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A New Approach for Identifying Demand and Supply Shocks in the Oil Market

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Abstract

An oil-price spike is often used as the textbook example of a supply shock. However, rapidly rising oil prices can also reflect a demand shock. Recognizing the difference is important for central bankers. A supply-driven increase in the price of oil can result in higher unemployment and inflation, leaving central bankers with the difficult decision to loosen policy, tighten policy, or not respond at all. A demand-driven increase reflecting global growth may support the case for tighter policy. In this post, we describe an approach for decomposing oil price changes into supply and demand shocks using financial market data.

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  • Jan J. J. Groen & Kevin McNeil & Menno Middeldorp, 2013. "A New Approach for Identifying Demand and Supply Shocks in the Oil Market," Liberty Street Economics 20130325, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:86862
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    File URL: https://libertystreeteconomics.newyorkfed.org/2013/03/a-new-approach-for-identifying-demand-and-supply-shocks-in-the-oil-market.html
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    Cited by:

    1. Akram, Q. Farooq, 2020. "Oil price drivers, geopolitical uncertainty and oil exporters' currencies," Energy Economics, Elsevier, vol. 89(C).
    2. Lodge, David & Manu, Ana-Simona, 2022. "EME financial conditions: Which global shocks matter?," Journal of International Money and Finance, Elsevier, vol. 120(C).
    3. Venditti, Fabrizio & Veronese, Giovanni, 2020. "Global financial markets and oil price shocks in real time," Working Paper Series 2472, European Central Bank.
    4. Gianluca Benigno & Julian di Giovanni & Jan J. J. Groen & Adam I. Noble, 2022. "The GSCPI: A New Barometer of Global Supply Chain Pressures," Staff Reports 1017, Federal Reserve Bank of New York.

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    Keywords

    Oil prices; dynamic factors; demand and supply;
    All these keywords.

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