A Micro-Based Model for World Oil Market
56 Pages Posted: 13 Jun 2017
Date Written: January 11, 2017
In this paper, we study the supply-demand drivers of the price of oil over the last two decades. We address the problem of endogeneity using a novel SVAR approach, which allows us to incorporate technological restrictions that occur at the micro level in the production of crude oil to solve the identification problem in a reduced form regression analysis that seeks to disentangle the drivers of oil prices. We explore the relationships between oil prices, rig counts, oil production and an index of world economic activity, and provide results for a heterogeneous set of countries. We find that when oil prices peaked in mid-2008 reaching almost US$150 compared to US$14 in 1998, a large proportion of the price move can be explained through a purely demand and supply factors.
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