The role of precautionary and speculative demand in the global market for crude oil

Jamie Cross, Bao H. Nguyen and Trung Duc Tran

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Contemporary structural models of the global market for crude oil treat storage demand as a composite of precautionary responses to uncertainty and speculative behavior, due to difficulties in jointly identifying these distinct demand components. This difficulty arises because the underlying expectation shifts are latent and operate through similar transmission mechanisms. In this paper, we extend the workhorse oil market model by jointly identifying these distinct demand components. Our main insight is that precautionary demand is the primary driver of the real price of crude oil, previously associate with storage demand shocks. Historically, precautionary demand shifts associated with adverse sociopolitical conditions in the Middle-East, can explain the oil price spikes during the 1979 oil crisis and the Wars of 1980 and 1990, while speculative demand was a more important driver during the disbandment of OPEC. Finally, we find that these newly identified shocks have distinct consequences for the U.S. economy: precautionary demand shocks reduce real GDP, while speculative demand shocks cause inflation.

Keywords: Oil price uncertainty; Oil market; SVAR; Narrative sign restrictions (search for similar items in EconPapers)
JEL-codes: C32 C52 Q41 Q43 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2020-04
New Economics Papers: this item is included in nep-ene and nep-ore
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: The role of precautionary and speculative demand in the global market for crude oil (2022)
Working Paper: The Role of Precautionary and Speculative Demand in the Global Market for Crude Oil (2021)
Working Paper: The role of precautionary and speculative demand in the global market for crude oil (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2020-34

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