Oil Supply Shocks Research Articles

Inflation Expectations and the Pass-Through of Oil Prices

Abstract Inflation expectations and the associated pass-through of oil price shocks depend on demand and supply conditions underlying the global oil market. We establish this result using a structural VAR model of the global oil market that jointly identifies transmissions of oil demand and supply shocks through real oil prices to both expected and actual inflation. We demonstrate that economic activity shocks have a significantly longer-lasting effect on inflation expectations and actual inflation than other types of real oil price shocks, and resolve disagreements around the role of oil prices in explaining the missing deflation puzzle of the Great Recession.

The impact of oil price shocks on economic growth in Algeria

In this study, we investigate the consequences of oil price shocks on Algerian economic growth, both on an aggregated and a disaggregated level. We adopt the method used in (Kilian, 2009) in which global oil supply shocks, global demand shocks, and anticipated demand shocks are defined. We use a two structural VAR models. The first model identifies shocks to oil prices using monthly data on oil production, oil real prices, and indicators of global eco- nomic activity. The second model describes the dynamics of a set of macroeconomic varia- bles: real overall GDP, hydrocarbon GDP, agricultural GDP, construction GDP, and interna- tional trade variables. To grasp the impact of oil shocks on sectoral growth, the model is aug- mented via three external shocks identified in the first stage. Our results are twofold. First, they show the significance of the oil price shocks' impact on the Algerian economy. Second, they indicate an asymmetry in this impact. Negative shocks to oil prices have depressive ef- fects on economic activity as a whole, including the non-hydrocarbon sector. We detect a delay-effect; global demand shocks affect economic sectors after 5-7 quarters, whereas oil price shocks affect the hydrocarbon sector after 1-2 quarters only.

Petrol Fiyat Şoklarının Temiz Enerji ile Petrol ve Gaz Şirketlerinin Hisse Senedi Getirilerine Etkileri

This study empirically examines how fluctuations in oil prices affect the stock returns of clean energy and oil and gas companies between 2001:01 and 2022:06. Our results show that a negative oil supply shock affects the stock returns of clean energy companies positively. In contrast, an oil-specific demand shock negatively affects them. The findings also reveal that an increase in oil prices owing to an oil-specific demand shock tends not to improve the stock returns of oil and gas companies. Consequently, the results indicate that oil and clean energy are not alternatives.

The Time-Varying Effects of Oil Shocks on the Trade Balance of Saudi Arabia

This study aims to analyze the impact of oil shocks on the external balance of Saudi Arabia, as one of the largest net oil-exporting countries. To this end, a time-varying parameter vector autoregression model (TVP-VAR) is estimated by using quarterly data covering the period between 1991: Q1 and 2021: Q4. We find that identifying the source of shocks plays an important role in understanding the time-varying impact of shocks on its economy. Our findings indicate that the global oil production shocks excluding Saudi Arabia have a negative and significant impact on the trade balance and are greater than the impact of the Saudi oil production shocks, which is not significant for most of the period. In addition, we found that oil price shocks have more profound and much greater impacts than global and domestic oil supply shocks. This may be attributed to the fact that oil price shocks are more than oil supply shocks, and supply shocks are linked to oil price shocks. However, impulse responses show that the effects of oil shocks are volatile over time and their effects are generally more pronounced during and immediately after global shocks. Our findings have serious implications for the trade balance of Saudi Arabia, particularly in the low and volatile oil price environment.

Disentangled oil shocks and stock market volatility in Nigeria and South Africa: A GARCH-MIDAS approach

In this study, we investigate the effects of disentangled oil shocks on the volatility of the stock markets of Nigeria and South Africa using the Mixed Data Sampling variant of the Generalized Autoregressive Conditional Heteroscedasticity (GARCH-MIDAS) model. The disentangled oil shocks involve oil supply shock, economic activity shock, oil consumption demand shock, and oil inventory demand shock covering January 2010 and July 2022. Overall, we find that the stock market volatilities of Nigeria and South Africa respond similarly to oil supply shock and oil consumption demand shock but differently to economic activity shock and oil inventory demand shock. The unusual increase in the volatility of Nigeria’s stock market has been attributed to the loss of investors’ confidence which takes a too long time to be restored. Our results are robust to alternative forecast sampling techniques, particularly fixed and rolling windows.

Oil price shocks and China's consumer and entrepreneur sentiment: a Bayesian structural VAR approach.

