Oil Shocks Research Articles

Time-variation between metal commodities and oil, and the impact of oil shocks: GARCH-MIDAS and DCC-MIDAS analyses

Extant literature establishes co-movements among commodity (metal and oil) prices; whereas oil price/shocks aggregate, as a lone predictor, has relative predictability for most financial assets. We assess the predictability of Baumeister and Hamilton's (2019) decomposed oil shocks (economic activity shocks, oil consumption demand shocks, oil inventory demand shocks, and oil supply shocks) for conditional volatilities of prominently traded precious metals (gold, palladium, platinum, and silver) using GARCH-MIDAS-X framework. The asymmetric effect of decomposed oil shocks on precious metals' volatilities is examined. The DCC-MIDAS framework allows to investigate the conditional correlations and volatility between oil and precious metal prices. Results show that precious metals exhibit hedging potentials against oil demand and supply shocks, with heterogeneity observed in the precious metal-oil shocks nexus. Asymmetry is evident in the responses of metals' volatility to oil shocks. DCC-MIDAS results reveal significant dynamic correlations between oil prices and precious metals (except for platinum). Our results are robust (sensitive) to precious metals (oil shocks) proxies. The findings are insightful for commodity market stakeholders.

Глобальні стагфляційні шоки та перегляд монетарної політики: уроки криз 1970-х та 2020-х

The article clarifies what lessons for monetary policy under conditions of stagflationary shocks can be drawn from the analysis of inflation drivers, the global environment and approaches to macroeconomic policy in the run-up to and during the oil shocks of the 1970s and the supply shocks of the 2020s, caused by the pandemic and by the global effects of the full-scale war of the Russian Federation against Ukraine. The following factors have been identified that worsen the situation compared to the crisis of the 1970s for the monetary policy: larger-scale geopolitical threats; a wider complex of supply shocks and accelerated restructuring of the energy supply system under the influence of growing geopolitical threats; much more complex global supply chains; the more differentiated nature of countries’ vulnerability to the current supply shocks, that creates new sources of external instability as a result of the growing gap between interest rates and changes in exchange rates; strengthening the global implications of US Fed policy under conditions of stronger global integration; significantly higher levels of private and public debt; intensification of political and economic confrontation between the largest economies of USA and China. It is shown that the more favorable conditions for monetary policy compared to the 1970s are the developed institutional mechanism of anti-inflationary monetary policy, smaller institutional opportunities for emerging a "wage-price" spiral; greater resilience of EMs to external shocks. In order to increase the resistance of national and global economies to stagflationary shocks we need following corrections in monetary policy: decisive anti-inflationary policy in the face of threat of pro-inflationary behavior of economic agents; coordinated optimization and ensuring trust in monetary and fiscal policy, shifting fiscal policy to overcoming aggregate supply constraints; loosening the assumption of absolute elasticity of aggregate supply in the world of globalization and technological progress; correction the methods of measuring economic slack and estimation of equilibrium interest rate; adaptation of strategy, communication and tools of monetary policy to conditions of radical uncertainty; expanding the concept of monetary policy independence in small open EMDEs by taking into account the disproportionately large losses of this group of countries from importing inflation and recession from leading developed economies.

Does the Volatility of Oil Price Affect the Structure of Employment? The Role of Exchange Rate Regime and Energy Import Dependency

The volatility of oil price as a key energy resource for modern economies has a significant impact on the macroeconomic situation. In addition to affecting aggregated production, consumption, employment and inflation, oil shocks can affect the economy in a more nuanced way. One consequence of the turmoil in the oil market may be a shift in the employment structure between the tradable and non-tradable sectors, which we investigate in this paper. The aim of this study is to test how oil price volatility affects the structure of employment in Central and Eastern European countries. Our main hypothesis is that oil price volatility causes a temporal employment reallocation between tradable and non-tradable sectors. To verify this assumption, we created Interacted Panel VAR (IPVAR), which showed that the shocks of oil price volatility affect the employment structure and this impact is conditioned by the level of dependence on energy imports and the exchange rate regime. The constructed impulse response functions showed that, in general, oil price volatility causes a temporal fall in relative employment in the manufacturing (tradable) sector. For periods of an above-average import of energy, the exchange rate regime does not matter for the response of the structure of employment. Inversely, when countries are less dependent on imports of energy, the exchange rate regime matters for shock absorption—for floats, oil price shocks cause a temporal fall in relative employment in manufacturing, whereas for pegs, there is a slight relative increase in employment in manufacturing.

