Understanding the decline in the price of oil since June 2014

Christiane Baumeister and Lutz Kilian

No 501, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: Some observers have conjectured that oil supply shocks in the United States and in other countries are behind the plunge in the price of oil since June 2014. Others have suggested that a major shock to oil price expectations occurred when in late November 2014 OPEC announced that it would maintain current production levels despite the steady increase in non-OPEC oil production. Both conjectures are perfectly reasonable ex ante, yet we provide quantitative evidence that neither explanation appears supported by the data. We show that more than half of the decline in the price of oil was predictable in real time as of June 2014 and therefore must have reflected the cumulative effects of earlier oil demand and supply shocks. Among the shocks that occurred after June 2014, the most influential shock resembles a negative shock to the demand for oil associated with a weakening economy in December 2014. In contrast, there is no evidence of any large positive oil supply shocks between June and December. We conclude that the difference in the evolution of the price of oil, which declined by 44% over this period, compared with other commodity prices, which on average only declined by about 5%-15%, reflects oil-market specific developments that took place prior to June 2014.

Keywords: oil price declines; OPEC; oil supply; oil demand; shale oil (search for similar items in EconPapers)
JEL-codes: C53 Q43 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (50)

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Related works:
Journal Article: Understanding the Decline in the Price of Oil since June 2014 (2016)
Working Paper: Understanding the Decline in the Price of Oil since June 2014 (2016)
Working Paper: Understanding the Decline in the Price of Oil since June 2014 (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:501

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