Identifying Oil Price Shocks and Their Consequences: The Role of Expectations in the Crude Oil Market

31 Pages Posted: 22 May 2018

See all articles by Takuji Fueki

Takuji Fueki

Bank of Japan

Hiroka Higashi

Bank of Japan

Naoto Higashio

Bank of Japan

Jouchi Nakajima

Bank for International Settlements (BIS)

Shinsuke Ohyama

Bank of Japan

Yoichiro Tamanyu

Bank of Japan

Date Written: May 17, 2018

Abstract

This paper proposes a simple but comprehensive structural vector autoregressive (SVAR) model to examine the underlying factors of oil price dynamics. The distinguishing feature is to explicitly assess the role of expectations on future aggregate demand and oil supply in addition to the traditional realized aggregate demand and supply factors. Our empirical analysis shows that identified future demand and supply shocks explain about 30-35 percent of historical oil price fluctuations. In particular, future oil supply shocks are more than twice as important as realized and future demand shocks in accounting for oil price developments. The empirical result indicates that the influence of oil price shocks on global output varies according to the nature of each shock. We also show that the financial factors and the development of shale-oil technology are additional relevant sources of oil price fluctuations.

Keywords: Oil demand and supply, Oil price, Structural vector autoregressive model

JEL Classification: C32, E44, G12, G15

Suggested Citation

Fueki, Takuji and Higashi, Hiroka and Higashio, Naoto and Nakajima, Jouchi and Ohyama, Shinsuke and Tamanyu, Yoichiro, Identifying Oil Price Shocks and Their Consequences: The Role of Expectations in the Crude Oil Market (May 17, 2018). BIS Working Paper No. 725, Available at SSRN: https://ssrn.com/abstract=3180427

Takuji Fueki

Bank of Japan ( email )

CPO Box 203
Tokyo, 100-91
Japan

Hiroka Higashi

Bank of Japan ( email )

CPO Box 203
Tokyo, 100-91
Japan

Naoto Higashio

Bank of Japan ( email )

CPO Box 203
Tokyo, 100-91
Japan

Jouchi Nakajima (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Shinsuke Ohyama

Bank of Japan ( email )

CPO Box 203
Tokyo, 100-91
Japan

Yoichiro Tamanyu

Bank of Japan

CPO Box 203
Tokyo, 100-91
Japan

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