Oil structural shocks, bank-level characteristics, and systemic risk: Evidence from dual banking systems

• Investigates the impact of structural oil shocks on the systemic risk of banking in the GCC countries. • The impact of bank-level variables on systemic risk is small relative to oil price shocks. • Islamic banks are less risky in terms of systemic risk exposure to all sources of oil price shocks. • Systemic risk is more exposed to oil price shocks for large banks. • The effect of structural oil shocks on the systemic risk are more significant during the global financial crises than the COVID-19 pandemic. By performing a structural VAR analysis on oil price shocks, we provide an evidence on how the origins of oil price shocks impact the risk level of banks in oil-exporting countries and whether bank-level characteristics can influence the sensitivity of risk to oil shocks. When conducting panel regression analysis, we document the following findings. First, not all shocks have the same effect on bank risk. Due to oil supply shocks, the increase in oil price raises bank risk, whereas the similar increase in price due to economic expansion or oil-market specific demand reduces that risk. Second, the business model (whether the bank is Islamic or conventional), size, income diversification, profitability, and financial leverage influence the bank risk exposure to oil shocks differently. Third, the two major recent crises (global financial crises and COVID-19 pandemic) magnified bank risk exposure to oil supply shocks and speculative oil demand shocks. Overall, the structural oil shocks explain a large fraction of the variation in financial stability in GCC countries.

Less Water, Less Oil: Policy Response for the Kenyan Future, a CGE Analysis

The continuous depletion of nonrenewable natural resources and climate change may lead to a future characterized by a higher frequency of extreme natural events (i.e., flooding, hurricanes, and droughts) and resource supply shocks (i.e., oil price shock). Sub-Saharan African countries will be particularly exposed to these types of shock due to their socioeconomic conditions and geographical conformation. This study investigates the impact of two contemporaneous covariant sudden shocks (i.e., drought and price oil shock) and the possible coping strategies through a static computable general equilibrium (CGE) model for Kenya. The results suggest that a mitigation policy as public transfers is an effective mitigation tool for drought effects, improving welfare and GDP in the short run. However, adopting public transfers during an oil crisis may have regressive effects on population income and welfare. Because the mitigation effectiveness is strongly affected by the complex interaction of combined shocks, the public authorities should pay attention to policy implementation. These findings call for a new scheme of transfer allocation where rural and low-income household quantiles should receive more attention by postdrought mitigation policy, being that they are more vulnerable to external shocks.

유가충격이 무역수지에 미치는 영향에 관한 연구

Purpose - The primary contribution of this paper is to investigate the impacts of oil supply shocks, aggregate demand shocks, and oil-specific demand shocks on three measures of South Korea’s trade balance oil, non-oil, and total trade balance with its top trading partner China. Design/Methodology/Approach - In order to investigate how trade balance is influenced by three types of oil price shocks, we used a Structural Vector Autoregressive (SVAR). Also, Impulse Response Function (IRF) was used to calculate degree of the trade balance response to the oil price shock. Findings - We discover that aggregate demand shocks have the greatest impact on Korea’s trade balances, while oil supply shocks have negligible impacts. Additionally, the overall impact of the three oil shocks on Korea’s trade balances with China appears to rely on the response of the non-oil trade balance. Research Implications - This outcome explains why the roles of the different shock components of crude oil prices should be accounted for when modeling the nexus between oil price shocks and Korea’s balance of trade

Nexus between energy price shocks and the G7 financial development

In this empirical study, we aim at exploring the causality and the dependence between energy price shocks and the G7 financial development (proxied by the stock market). The causality and contagion effects are examined using the Granger causality-based vector autoregression, and the dependence structures are evaluated using various Copula models. Based on the data covering 2006 to 2020, we find evidence that there is a weak causality between energy price shocks and the financial markets of the G7, except for Japan, which is given to illustrate its sensitivity to the energy prices. Additionally, the dependence structure from copula models demonstrated a positive relationship between the financial markets and energy price shocks. Finally, we find the strong tail dependence between the negative oil price shock and G7 stock markets, implying the contagion links between oil shocks and the G7 financial development.

