Essays on the Causes and Dynamic Effects of Oil Price Shocks
Creators: name: Mohammed, Mikidadu
Publisher: name: University of Utah
Year: 2019
Subjects: Economic theory

description: Since the 1973 oil crisis, the causes and macroeconomic effects of oil price shocks remain relevant issues for academics and policymakers. Where do oil price shocks come from? How are they transmitted? What are their macroeconomic impacts? Which policies appear promising in helping an economy adjust to such shocks? Indeed, understanding the causes of oil price shocks and quantifying the magnitude of their impacts on the macroeconomy is crucial for designing appropriate policy responses. The three essays in this dissertation extend recent advances in the oil shocks literature to investigate the underlying causes of oil price shocks and examine the macroeconomic effects of the shocks on oil-importing countries. The first essay (contained in Chapter 3) uses a structural Vector Autoregressive (VAR) model of the global crude oil market to identify the underlying causes of oil price shocks and quantify the contributions of the different sources of the shocks. Empirical results reveal that oil price shocks are caused by distinct supply and demand shocks: an oil supply shock caused by disruptions in global oil production; an aggregate demand shock driven by changes in global economic activity; and an oil-specific demand shock driven by shifts in precautionary demand for oil due to uncertainties about future oil supply shortfalls. An unexpected oil supply disruption causes a modest transitory increase in the real price of oil; an unanticipated increase in aggregate demand causes a strong increase in the real price of oil; and an unanticipated increase in precautionary demand for oil triggers an immediate and large increase in the real price of oil. In the second essay (Chapter 4), I propose a two-step modeling framework that combines the structural VAR model and panel autoregressive distributed lag (ARDL) model to examine the elasticities of oil import demand to oil price shocks for a sample of 30 oil-importing countries: Organization for Economic Cooperation and Development (OECD) and non-OECD. The elasticity estimates show that import demand for oil is less sensitive to oil price shocks driven by supply disturbances but highly sensitive to oil price shocks driven by aggregate demand and precautionary demand shocks. Dividing the sample into OECD and non-OECD countries, both groups are found to be identical in their responses to oil supply shocks but they differ in their responses to aggregate demand and precautionary demand shocks. The final essay (Chapter 5) estimates the effects of oil price shocks on the macroeconomic performance of 14 OECD oil-importing countries. Utilizing a block recursive VAR, the results show that increases in the price of oil driven by oil supply shocks and precautionary demand shocks are inflationary and unfavorable for economic growth while increases in the price of oil driven by aggregate demand shocks are inflationary but increase the rhythm of economic activity. Also, Chapter 5 evaluates whether structural differences matter for the impact of oil shocks across countries, focusing on the role of oil intensity defined as the share of oil consumption in total energy consumption. The overarching conclusion of the dissertation is that oil price shocks do not originate solely from the exogenous supply shocks but also originate from the endogenous demand shocks. Consequently, the macroeconomic effects of the shocks as well as the appropriate policy responses crucially depend on the source of the shock.