Transmission Of Oil Price Shocks Research Articles

The shale oil boom and the US economy: Spillovers and time‐varying effects

SummaryWe provide new evidence that the transmission of oil price shocks to the US economy has changed with the shale oil boom. To show this, we develop a time‐varying parameter factor‐augmented vector autoregressive (FAVAR) model with a large data environment of state‐level, industry, and aggregate US data. The model effectively captures potential spillovers between oil and non‐oil industries, as well as variation over time. Specified in this way, we find that investment, income, industrial production, and (non‐oil) employment in most oil‐producing and some manufacturing‐intensive US states increase following an oil‐specific shock—effects that were not present before the shale oil boom.

Revisiting the relationship between oil supply news shocks and U.S. economic activity: Role of the zero lower bound

Do oil supply news shocks affect the U.S. economy differently at the zero lower bound? We provide evidence consistent with this hypothesis. Using various U.S. macroeconomic time series data from 1975, we find that the transmission of oil price shocks driven by changes in supply expectations is substantially different at the zero lower bound. These shocks tend to be contractionary when interest rates are higher, and expansionary when monetary policy is operating in the ZLB. Private business investment plays a key role in altering the transmission of oil supply news shocks around the ZLB. The results continue to hold even after controlling for a potentially confounding non-linearity associated with the U.S. shale oil boom. Our empirical investigation should improve our understanding of the role played by policy and structural factors in altering the transmission of oil shocks to the U.S. economy.

On the transmission of oil supply and demand shocks to CO2 emissions in the US by considering uncertainty: A time-varying perspective

In an economic context increasingly governed by structural changes, crises, and uncertainty, our understanding of the transmission of oil price shocks to real economic activity and the resulting effects on CO2 emissions is found to evolve over time. Our understanding is also found to evolve when considering the sources of oil price fluctuations as emanating from the supply or demand side. So far, there is still few answers provided by the literature on how economic and policy uncertainty influences the response of CO2 emissions to different sources of oil price shocks. This paper tries to investigate this ‘missing link’ by estimating the time-varying transmission of oil supply and demand shocks to CO2 emissions in the US, while considering the simultaneous effect of uncertainty. Using monthly data covering a period including the Covid-19 health crisis, a two-step estimation procedure is adopted: before constructing a time-varying parameter structural vector autoregression model with stochastic volatility (TVP-SVAR-SV), a structural VAR model (SVAR) is implemented to decompose oil price shocks in four structural shocks namely: oil supply shock, aggregate demand shock, domestic demand shock and oil-specific demand shock. Estimation results and robustness tests show that the level of uncertainty shapes the transmission of oil price shocks to CO2 emissions. Oil supply and oil-specific demand shocks impact negatively CO2 emissions mostly when uncertainty is low. A high uncertainty level leads to a perverse positive impact of aggregate demand shocks on CO2 emissions. Interestingly, CO2 emissions are found to increase during low levels of uncertainty in response to domestic demand driven oil price shocks. This finding may be due to the expansive economic policies enforced to decrease uncertainty and increase consumption in reaction to domestic demand shocks. These results imply that workable solutions targeting an optimal level of CO2 emissions should not only consider different sources of oil price fluctuations but also the level of uncertainty. Discarding the level of uncertainty may lead to a sub-optimal calibration of the regulatory and fiscal measures aiming to protect the environment against different sources of oil price shocks and to adapt these measures to the time horizon of carbon emissions responses.

Shocks of crude oil prices and world trade policy uncertainty: How much do they matter for China’s trade balance with its three largest partners?

The primary contribution of the current article is to use the SVAR methodology to study the dynamic responses of China’s trade balance with its three largest partners – the U.S., Japan, and Korea – to shocks of oil supply, global demand, and oil-specific demand, controlling for world trade policy uncertainty. We discover that the transmission of oil price shocks relies on the type of shock and different trading partners. Thus, China would need to consider the various oil shock components as the key factors determining the dynamics of the bilateral trade flows with its major partners. We also reveal that world trade policy uncertainty plays an important role in fluctuating China’s trade flows with the U.S., but not with Japan and Korea. When examining China–U.S. trade, therefore, it is important to take into consideration the uncertainty surrounding trade policies. Failure to do so may result in model misspecification in econometric models, which could lead to misleading conclusions.