Macroeconomic effects of crude oil shocks: Evidence from South Asian countries.

This research tends to convey the relationship between crude oil price volatility and key macroeconomics indicators, i.e., gross domestic product (GDP), inflation rate (IR), interest rate, and exchange rate. The study collected the time-series data (2000–2020) from the South Asian countries (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka), and employed macroeconomic policy modeling tools (impulse response function and the prediction error variance decomposition technique) in the vector autorepression (VAR) setup. The outcome of the impulse response function explained considerable variance among macroeconomic indicators in response to crude oil price shocks. The macroeconomic indicators are extremely susceptible to minor fluctuations in oil prices causing a significant impact on the region's socioeconomic situation. The result of variance decomposition indicates that each country in the region reacts differently to crude oil price volatility which reflects their macroeconomics fundamentals, independent policy, sector structure, and country differences. The findings support change in public policies in a way to reduce their dependency on oil energy and encourage them toward renewal and green energy sources for better environmental results and sustainable development.

Modelling dynamic connectedness between oil price shocks and exchange rates in ASEAN+3 economies

ABSTRACT This study analyses the impact of the oil price shocks (demand, supply, and risk) on the exchange rates of a unique group of developed and emerging economies that comprise the ASEAN +3 countries. We combine a novel approach to decomposing the oil price shocks at a higher (daily) frequency with the dynamic network connected approach to analyse the connectedness of the oil shocks and exchange rates from January 2006 to July 2020, enabling us to cover various phases of the business cycle in these economies. Our results show that demand and risk shocks are the main contributors to the connectedness. We document that the Singapore dollar and the Malaysian Ringgit are the main transmitters of shocks in the ASEAN +3 group, whereas the role of the Chinese yuan and the Japanese yen is rather limited despite the bigger size of these two economies. Our results have important policy implications for investors, regulators, and policymakers.

A dynamic model for liquid fossil fuel production based on gross product/ERoEI coupling

Since 1940, many attempts to model oil production have been proposed. These approaches, using increasing complexity, consider growing and decay of production independently of external, time-varying, causes. It is here proposed to extend the production equation by a dynamic dependency between oil and Energy Return on Energy Invested (ERoEI). The model is based on mass and energy conservation and can be applied to all extracted liquid fossil fuels. After comparison with oil extraction and ERoEI dynamics, it highlights the existence of an external, controlling parameter: the investment rate, which account for the re-investment in newly operated liquid fuel sources. Its dynamic provides explanations about the oil shock and some explanations about the peak prediction issues of the Hubbert model. Studying this evolution suggests an attempt to control the oil production in order to sustain a globally linear production, starting around 1943: at short time scale (shorter than 28–36 years), the investment rate evolved linearly. However, in order to keep a linearly growing production at long time scale, the investment rate had to evolve exponentially: this was achieved through a piecewize linear control, where the investment rate and its derivative doubled every 28–36 years. The link between this control and the oil shocks suggests the next oil shock will occur around 2035–2040.The model also allows to highlight a major issue in liquid fossil fuel production: even if gross product can be controlled and keeps growing linearly, net product, which account for the energy delivered by the oil industry to the consumer, can decrease before the gross product peaks, due to the decay of ERoEI. At this point, the energy benefit of the oil industry will inevitably decrease and oil production will slow down. Based on the present model and a sensibility study on its parameters, this tipping point will happen between 2026 and 2039. Net product of fossil liquid fuels could therefore keep growing linearly until this point, where a steep decay is expected. Hence production will be strongly asymmetric regarding the peak, contrary to the prediction suggested by Hubbert's model. Production will finally be close to zero around 2063–2072.

