The economic implications of oil supply uncertainty

By exploiting the stochastic volatility in oil production, we identify a novel source of instability in the global oil market: oil supply uncertainty. Our measure provides additional insights to standard measures in the literature, such as the geopolitical risk index and oil supply surprises. In particular, we demonstrate that unexpected increases in oil supply uncertainty lead to higher real oil prices and a drop in inventories. As such, our mechanism works through the speculative component in the global oil market, resembling the effects of a shortfall in oil supply. However, in contrast with a negative oil supply shock, heightened oil supply uncertainty yields a highly transitory decline in oil production. Furthermore, evidence from a sectoral analysis of the U.S. economy indicates that the effect on economic activity is more pronounced in the durable goods sector, driven by delayed investment and spending decisions, while the most pronounced effects are observed in energy-sensitive sectors.