Modeling the Impact of Agricultural Shocks on Oil Price in the US: A New Approach

Tan Vu (), Duc Hong Vo, Chi Ho () and Loan Thi-Hong Van
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Duc Hong Vo: Business and Economics Research Group, Ho Chi Minh City Open University, Ho Chi Minh City 7000, Vietnam
Loan Thi-Hong Van: School of Advanced Study, Ho Chi Minh City Open University, Ho Chi Minh City 7000, Vietnam

JRFM, 2019, vol. 12, issue 3, 1-27

Abstract: The current literature has generally considered prices of the agricultural commodity as an endogenous factor to crude oil price. As such, the role of the agricultural market in the energy sector has been largely ignored. We argue that the expansion of agricultural production may trigger a significant increase in oil price. In addition, the world has recently witnessed a growth in biofuel production, leading to an increase in the size of the agricultural sector. This study is conducted to examine the impact of different agricultural shocks on the oil and agricultural markets in the US for the period from 1986 to 2018. The study utilizes the Structural Vector Autoregressive (SVAR) model to estimate the relationship between the agricultural market and the crude oil market. Moreover, the variance decomposition is also used to quantify the contribution of agricultural demand shocks on oil price variations. Findings from this paper indicate that different agricultural shocks can have different effects on oil price and that corn use in ethanol plays an important role in the impact of corn demand shocks on oil price. We find evidence that the agricultural market can have an impact on oil prices through two main channels: indirect cost push effect and direct biofuel effect. Of these, the biofuel channel unexpectedly suggests that the expansion of bioethanol may in fact foster the dependency of the economy on fossil fuel use and prices.

Keywords: agricultural commodity prices; volatility; crude oil prices; structural vector autoregressive model; impulse response functions (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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