Exploring the Trend of Commodity Prices: A Review and Bibliometric Analysis

As the supply of commodities forms essential lifelines for modern society, commodity price fluctuations can significantly impact the operation and sustainable development of macroeconomics, production activities, and people’s security and well-being. The commodity trading market also plays a pivotal role in the competition of the international industrial chain and the sustainable development of the industry. The method of bibliometrics was used in this study to trace the development of research on commodity prices, and statistical and co-citation analyses were conducted on selected literature samples. It was found that the research hotspots in this field are concentrated on four aspects: factors influencing commodity prices, the impact of price fluctuations on the macroeconomy, forecasts of commodity prices, and the financialization of commodities. A current commodity price research network centered on oil prices has formed. Future directions in this field, which developed out of oil shock research 40 years ago, can further investigate the impact of factors and the responses that can be made to emergencies on commodity prices, as well as continuing to develop better methods of commodity price forecasting.

Cost effects of the latest mining boom on emerging economies

ABSTRACT An input–output approach is used to identify the impact of the last mining boom (2000–08) on the cost and prices of mining industry products in four BRICS countries (Brazil, Russia, India and China). Using input–output tables and environmental information from the World Input–Output Database (WIOD), the analysis points to higher costs in emerging economies due to higher wages, slower technical progress, positive pass-through of oil shocks and partial sequential depletion processes in industrial minerals.

The asymmetric relationship between structural oil shocks and food prices: evidence from Saudi Arabia

ABSTRACT This paper examines the impacts of structural oil shocks, namely, the index of industrial production, world production of oil, and spot crude oil prices on the food prices in Saudi Arabia between 1986 and 2020 using nonlinear autoregressive distributed lags (NARDL) and Structural Vector Autoregressive (S-VAR) models to capture both short- and long-run asymmetries between these variables. The asymmetry between industrial production and food price in the short- and long-run was revealed and the impact of negative shocks of industrial production on the food prices was dominant. This implies that lower economic activities result in declined industrial production and food shortage which exerts a hike in food prices. With respect to Saudi Arabia, a significant relationship between negative shocks in crude oil prices and food prices was found in short- as well as long-run periods. The estimations also reveal that increases in oil supply result in a decline in food prices decrease in both periods of time. Similarly, a positive association between GDP growth and food prices was found. Finally, the oil supply shocks are found as the main factor, followed by the oil demand shocks and crude oil prices, causing the food price variation in Saudi Arabia.

The Dynamic Effects of Oil Price Shocks on Exchange Rates—From a Time-Varying Perspective

This study investigates the time-varying effects of three types of oil price shocks (oil demand, supply, and risk shock) on exchange rates by applying the time-varying parameter structural vector autoregression stochastic volatility (TVP-SVAR-SV) model. Through examining the impulse response of exchange rates to oil price shocks at different lag periods and time points, this paper contributes to the existing literature on the dynamic relationship between oil shocks and exchange rates. From the response at different lag periods, we find that oil price shocks have a significant time-varying impact on the exchange rate, among which oil demand shock has the most significant effect. The response of the exchange rate market to oil price shock shows an obvious short-term time-varying effect and is positive and negative alternately, with a certain periodicity. From the response at different time points, the time-varying effect of oil price shock on exchange rates is related to external shock, and is more intense during the global economic and political turmoil. This is the first empirical study using a novel method to examine the time-varying effects of oil price shock from different sources on exchange rates, providing investors and policy makers assistance to manage foreign exchange during global turmoil periods.

Dynamic asymmetric impact of equity market uncertainty on energy markets: A time-varying causality analysis

This paper aims to investigate the dynamic asymmetric impact of equity market uncertainty on the energy market. For that reason, we first apply the asymmetric Granger causality test to capture both positive and negative EMV and oil shocks. We find the existence of the asymmetric effect, displaying as negative EMV shocks are the primary driving factors of positive oil shocks, while positive EMV shocks can affect negative oil shocks. Further, on the basis of three rolling-window procedures, we extend the asymmetric causality test to detect the structural breakpoints and time-varying characteristics of the causal relationships running from EMV shocks to oil shocks. Results show that some extreme events may lead to a structural breakpoint in their relationships. In particular, the negative effects of EMV shocks on oil shocks seem to be more lasting than the positive ones. Our findings may provide a new perspective on asset allocation, energy portfolio construction, and risk management.

