Oil Price Shocks: Causes and Consequences

TLDR

Recent research has challenged long-held beliefs about the causes and consequences of oil price shocks, revealing that evolving empirical and theoretical models have reshaped our understanding of their determinants and their interaction with the global economy. The study aims to explicitly account for the demand and supply shocks underlying oil price shocks when examining their transmission to the domestic economy. The authors use structural models of the global economy that incorporate the oil market to disentangle cause and effect between oil prices and the economy. Key findings show that the real price of oil is endogenous to economic fundamentals and that oil price shocks do not occur in isolation.

Abstract

Research on oil markets conducted during the last decade has challenged long-held beliefs about the causes and consequences of oil price shocks. As the empirical and theoretical models used by economists have evolved, so has our understanding of the determinants of oil price shocks and of the interaction between oil markets and the global economy. Some of the key insights are that the real price of oil is endogenous with respect to economic fundamentals and that oil price shocks do not occur ceteris paribus. As a result, one must explicitly account for the demand and supply shocks underlying oil price shocks when studying their transmission to the domestic economy. Disentangling cause and effect in the relationship between oil prices and the economy requires structural models of the global economy including the oil market.