Understanding the Decline in the Price of Oil Since June 2014

CFS Working Paper No. 501

36 Pages Posted: 29 Jan 2015 Last revised: 31 Mar 2015

Christiane Baumeister

University of Notre Dame

Lutz Kilian

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

Multiple version iconThere are 3 versions of this paper

Date Written: February 22, 2015

Abstract

Some observers have conjectured that oil supply shocks in the United States and in other countries are behind the plunge in the price of oil since June 2014. Others have suggested that a major shock to oil price expectations occurred when in late November 2014 OPEC announced that it would maintain current production levels despite the steady increase in non-OPEC oil production. Both conjectures are perfectly reasonable ex ante, yet we provide quantitative evidence that neither explanation appears supported by the data. We show that more than half of the decline in the price of oil was predictable in real time as of June 2014 and therefore must have reflected the cumulative effects of earlier oil demand and supply shocks. Among the shocks that occurred after June 2014, the most influential shock resembles a negative shock to the demand for oil associated with a weakening economy in December 2014. In contrast, there is no evidence of any large positive oil supply shocks between June and December. We conclude that the difference in the evolution of the price of oil, which declined by 44% over this period, compared with other commodity prices, which on average only declined by about 5%-15%, reflects oil-market specific developments that took place prior to June 2014.

Keywords: Oil price declines, OPEC, oil supply, oil demand, shale oil

JEL Classification: Q43, C53

Suggested Citation

Baumeister, Christiane and Kilian, Lutz, Understanding the Decline in the Price of Oil Since June 2014 (February 22, 2015). CFS Working Paper No. 501. Available at SSRN: https://ssrn.com/abstract=2557316 or http://dx.doi.org/10.2139/ssrn.2557316

Christiane Baumeister

University of Notre Dame ( email )

722 Flanner Hall
Notre Dame, IN 46556
United States
+1 574 631 8450 (Phone)

HOME PAGE: http://https://sites.google.com/site/cjsbaumeister/

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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