Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market

Lutz Kilian ()

No 5994, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using a newly developed measure of global real economic activity, a structural decomposition of the real price of crude oil in four components is proposed: oil supply shocks driven by political events in OPEC countries; other oil supply shocks; aggregate shocks to the demand for industrial commodities; and demand shocks that are specific to the crude oil market. The latter shock is designed to capture shifts in the price of oil driven by higher precautionary demand associated with concerns about the availability of future oil supplies. The paper quantifies the magnitude and timing of these shocks, their dynamic effects on the real price of oil and their relative importance in determining the real price of oil during 1975-2005. The analysis also sheds light on the origins of the major oil price shocks since 1979. Distinguishing between the sources of higher oil prices is shown to be crucial for assessing the effect of higher oil prices on U.S. real GDP and CPI inflation. It is shown that policies aimed at dealing with higher oil prices must take careful account of the origins of higher oil prices. The paper also quantifies the extent to which the macroeconomic performance of the U.S. since the mid-1970s has been determined by the external economic shocks driving the real price of oil as opposed to domestic economic factors and policies.

Keywords: oil supply; causality; oil demand; oil price shocks (search for similar items in EconPapers)
JEL-codes: E31 E32 Q43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-mac
Date: 2006-12
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Journal Article: Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market (2009)
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