This paper studies the effect of oil price shocks on China's consumer and entrepreneur sentiment using a novel Bayesian inference structural vector autoregression model. Interestingly, we find that oil supply and demand shocks that raise oil prices have significantly positive effects on both consumer and entrepreneur sentiment. These effects are more significant on entrepreneur sentiment than on consumer sentiment. Furthermore, oil price shocks promote consumer sentiment mainly by increasing their satisfaction with current income and their expectation of future employment. Oil price shocks would change consumers' saving and consumption decisions but not their plans to buy cars. Meanwhile, the effect of oil price shocks on entrepreneur sentiment differs across different types of enterprises and industries.

Inflationary Pass-through Effects of Oil Price Shocks on the Zambian Economy (1985–2019)

This study explores the effect of disaggregated oil price shocks on Zambia’s historic headline inflation rates. To quantify the contemporaneous impact of oil price shocks on inflation, a Structural Vector Autoregressive Model (SVAR) is utilised, which is supplemented with Impulse Response Functions (IRFs), Granger Causality Tests and Forecast Error Variance Decomposition (FEVD). After satisfying the cointegration criteria, long-run relationships are examined using the Vector Error Correction Model (VECM).The findings show that decomposed oil price shocks do not have a short-run contemporaneous impact on inflation at the 5% level and that oil price shocks do not Granger-cause inflation. The insignificance of the short-run inflationary pass-through effect is attributed to Zambia’s historic price controls, fuel subsidies, exchange rate controls and increased credibility of monetary policy. Notably, of the three types of oil price shocks, FEVD results show that global aggregate demand shocks are attributed for the largest variation in Zambia’s inflation rates, i.e. 1.8%. Long-run analysis using VECM shows that global aggregate demand and oil supply shocks both have a significantly negative long-run impact on inflation, while oil-specific demand shocks have a significantly positive impact on inflation. The speed of adjustment of inflation back to equilibrium after a short-run deviation is shown to be significant and monotonic.

The impact of oil shocks from different sources on China's clean energy metal stocks: An analysis of spillover effects based on a time-varying perspective

In order to examine the impact of oil shocks from different sources on clean energy metals in China. This paper first obtains different sources of oil shocks, namely, oil supply shocks, oil demand shocks and oil risk shocks, and then uses the TVP-VAR model to investigate the time-varying effects and point-in-time impacts of different sources of oil shocks on Chinese clean energy metal stocks. The results show that, firstly, oil shocks from different sources have time-varying and heterogeneous effects on clean energy metal stocks. Compared to other oil shocks, the impact of oil demand shocks is the largest. Due to the different status and nature of different clean energy metals, the impact of different sources of oil shocks is different. At different time points of major events, the impact of different sources of oil shocks is different. Therefore, there is a need to focus on the impact of different events.

The role of crude oil demand and supply shocks on exchange rates: empirical evidence from South Korea

ABSTRACT The primary contribution of the present paper is to explicitly take into consideration the role that the three different components of crude oil shocks – oil supply shocks, aggregate demand shocks, and oil-specific demand shocks – when studying the nexus between oil price shocks and the South Korean won (KRW). We discover that oil demand shocks have had significant impacts on KRW over the past two decades: that is, an upsurge in oil prices driven by positive shocks in aggregate demand and oil-specific demand appears to appreciate KRW. However, oil supply shocks turn out to have negligible impacts. We also unveil that two oil demand shocks seem to asymmetrically influence KRW in the short run.

Changes in the effects of oil price shocks on US industrial production

AbstractThis paper examines whether there exists a structural change in the relationship between oil shocks and US industrial production with the rapid development in oil industry due to the shale revolution. Using a structural VAR model, I identify supply and demand shocks in global crude oil markets and estimate changes in their effects on the US industrial production. The key finding is that the US industry output has become more responsive to oil price shocks since the shale oil boom. Oil supply shocks have been more important and heterogeneous effects on the industrial production depending on the US or non‐US oil supply component. There has also emerged the positive effect of oil demand shocks, stimulating aggregate economic activity. In particular, I find that there have been strong positive spillover effects from an oil price increase to other industries not only through direct purchases of inputs for oil production and investment, but also through indirect knowledge and technology transfers created during the shale revolution. These findings have profound policy implications for the fiscal and monetary authority who copes with exogenous oil shocks.

