Understanding the Decline in the Price of Oil Since June 2014

37 Pages Posted: 10 Feb 2015

See all articles by Christiane Baumeister

Christiane Baumeister

University of Notre Dame; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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 2015

Abstract

Some observers have conjectured that the decline in the price of oil after June 2014 resulted from positive oil supply shocks in the second half of 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 demand, Oil price declines, Oil supply, OPEC, Shale oil

JEL Classification: C53, Q43

Suggested Citation

Baumeister, Christiane and Kilian, Lutz, Understanding the Decline in the Price of Oil Since June 2014 (February 2015). CEPR Discussion Paper No. DP10404. Available at SSRN: https://ssrn.com/abstract=2562969

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Lutz Kilian

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