US shale oil and the behaviour of commodity prices

The US is committed to technological improvements in horizontal drilling and hydraulic fracturing in its drive of toppling the world’s leading oil producers by the mid-2020s and evolving into a net oil exporter by 2030. Consequently, the technological innovations revolutionised the US oil sector and the international oil market with increasing relevance of the shale oil and attendant shock spill overs to financial and commodity markets. Upon these attractions and consistent with evidence in the literature, we trace the oil price and commodity price dynamics to the shale revolution using a recursive structural VAR model of the shale supply shocks. In line with the standard practice of ensuring sensitivity of results, we also conduct analyses such as impulse responses, forecast-error variance decomposition and historical decompositions for the total US oil production shocks. We show that the shale revolution, rather than the total US oil supply shocks, is associated with the recent oil price plunge while both oil supply shocks are associated with mild shock spill over to all- and nonfuel- commodity prices.