Macroeconomic effects of demand and supply shocks in the global oil price on the Vietnamese economy

PurposeThe purpose of this paper is to examine the effects of several structural shocks in oil prices on the Vietnamese economy and answer three key research questions: Is there a relationship between oil price shocks and macroeconomic indicators in Vietnam? How do different types of oil price impulses affect Vietnamese inflation and economic performance? To what extent do structural shocks in oil prices explain variations in Vietnam’s macroeconomic indicators?Design/methodology/approachLower triangular Cholesky decomposition is performed on a short-term impact matrix in a two-block structural vector autoregressive model. The data set is defined monthly, from January 2000 to December 2021. The contributions of structural shocks in oil prices to the domestic variances are analysed using variance decomposition methods. In this study, both forecast error variance decomposition and historical decomposition are used.FindingsThe consequences of oil price fluctuations on Vietnamese output and inflation depend on different sources of oil price shocks. In comparison, oil supply shocks have an insignificant effect on both domestic industrial output and consumer price index inflation; however, positive shocks in aggregate and precautionary oil demands increase these domestic indicators substantially and sustainably. An analysis of variance decompositions reveals that supply-side oil shocks have very limited explanatory power for variations in domestic variables. Nevertheless, the contributions of unanticipated demand-side booms to domestic variations in the past and projected forecasts are considerable.Research limitations/implicationsThe findings from this research uncover potential risks for Vietnam’s economic prospects if the consequences of oil price shocks are not managed effectively.Originality/valueGiven the lack of economic sensitivity to supply-side oil shocks and the strong response to shifts in oil demands, greater pressure on the domestic economy is likely when Vietnam increases its dependence on oil imports.

Oil Demand and Supply Shocks in Canada’s Economy

Oil Demand and Supply Shocks in Canada’s Economy

Supply and demand shocks in the global oil market: How much do they matter for exchange rates in OPEC members?

The current article uses the SVAR and ARDL methodologies to study the dynamic responses of exchange rates for OPEC's 13-member countries to oil supply shocks, aggregate demand shocks, and oil-specific demand shocks. We discover that the timing and the direction of the responses of the OPEC currencies appear to differ with the cause of the oil price shocks. We also reveal that the effects of the three oil shocks could be viewed as a short-run phenomenon for the OPEC currencies.

Does oil price uncertainty affect corporate innovation?

This study examines the relation between oil price uncertainty (OPU) and corporate innovation productivity. Using firm-level innovation data of US firms, we find that OPU is negatively associated with future innovation outcomes, proxied by the number of patents and subsequent citations, and the dollar value of innovation. However, this negative relation is more pronounced for non-green innovation than for green innovation and predominantly driven by oil supply shocks. Our supply-side explanation suggests that since oil supply shocks induce uncertainty about future economic growth opportunities and cost of operation, firms tend to decrease their investment in innovation activities. This negative relation is pronounced more in manufacturing firms and firms located in non-oil-producing states, and the pre-financial crisis period. Further analysis suggests that increases in the cost of external financing and cash holdings appear to be the underlying mechanisms through which OPU impedes firm innovation. The results survive from several model specifications, alternative variable definitions, and controlling additional firm and macroeconomic factors. Overall, OPU seems to have an important implication in shaping firms' investment in innovation. Several implications are discussed.

The importance of supply and demand for oil prices: Evidence from non‐Gaussianity

When quantifying the importance of supply and demand for oil price fluctuations, a wide range of estimates have been reported. Models identified via a sharp upper bound on the short‐run price elasticity of supply find supply shocks to be minor drivers. In turn, when replacing the upper bound with a weakly informative prior, supply shocks turn out to be substantially more important. In this paper, I revisit the evidence in a model that combines weakly informative priors with identification by non‐Gaussianity. For this purpose, a SVAR is developed where the unknown distributions of the structural shocks are modeled nonparametrically. The empirical findings suggest that once identification by non‐Gaussianity is incorporated into the model, posterior mass of the short‐run oil supply elasticity shifts toward zero and oil supply shocks become minor drivers of oil prices. In terms of contributions to the forecast error variance of oil prices, the model arrives at median estimates of just 6% over a 16‐month horizon.

Green bonds and oil price shocks and uncertainty: A safe haven analysis

This paper investigates the hedge and safe-haven properties of green bonds (GBs) performing as a safeguard against oil price shocks and uncertainty, in comparison to the corresponding roles of gold, the 3-month European government bills and the U.S. 3-Month T. bills. Oil price shocks are disentangled into oil supply, oil demand, and oil risk shocks based on the recent methodology of Ready (2018) , generated in a framework that includes gold, oil shocks, and oil uncertainty (OVX). The ability of GBs to protect against oil price shocks and oil uncertainty is examined, using the GARCH and quantile regression (QR) models. The results show that GBs are more appropriate than gold and conventional bonds (CBs) as hedging and safe haven tools against oil price shocks and oil uncertainty. Besides, the ability of GBs to protect against oil price shocks and uncertainty depends on whether the oil shocks are supply, demand, or risk shocks. Furthermore, we find that GBs serve as a strong hedge and/or a safe haven against structural oil shocks generally under the bearish GBs market conditions. The European government bills and the US T. bills play the role of weak hedge and a safe haven asset against the oil uncertainty and the oil shocks. This role varies across quantiles (bear and bull market conditions). Relevant risk management implications are discussed.