Asymmetries in the transmission of oil price shocks to inflation in the eurozone

Theory predicts that the level of inflation in an economy and the trend in the prevailing inflation rate may affect how oil price shocks, through their influence on firms’ expectations and price-setting behaviors, are transmitted to inflation. However, empirical evidence regarding this relationship is limited and calls for further exploration. Using data for 12 eurozone countries over the period from 1999 to 2020, we analyze how the inflation environment in which an oil price shock occurs influences its transmission. We find that the inflation environment is a determinant in the way oil supply shocks and oil-specific demand shocks are transmitted to inflation, with positive shocks displaying higher transmission in high inflation environments. Furthermore, transmission of shocks to core inflation, which represents an indirect effect, only occurs in high inflation environments. These findings highlight the need to consider the inflation environment in order to define appropriate monetary policies in response to inflationary pressures caused by oil price shocks.

Interpreting the oil risk premium: Do oil price shocks matter?

Abstract This paper analyzes the link between the economic fundamentals of the global crude oil markets and the oil futures risk premium. The compensation for risk required by speculators in the oil futures market is modelled as part of the endogenous transmission of oil price shocks. The empirical approach is based on a Structural Vector Autoregressive model of the international market for crude oil. The dynamic response functions show a negative relationship between the risk premium and the real price of oil, triggered by shocks to economic fundamentals. Moreover, the expected returns of a long futures investment are largely explained by a specific shock component related to oil speculators and a shift in the global demand for crude oil.

The impact of diesel price on upstream and downstream food prices: Evidence from São Paulo

The literature on the transmission of oil price shocks to prices along the food supply chain has widely ignored how shocks upstream differ from downstream ones. This article examines this issue by modelling upstream and downstream diesel price shocks along the nutritional high-value food supply chain in São Paulo. Using a Vector Error Correction approach and monthly data from July 2001 to December 2013, we estimate short-run and long-run dynamics in producer and retail prices of meat, eggs, dairy and fats & oil due to changes in the average monthly price of diesel. The results of the Granger causality analysis show that the price of diesel cannot be used to predict the behaviour of producer prices in all the markets under study, and the price of diesel predicts retail price only in the egg market. This result is in line with the nature of price controls in Brazil. As of January 2002, the prices charged by distributors and retailers have been liberalized, although wholesale prices of the derivatives, including that of diesel, continue to be set by the state oil company with the objective of controlling inflationary pressures. The results of the response of food prices to diesel price shocks show a positive response of both upstream and downstream prices of egg and dairy products both upstream and downstream, while the opposite direction occurs in the fat and meat markets albeit the initial positive shock of the producer price of meat. The findings of the study show the important role of public policy in determining the nature of price transmission along the food supply chain.

The Shale Oil Boom and the US Economy: Spillovers and Time-Varying Effects

We analyze if the transmission of oil price shocks on the U.S. economy has changed with the shale oil boom. To do so, we put forward a framework that allows for spillovers between industries and learning by doing (LBD) over time. We identify these spillovers using a time-varying parameter factor-augmented vector autoregressive (VAR) model with both state level and country level data. In contrast to previous results, we find considerable changes in the way oil price shocks are transmitted to the U.S economy: there are now positive spillovers to non-oil investment, employment and production from an increase in the oil price - effects that were not present before the shale oil boom.

Is the Discretionary Income Effect of Oil Price Shocks a Hoax?

The transmission of oil price shocks has been a question of central interest in macroeconomics since the 1970s. There has been renewed interest in this question since the large and persistent fall in the real price of oil in 2014-16. In the context of this debate, Ramey (2017) makes the striking claim that the existing literature on the transmission of oil price shocks is fundamentally confused about the question of how to quantify the effect of oil price shocks. In particular, she asserts that the discretionary income effect on private consumption, which plays a central role in contemporary accounts of the transmission of oil price shocks to the U.S. economy, makes no economic sense and has no economic foundation. Ramey suggests that the literature has too often confused the terms-of-trade effect with this discretionary income effect, and she makes the case that the effects of the oil price decline of 2014-16 on private consumption are smaller for a multitude of reasons than suggested by empirical models of the discretionary income effect. We review the main arguments in Ramey (2017) and show that none of her claims hold up to scrutiny. Our analysis highlights the theoretical basis of the discretionary income effect. We also discuss improved regression-based estimates of this effect that allow for changes in the dependence on oil and gasoline imports, and we highlight the fact that alternative estimates used by policymakers involve strong simplifying assumptions.

