Transitory and Permanent Shocks in the Global Market for Crude Oil

Abstract

This paper documents the determinants of real oil price in the global market based on SVAR model embedding transitory and permanent shocks on oil demand and supply as well as speculative disturbances. We find evidence of significant differences in the propagation mechanisms of transitory versus permanent shocks, pointing to the importance of disentangling their distinct effects. Permanent supply disruptions turn out to be a bigger factor in historical oil price movements during the most recent decades, while speculative shocks became less influential.

Keywords: Oil prices, Supply and demand, Oil production, Purchasing power parity, Real sector, Oil market, Vector autoregressions, Narrative analysis, Bayesian estimation, Kalman filtering, WP, global activity, endogenous variable, oil price, real price, supply shock

JEL Classification: Q41, Q43, C32, E32, G28, E01, D4, Q, O13, Q35