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On Oil Price Shocks: The Role of Storage

  • Deren Unalmis
  • Ibrahim Unalmis
  • Derya Filiz Unsal

Building on recent work on the role of speculation and inventories in oil markets, the paper embeds a competitive oil storage model within a DSGE model of the U.S. economy. This enables us to formally analyze the impact of a (speculative) storage demand shock and to assess how the effects of various demand and supply shocks change in the presence of oil storage facility. The paper finds that business-cycle-driven oil demand shocks are the most important drivers of U.S. oil price fluctuations during 1982–2007. Disregarding the storage facility in the model causes a considerable upward bias in the estimated role of oil supply shocks in driving oil price fluctuations. The results also confirm that a change in the composition of shocks helps explain the resilience of the macroeconomic environment to the oil price surge after 2003. Finally, speculative storage is shown to have a mitigating or amplifying role depending on the nature of the shock.

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Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 60 (2012)
Issue (Month): 4 (December)
Pages: 505-532

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Handle: RePEc:pal:imfecr:v:60:y:2012:i:4:p:505-532
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