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

James L. Cross (), Bao H. Nguyen () and Trung Duc Tran ()
Additional contact information
James L. Cross: BI Norwegian Business School, Centre of Applied Macroeconomics and Commodity Prices (CAMP), https://www.bi.edu/about-bi/employees/department-of-economics/jamie-cross/
Bao H. Nguyen: Tasmanian School of Business & Economics, University of Tasmania, https://www.utas.edu.au/profiles/staff/economics/bao-nguyen
Trung Duc Tran: The University of Sydney, https://www.sydney.edu.au/arts/about/our-people/academic-staff/trungduc-tran.html

No 2020-02, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

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: 28 pages
Date: 2020
New Economics Papers: this item is included in nep-ene, nep-gen and nep-ore
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Citations: View citations in EconPapers (5)

Published by the University of Tasmania. Discussion paper 2020-02

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