Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003-2008?

19 Pages Posted: 19 May 2009

See all articles by Bruce Hicks

Bruce Hicks

University of Michigan at Ann Arbor - Department of Economics

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: April 2009

Abstract

Recently developed structural models of the global crude oil market imply that the surge in the real price of oil between mid-2003 and mid-2008 was driven by repeated positive shocks to the demand for all industrial commodities, reflecting unexpectedly high growth mainly in emerging Asia. This note evaluates this proposition using an alternative data source and a different econometric methodology. Rather than inferring demand shocks from an econometric model, we utilize a direct measure of global demand shocks based on revisions of professional real GDP growth forecasts. We show that recent forecast surprises were associated primarily with unexpected growth in emerging economies (and to a lesser extent in Japan), that markets were repeatedly surprised by the strength of this growth, that these surprises were associated with a hump-shaped response of the real price of oil that reaches its peak after 12 to 16 months, and that news about global growth predict much of the surge in the real price of oil from mid-2003 until mid-2008 and much of its subsequent decline.

Keywords: Demand, EIU, Forecast Revisions, Global Real Activity, News, Oil price, Shocks

JEL Classification: C42, C53, Q43

Suggested Citation

Hicks, Bruce and Kilian, Lutz, Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003-2008? (April 2009). CEPR Discussion Paper No. DP7265. Available at SSRN: https://ssrn.com/abstract=1405062

Bruce Hicks

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Lutz Kilian (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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