Oil shocks and investor attention

In this paper, we examine the existence of sentiment exposure in oil price returns. We augment the SVAR model of Kilian and Park (International Economic Review, 2009, 50, 1267–1287) by including the effects of (1) investors sentiment proxied by Google’s search volume index, (2) economic policy uncertainty (EPU) and (3) time variation in both coefficients and the variance-covariance matrix. Our empirical results show that changes in investor attention do exhibit a significant long-lasting impact on oil and stock market returns. Aggregate oil demand and supply shocks have a transitory effect on investor sentiment. We reveal that the impact of EPU is temporary and significant, while EPU responds strongly to shocks on oil prices and stock market returns. In all cases, the magnitude and sign of responses are affected by the timing of the shock. Our findings are robust to an alternative sentiment indicator and once the role of oil inventories is considered.

Oil shocks and global economy

This paper analyzes how global economic activity reacts to shocks in the crude oil market, allowing that such reactions may change over time by using a Time-Varying Parameter Vector Autoregression model. Our findings show that an unanticipated disruption in oil supply leads to a relevant decline in global economic activity at any period of time considered (1973:08–2019:06) and at any response horizon, with impacts being relatively similar over time. An unexpected expansion in aggregate demand meaningfully boots global economic activity at any period of time and at any response horizon. In contrast, an unexpected oil-specific demand increase only has a short-lived substantial effect on global economic activity for the shocks produced in the early 2000s, the global financial crisis and the shocks occurred in the last years of the 2010s. These findings are in line with those of Baumeister and Hamilton (2019) who, using a time-invariant model, found that oil supply shocks reduce global economic activity, but oil consumption-demand shocks do not.

Global Energy Price Volatility and Agricultural Commodity Prices in Malaysia.

Few studies have differentiated oil demand shocks from oil supply shocks in the literature that has investigated the impacts of these issues on the prices of agricultural products. This study attempts to investigate this problem by employing a structural vector autoregression (SVAR) technique on Malaysian data from January 1993 to December 2019. We found that the reactions of agricultural commodity prices to the changes in global oil prices largely depend on whether they result from oil demand shocks or oil supply shocks. Global oil demand shocks before the food price crisis (2006–2008) can explain a large share of the changes in prices of agricultural products, while after that period, their capacity to explain these changes becomes much weaker. After the food crisis period, the contribution of the oil supply shock to changes in the prices of agricultural products is higher than that of the oil demand shock. We can conclude that the role of oil supply in the economy in explaining changes in the prices of agricultural commodities is stronger after the food price crisis. This is because Malaysia’s economy, as a net oil exporter, benefits from higher oil prices resulting in higher demand for agricultural products and, consequently, higher prices for agricultural commodities.

Oil price shocks and cost of capital: Does market liquidity play a role?

This paper provides novel perspective to the oil-stock market nexus by examining the role of stock market liquidity in the propagation of oil price shocks to the cost of capital (CoC) estimates from a set of 34 global economies. Utilizing implied cost of capital estimates that are extracted from a dividend discount model and disaggregated oil price shock series including oil supply, consumption demand, inventory demand and economic activity shocks, we show that oil price shocks have quite heterogeneous effects on equity financing costs across the world economies, depending on the nature of the shock and the time horizon. Our findings show that oil supply shocks have a consistent positive effect on CoC, particularly for emerging economies and net oil importers, suggesting that supply driven oil price uncertainty significantly raises firm level financing costs regardless of the level of market liquidity. Interestingly however, market liquidity takes on a significant role when interacted with oil consumption demand shocks, suggesting that the effect of oil demand shocks on firms' financing costs is transmitted via the liquidity channel. Considering that liquidity dry-ups can severely impact firm financing costs, our findings provide important insights to policy makers as demand driven oil market shocks present a double challenge via its effects on market liquidity dynamics, which in turn, can enhance the negative impact of these shocks on firm financing costs and corporate investment activity. Overall, the findings highlight the role of market liquidity in the propagation of oil price shocks to firm financing costs with significant implications for corporate managers and policy makers.