Country-Specific Oil Supply Shocks and the Global Economy: A Counterfactual Analysis

47 Pages Posted: 4 Jun 2015

See all articles by Kamiar Mohaddes

Kamiar Mohaddes

University of Cambridge - Judge Business School; University of Cambridge - King's College, Cambridge

M. Hashem Pesaran

University of Southern California - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: May 30, 2015

Abstract

This paper investigates the global macroeconomic consequences of country-specific oil-supply shocks. Our contribution is both theoretical and empirical. On the theoretical side, we develop a model for the global oil market and integrate this within a compact quarterly model of the global economy to illustrate how our multi-country approach to modelling oil markets can be used to identify country-specific oil-supply shocks. On the empirical side, estimating the GVAR-Oil model for 27 countries/regions over the period 1979Q2 to 2013Q1, we show that the global economic implications of oil-supply shocks (due to, for instance, sanctions, wars, or natural disasters) vary considerably depending on which country is subject to the shock. In particular, we find that adverse shocks to Iranian oil output are neutralized in terms of their effects on the global economy (real outputs and financial markets) mainly due to an increase in Saudi Arabian oil production. In contrast, a negative shock to oil supply in Saudi Arabia leads to an immediate and permanent increase in oil prices, given that the loss in Saudi Arabian production is not compensated for by the other oil producers. As a result, a Saudi Arabian oil supply shock has significant adverse effects for the global economy with real GDP falling in both advanced and emerging economies, and large losses in real equity prices worldwide.

Keywords: country-specific oil supply shocks, identification of shocks, oil sanctions, oil prices, global oil markets, Iran, Saudi Arabia, international business cycle, Global VAR (GVAR), interconnectedness, impulse responses

JEL Classification: C320, E170, F440, F470, O530, Q430

Suggested Citation

Mohaddes, Kamiar and Pesaran, M. Hashem, Country-Specific Oil Supply Shocks and the Global Economy: A Counterfactual Analysis (May 30, 2015). CESifo Working Paper Series No. 5367, Available at SSRN: https://ssrn.com/abstract=2613899

Kamiar Mohaddes

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

University of Cambridge - King's College, Cambridge ( email )

King's Parade
Cambridge, CB2 1ST
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

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