ON THE EFFECTS OF OIL PRICE SHOCKS ON KOREA’S TRADE BALANCE WITH ITS TOP THREE PARTNERS: A STRUCTURAL VAR ANALYSIS

The primary contribution of this paper is to investigate the impacts that three components of oil shocks – oil supply shocks, aggregate demand shocks, and oil-specific demand shocks – have on three measures of Korea’s trade balances – oil, non-oil, and total trade balances – with its top three trading partners – China, the United States and Japan. We reveal that aggregate demand shocks have the greatest impact on Korea’s trade balances, while oil supply shocks have negligible impacts. Additionally, the overall impact of the three oil shocks on Korea’s trade balances with its top three partners appears to rely on the response of the non-oil trade balance.

Modeling tail risk in Indian commodity markets using conditional EVT-VaR and their relation to the stock market

Investment in commodity markets in India accelerated after 2007; this was accompanied by large price variability, hence, it becomes imperative to measure commodity price risk precisely. It becomes equally important to study the relationship between commodity price variability and the stock market. Hence, this study aims to calculate the tail risk of highly traded Indian commodity futures returns using the conditional EVT-VaR method for risk measurement. Secondly, the linkage between commodity markets and the stock market is also studied using the Delta CoVaR method. Results highlight the following points. There is risk transfer from the extreme increase/decrease in crude oil futures returns to the Nifty Index returns. Both extreme price increase or decrease of crude oil futures driven either by financial or a combination of financial and economic shocks affect the stock market. Zinc and Natural gas futures are not linked to the stock market, which means they can be useful in portfolio diversification. The findings suggest that, in Indian commodity markets, EVT-VaR is a useful tool for measuring risk. Only Crude oil futures shocks affect the stock market, and extreme integration between them becomes more prominent when oil shocks are driven by financial factors. Commodities other than Crude oil are not integrated with stock markets in India.

Do oil price shocks have any implications for stock return momentum?

The study examines the implications of structural oil price shocks on one of the most widely observed and pervasive momentum anomalies. We use a structural vector autoregression (SVAR) model to find the time-varying responses of momentum payoffs of India, Japan, the UK, and the US to different structural oil shocks—oil supply global aggregate demand shock, speculative shock, and other oil demand shocks. Structural oil shocks, particularly oil demand and speculative shocks, have important implications as conditioning information in predicting stock return momentum behavior according to the conditional asset pricing model. Overall, the results indicate that structural oil shocks have a significant impact on small cap and loser stock portfolios. Our findings have crucial implications to develop effective momentum investment strategies that consider structural oil shocks as conditioning information.

Nexus between oil shocks and agriculture commodities: Evidence from time and frequency domain

Oil shocks demonstrate an effective economic event in the face of several unprecedented financial challenges. The current study endeavors to investigate the nexus between oil shocks and agriculture commodities with portfolio implications. Building on the novel techniques of time- and frequency spillovers and portfolio analysis, we unlocked the potential connectedness networks as well as diversification and trading strategies for investors and portfolio managers. Our findings document strong intra and weaker inter-connectedness between oil shocks and agriculture commodities with greater time-varying spillovers in the short- and long-run. We framed valuable intuitions for policymakers, macro-prudential authorities, investors, and portfolio managers.

ASEAN-5 forex rates and crude oil: Markov regime-switching analysis

ABSTRACT We investigate the influence of moves in oil prices on exchange rates of Indonesia, Malaysia, the Philippines, Singapore and Thailand (the ASEAN-5 countries). We disentangle oil shocks, representing them by three components: demand shock, supply shock and risk shock, and examine their impact on the ASEAN-5 exchange rates by employing high-/low-volatility Markov regime-switching regressions for the period 2006 to Beckmann, Czudaj, and Arora 2020. We find that demand shocks make forex rates increase for net oil-producing as well as net oil-consuming economies. The impacts of supply shocks on forex rates for most economies are rather low. The risk shocks lead to depreciating effects on the ASEAN-5 currencies, supporting the notion that the open-oriented nature of ASEAN-5 economies makes them susceptible to constant fluctuations in the global oil market.