Understanding the Decline in the Price of Oil Since June 2014

41 Pages Posted: 15 Mar 2016

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 15, 2016

Abstract

Some observers have conjectured that the steep decline in the price of oil between June and December 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. We attribute $11 of this predictable decline to the cumulative effects of adverse demand shocks prior to July 2014, reflecting a slowing global economy, and $16 to positive oil supply shocks and to shocks to expected oil production that occurred prior to July 2014. The remaining oil price decline is accounted for by a shock to oil price expectations in July 2014 that lowered the demand for oil inventories and a shock to the demand for oil associated with an unexpectedly weakening economy in December 2014, which lowered the price of oil by an additional $9 and $13, respectively.

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

JEL Classification: Q430, C530

Suggested Citation

Baumeister, Christiane and Kilian, Lutz, Understanding the Decline in the Price of Oil Since June 2014 (February 15, 2016). CESifo Working Paper Series No. 5755. Available at SSRN: https://ssrn.com/abstract=2747889

Christiane Baumeister

University of Notre Dame ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Lutz Kilian (Contact Author)

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

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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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