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Importance of Demand and Supply Shocks for Oil Price Variations

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  • Ma, Lin

    (School of Economics and Business, Norwegian University of Life Sciences)

Abstract

This paper studies the importance of demand and supply shocks in the oil market, and tries to explain the formation of the short-run oil price by applying an extended commodity storage model to the cyclical components of the price. First, I employ a multivariate method to extract the cyclical component of the oil price, world oil consumption, and global GDP. Next, I find a large and positive effect of global GDP shock on the oil price cycles in a VAR model. Then, I estimate the commodity storage model using a moment-matching method. All parameters are estimated significantly, and the model shows good capability of reproducing the volatility and persistence of oil pricecycles. IfindthattheGDPshockgeneratesamuchmoremoderateeffectontheoil price cycles in the extended commodity storage model than the empirical evidence from the VAR analysis, and the production shock plays an important role for the variance of the cyclical component of the oil price.

Suggested Citation

  • Ma, Lin, 2018. "Importance of Demand and Supply Shocks for Oil Price Variations," Working Paper Series 10-2018, Norwegian University of Life Sciences, School of Economics and Business.
    • Handle: RePEc:hhs:nlsseb:2018_010
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    References listed on IDEAS

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    More about this item

    Keywords

    Oilprice; demandshock; supplyshock; competitivestorage model; BeverageNelson decomposition; simulated method of moments;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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