Asymmetric pass-through of oil prices to gasoline prices with interval time series modelling

Modelling and analyzing the pass-through of crude oil prices to retail gasoline prices has received an increasing attention in existing literature. However, most of the ongoing efforts focus on point-valued data, which may suffer from the informational loss. This paper first employs the threshold autoregressive interval-valued (TARI) models developed recently by Sun et al. (2018a) to investigate this transmission, and proposes a novel consistent interval-based test to detect threshold effects, and derives its asymptotic properties. These interval-based TARI model and test, superior to traditional point-based methods, can produce more efficient parameter estimation and more powerful inference due to the informational gain of interval data. That is, interval data simultaneously contain more information (e.g., trend and volatility) than point-valued data during the same period. Empirical results suggest that retail gasoline prices are adjusted upwards faster than downwards, and this short-run asymmetry is statistically significant during the whole sample. Our findings reveal that both the level and volatility of oil prices have a positive impact on the price of gasoline, which contributes to the asymmetries in the transmission of oil price shocks. These results are robust before and after financial crisis. Furthermore, it is interesting to find that after financial crisis, both the error correction adjustment speeds and the asymmetries decrease.

OIL PRICE SHOCKS, INVENTORIES, AND MACROECONOMIC DYNAMICS

This paper investigates the time delay in the transmission of oil price shocks using disaggregated manufacturing data on inventories and sales. VAR estimates indicate that industry-level inventories and sales respond faster to an oil price shock than aggregate gross domestic product, especially in industries that are energy-intensive. In response to an unexpected oil price increase, sales drop and inventories are accumulated. This leads to future reductions in production. We estimate a modified linear–quadratic inventory model to inquire whether the patterns observed in the VAR impulse responses are consistent with rational behavior by the firms. Estimation results suggest that three mechanisms play a role in the industry-level dynamics. First, oil prices act as a negative demand shock. Second, the shock catches manufacturers by surprise, resulting in higher-than-anticipated inventories. Third, because of their desire to smooth production, manufacturers deviate from the target level of inventories and spread the decline in production over various quarters; hence the delay in the response of aggregate output.

The Role of Oil Price Shocks in Causing U.S. Recessions

AbstractAlthough oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide a formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid‐1970s, analyze its determinants, and show that the linear model fits the data better.

Is the Discretionary Income Effect of Oil Price Shocks a Hoax?

The transmission of oil price shocks has been a question of central interest in macroeconomics since the 1970s. There has been renewed interest in this question after the large and persistent fall in the real price of oil in 2014-16. In the context of this debate, Ramey (2017) makes the striking claim that the existing literature on the transmission of oil price shocks is fundamentally confused about the question of how to quantify the effect of oil price shocks. In particular, she asserts that the discretionary income effect on private consumption, which plays a central role in contemporary accounts of the transmission of oil price shocks to the U.S. economy, makes no economic sense and has no economic foundation. Ramey suggests that the literature has too often confused the terms-of-trade effect with this discretionary income effect, and she makes the case that the effects of the oil price decline of 2014-16 on private consumption are smaller for a multitude of reasons than suggested by empirical models of the discretionary income effect. We review the main arguments in Ramey (2017) and show that none of her claims hold up to scrutiny.

How the Tight Oil Boom Has Changed Oil and Gasoline Markets

Starting in late 2008, the U.S. production of tight oil surged, causing a renaissance in the U.S. oil sector that few industry analysts had anticipated. This tight oil boom reduced the dependence of the United States on petroleum imports and allowed it to become a major exporter of gasoline and diesel fuel. Since mid-2014 the global real price of crude oil has experienced a large and sustained decline. This review article addresses several questions of general interest. First, to what extent was the recent oil price decline caused by the tight oil boom? Second, how did the tight oil boom affect the price of gasoline in global markets and in the United States? Third, what determines the investment response of the oil sector to oil price fluctuations? Fourth, how has the tight oil boom affected the transmission of oil price shocks to the U.S. economy? Finally, what are the implications of the U.S. tight oil boom for European oil importing economies?

Another perspective on gasoline price responses to crude oil price changes

The effects of oil price volatility on the responses of gasoline prices to oil price shocks have received little attention in discussions on the relationship between the prices of crude oil and gasoline. In this paper we consider such effects by using a bivariate structural vector autoregression which is modified to accommodate GARCH-in-mean errors. Our measure of oil price volatility is the conditional variance of the oil price–change forecast error. We isolate the effects of volatility in the price of oil on the price of gasoline and employ simulation methods to calculate nonlinear impulse response functions (NIRFs) to trace any asymmetric effects of independent oil price shocks on the conditional means of gasoline prices. We test whether the relationship between the prices of crude oil and gasoline is symmetric using tests of the null hypothesis of symmetric impulse responses. Based on monthly U.S. data over the period from 1978:1 to 2014:11, our empirical results show that gasoline prices respond asymmetrically to positive and negative oil price shocks. We also find that oil price volatility has a positive effect on the price of gasoline and it contributes to the asymmetries in the transmission of oil price shocks.

