Not all demand oil shocks are alike: disentangling demand oil shocks in the crude oil market

Purpose - The purpose of this paper is to re‐examine the structural origins of international crude oil price fluctuation. Design/methodology/approach - The paper establishes a structural vector autoregression model based on the generalized supply and demand analysis of crude oil price fluctuation and performance the structural decomposition of price shocks with impulse response analysis of those factors. Findings - It is found that four kinds of structural shocks derived from the generalized supply and demand analysis are the essential determinants of crude oil prices fluctuation. On one hand, similar to Kilian's results, the supply side shocks – both the exogenous geopolitical ones and other oil supply shocks have little influence. Whereas, the demand side shocks – both the aggregate demand shock and the oil market specific demand shock have prominent effects. On the other hand, with the expanded sample range, it is found that the dynamic characteristic of the impulse response of oil price to demand side factors is not only incompatible with the basic economic theory, but also clashes with Kilian's statement based upon his research. It is conjured that the incompatibility comes from the ignorance of the finer decomposition of demand side factors. To decompose those demand side factors further, the US dollar liquidity was added into the model. The results show that the impact of US dollar liquidity on the fluctuation of oil prices cannot be ignored. The argument that ascribes the soaring international crude oil price to China's economic growth lacks theoretical and empirical evidence. Originality/value - The paper contributes marginally to the research on the structural origins of international crude oil price fluctuation and sheds light on the possibility of finer decomposition of demand side oil shocks.