharia and conventional stock during the period of study.Methodology – This study uses daily price data of oil price, gold, Islamic index, and LQ45 index. The period spans from 2020 to 2022, which is split into two sub-periods: pre-war and during the war period. Structural vector autoregression (SVAR) was used for data analysis.Findings – This study provided three main findings. First, the Islamic index was found to be more exogenous than conventional stock, implying the safe haven properties of Islamic stock. Second, oil prices have a negative and significant impact on both conventional and Islamic stocks. However, Islamic stocks are less affected by oil price shocks than conventional stocks. Lastly, Gold is a safe haven asset for both Islamic and conventional stocks.Implications – This study is expected to be beneficial for Islamic investors making investment decisions, particularly in the war period, which is still ongoing and more specific for taking advantage of diversification opportunities.Originality – Despite a huge number of studies that investigate the Islamic stock – oil price nexus, this study uncovers the impact of the most recent geopolitical tension during the Russia-Ukraine War.

Asymmetric Effects of COVID-19 Deaths and Oil Price Shocks on Stock Market Returns in Some Selected African Countries: Evidence From Nonlinear ARDL Approach

This study investigates the asymmetric impact of oil price shocks and COVID-19 total deaths on Kenya, Morocco, Nigeria and South Africa stock market returns. To achieve this objective employing weekly time series data from March 13, 2020 to September 23, 2022, first, we apply the BDS test which confirm the nonlinearity of each series. Second, stationarity tests are used to investigate each series for unit root. The results show that series are stationary in level and in first difference. Third, the bounds test reveals that the series have a cointegration relationship and we apply the nonlinear autoregressive distributed lag (ARDL) ARDL framework to decompose oil price into positive and negative partial sum to investigate a possible asymmetric effect of oil price on stock market returns. The main findings of the asymmetric ARDL model reveal that, in the short-run dynamic, a positive shock in the oil price have a negative and positive effect on stock market returns in Morocco and South Africa respectively. The result is insignificant for Kenya and Nigeria. A negative shock in the oil price have a negative effect on the stock returns in Nigeria, South Africa and in Kenya, Morocco with one period lag. Furthermore, in the long-run, a positive shock in oil price exerts a negative effect on the stock market performance in Morocco and Nigeria while a negative shock in oil price leads to a negative effect also on the stock market returns. The total deaths present a counterintuitive result. Both in the long-run and short-run dynamic, the total number of deaths due to COVID-19 have a significant increasing effect on stock market returns in Kenya, Morocco and South Africa except for Nigeria.

Inflation effects of oil and gas prices in the UK: Symmetries and asymmetries

The United Kingdom is among the countries experiencing a cost-of-living crisis believed to be influenced, at least in part, by the dynamics of the international oil and gas markets. To this end, this study aims to achieve to achieve two objectives. Firstly, the dynamic association between the UK's inflation and oil and gas prices is examined. Further, the study examines whether the response of the UK's inflation to energy price dynamics is (a)symmetric. This study adopts wavelet coherency to determine the dynamic co-movement between energy prices and inflation. In addition, the dynamic simulated autoregressive distributed lag model (DS-ARDL) is used to examine the dynamic response of inflation to energy price changes. The estimation results reveal a symmetric response of inflation to gas price shocks. Further, the response of inflation to oil price shocks is asymmetric. Interestingly, the effect of gas price dynamics passes more strongly to inflation than to oil price dynamics. These findings suggest that a more diversified energy mix could help prevent substantial energy price pass-through to inflationary pressures.

Functional Oil Price Expectations Shocks and Inflation

ABSTRACTThis paper investigates the inflation effects of oil price expectations shocks constructed as functional shocks, that is, as shifts in the entire oil futures term structure (both standard and risk‐adjusted). The latter are then included in a vector autoregressive model with exogenous variables (VARX) to examine the US case. Counterfactual analysis is also carried out to investigate second‐round effects on inflation through the inflation expectations channel. These are found to be significant, in contrast to earlier studies based on standard oil price shocks. Additional nonlinear local projections including a shock decomposition exercise show that inflation and inflation expectations are primarily driven by changes in the curvature (level and slope) factor when the latter are anchored (unanchored). These findings provide useful information to policymakers concerning the impact of oil price expectations on inflation and inflation expectations.