The Role of Oil Price Shocks in Causing U.S. Recessions

Although oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide the first formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional recessionary effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid-1970s. Compared to the linear model, the cumulative effect of oil price shocks over course of the next two years is much larger in the net oil price increase model. For example, oil price shocks explain a 3% cumulative reduction in U.S. real GDP in the late 1970s and early 1980s and a 5% cumulative reduction during the financial crisis. An obvious concern is that some of these estimates are an artifact of net oil price increases being correlated with other variables that explain recessions. We show that the explanatory power of oil price shocks largely persists even after augmenting the nonlinear model with a measure of credit supply conditions, of the monetary policy stance and of consumer confidence. There is evidence, however, that the conditional fit of the net oil price increase model is worse on average than the fit of the corresponding linear model, suggesting much smaller cumulative effects of oil price shocks for these episodes of at most 1%.

Impactos indirectos de los precios del petróleo en el crecimiento económico colombiano

In this paper, we study the relationship between oil prices and macroeconomic variables such as gross domestic product (GDP), real exchange rate, fiscal balance, among others, in Colombia during two time periods: 1982-2013 and 2000-2013. We use vector autoregressive models to analyze impulse-response functions; also, we use transformations of oil prices allowing contrast of different hypotheses on the transmission of price shocks to the economy. Further, we contrast Colombian and international evidence regarding the hypothesis that the main channel of transmission of oil price shocks is private consumption. We find evidence of a relationship between consumption and GDP for both time periods. Particularly in the period 2000-2013, when the oil sector has gained participation in the Colombian economy, it is found that private consumption serves as an indirect transmission channel of oil prices into GDP.

The Impact of the Shale Oil Revolution on U.S. Oil and Gasoline Prices

This article examines how the shale oil revolution has shaped the evolution of U.S. crude oil and gasoline prices. It puts the evolution of shale oil production into historical perspective, highlights uncertainties about future shale oil production, and cautions against the view that the U.S. may become the next Saudi Arabia. It then reviews the role of the ban on U.S. crude oil exports, of capacity constraints in refining and transporting crude oil, of differences in the quality of conventional and unconventional crude oil, and of the recent regional fragmentation of the global market for crude oil for the determination of U.S. oil and gasoline prices. It discusses the reasons for the persistent wedge between U.S. crude oil prices and global crude oil prices in recent years and for the fact that domestic oil prices below global levels need not translate to lower U.S. gasoline prices. It explains why the shale oil revolution unlike the shale gas revolution is unlikely to stimulate a boom in oil-intensive manufacturing industries. It also explores the implications of shale oil production for the transmission of oil price shocks to the U.S. economy.

Lower Oil Prices and the U.S. Economy: Is This Time Different?

We explore the effect of the sharp and sustained decline after June 2014 in the global price of crude oil (and hence in the U.S. price of gasoline) on U.S. real GDP growth. Our analysis suggests that this decline produced a cumulative stimulus of about 0.9 percent of real GDP by raising private real consumption and non-oil-related business investment, and an additional stimulus of 0.04 percent, reflecting a shrinking petroleum trade deficit. This stimulative effect, however, has been largely offset by a large reduction in real investment by the oil sector. Hence, the net stimulus since June 2014 has been close to zero. We show that the U.S. economy’s response was not fundamentally different from that observed after the oil price decline of 1986. Then as now, the U.S. economy’s response is consistent with standard economic models of the transmission of oil price shocks. We find no evidence that frictions in reallocating capital and labor across sectors or increased uncertainty about the price of gasoline explain the sluggish response of U.S. real GDP growth. Nor do we find evidence of financial contagion, of spillovers from oil-related investment to non-oil-related investment, of an increase in household savings, or of households deleveraging.

Asymmetries in the response of economic activity to oil price increases and decreases?

It has been common to assume that the relationship between economic activity and oil prices is asymmetric. Theoretical underpinnings for this asymmetry include costly sectoral reallocation, partial equilibrium models of irreversible investment, and some version of precautionary savings. Yet, recent studies that use new methodologies to test for asymmetries in U.S. data have cast some doubts on that premise. In this paper, we use state-of-the-art techniques to evaluate the presence of asymmetries for a set of OECD countries containing both oil exporters and oil importers. We find very little support for the hypothesis that the response of industrial production to oil price increases and decreases is asymmetric. Our results have important implications for theoretical models of the transmission of oil price shocks: they point towards the importance of direct-supply and direct-demand transmission channels, as well as indirect transmission channels that imply a symmetric response.