Understanding the estimation of oil demand and oil supply elasticities

Lutz Kilian

Energy Economics, 2022, vol. 107, issue C

Abstract: This paper examines the advantages and drawbacks of alternative methods of estimating oil supply and oil demand elasticities and of incorporating this information into structural VAR models of the global oil market. I show that some of these methodologies suffer from drawbacks that call into question the estimates they generate. I also explain the rationale for the use of alternative elasticity definitions in the literature and discuss the trade-off between these definitions. Once these issues are recognized, seemingly conflicting conclusions in the recent literature can be reconciled. My analysis reaffirms the conclusion that the one-month oil supply elasticity is close to zero, which implies that oil demand shocks are the dominant driver of the real price of oil.

Keywords: Oil supply elasticity; Oil demand elasticity; IV estimation; Structural VAR; Bayesian inference; Oil price; Gasoline price (search for similar items in EconPapers)
JEL-codes: C36 C52 Q41 Q43 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Related works:
Working Paper: Understanding the Estimation of Oil Demand and Oil Supply Elasticities (2020)
Working Paper: Understanding the Estimation of Oil Demand and Oil Supply Elasticities (2020)
Working Paper: Understanding the Estimation of Oil Demand and Oil Supply Elasticities (2020)
Working Paper: Understanding the estimation of oil demand and oil supply elasticities (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:107:y:2022:i:c:s0140988322000317

DOI: 10.1016/j.eneco.2022.105844

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