Exploring the dynamic connections between oil price shocks and bond yields in developed nations: A TVP-SVAR-SV approach

This paper investigates the impact of oil price changes on bond yields across nine developed nations, focusing on how demand, supply, and oil-specific demand shocks influence bond spreads. Using a Time-Varying Parameter Structural Vector Autoregression with Stochastic Volatility (TVP-SVAR-SV) model, we find that bond yields are short-term responsive to oil price fluctuations, indicating efficient domestic bond markets. However, we observe distinct country-specific reactions, particularly in the US and the UK. In the US, supply shocks cause temporary declines in bond yields, while demand shocks reduce bond yields in both countries. Oil-specific demand shocks have cyclical impacts. Unlike the global financial crisis, the COVID-19 pandemic uniquely influenced bond yields, with minimal short-term effects in Canada, France, Spain, and the US post-COVID-19, contrasting with the severe impacts during the financial crisis. These findings suggest investors should consider the varying impact of oil shocks on bond yields across countries, and policymakers should monitor and address the potential implications of oil price fluctuations for financial stability and market efficiency.

Renewable Energy, Economic Policy Uncertainty and Climate Policy Uncertainty: New Evidence for Environmental Kuznets Curve from Emerging and Developed Countries

Recent events, such as the financial crisis, oil price shocks or fluctuations, Brexit, the US–China trade war, the COVID-19 pandemic, the Russia–Ukraine conflict and the subsequent energy crisis, have surged global economic policy uncertainty. As climate change has recently been more pronounced around the globe, discussions about climate policies and related uncertainties have also become a major concern. This study investigates the role of economic policy uncertainty (EPU) and climate policy uncertainty (CPU) on climate change (environmental degradation) for selected emerging and developed economies, expanding the IPAT framework and merging it with the Environmental Kuznets Curve (EKC) hypothesis. The IPAT framework examines the impact (I) of population (P), affluence (A), and technology (T) on the environment, whereas the EKC hypothesis proposes an inverted U-shaped curve between affluence and environmental degradation. Two models were created and tested for emerging and developed countries, namely Model 1 with EPU and Model 2 with CPU. A Pooled Mean Group (PMG) estimator is employed to investigate the interrelation between carbon dioxide (CO2) emissions and selected variables; namely the real Gross Domestic Product (GDP) per capita, squared real GDP per capita, renewable share in consumption, the EPU, the CPU and population. Test results indicate that the EKC hypothesis is verified only in Model 1 and for emerging countries, whereas population escalates climate change in both country groups. Furthermore, in line with the consumption effect theorized earlier in the literature, EPU is negatively related to carbon emissions in emerging countries. Thus, the EPU leads to a decrease in the use of energy and pollution-intensive commodities and mitigates climate change in EMEs. Compatible with our ex-ante expectations, renewable energy consumption alleviates climate change in both country groups in the short term. In Model 2, with CPU, we find no evidence supporting the EKC hypothesis for any country groups. However, we reaffirm that renewable energy consumption decreases CO2 emissions in developed countries, which is in support of the argument that energy transition holds the key to tackling climate change. Finally, CPU is associated with a decrease in CO2 emissions in emerging countries in the short term, potentially leading to a reduction in overall economic activity and alleviating climate change. This might also be attributable to the fact that the decisions of economic agents substantially rely on current and future policy (both economic and climate) expectations. Overall, verifying the EKC hypothesis for emerging countries in Model 1, we might argue that there is good potential for emerging countries to save money and time on environmental costs via the adoption of clean technologies and related policies. Last but not least, on a global scale, energy transition with better utilization of renewable sources holds the key to tackling climate change and reducing emissions.