Long Run Relationship Between Oil Prices and Aggregate Oil Investment: Empirical Evidence

Abstract

Using the aggregate number of oil rigs as a proxy of oil investment, I evaluate the bidirectional relationship between oil prices and oil investment in OPEC and Non-OPEC countries. We take advantage of Bayesian estimation techniques and innovation accounting to incorporate the long run dynamics of the oil market without imposing strong restrictions on its structural form. Our results suggest that aggregate oil investment reacts to oil price changes as predicted in the traditional Hotteling model, but the response of oil price to shocks in oil investment (when controlling for world oil demand and oil production in both groups) is barely significant and usually transitory.

Keywords: Energy Prices, Oil Investments, Vector autoregression, Bayesian methods

JEL Classification: C11, C32, C53, L71, Q41, Q43