Working Paper: CEPR ID: DP10404
Authors: Christiane Baumeister; Lutz Kilian
Abstract: Some observers have conjectured that the decline in the price of oil after June 2014 resulted from positive oil supply shocks in the second half of 2014. Others have suggested that a major shock to oil price expectations occurred when in late November 2014 OPEC announced that it would maintain current production levels despite the steady increase in non-OPEC oil production. Both conjectures are perfectly reasonable ex ante, yet we provide quantitative evidence that neither explanation appears supported by the data. We show that more than half of the decline in the price of oil was predictable in real time as of June 2014 and therefore must have reflected the cumulative effects of earlier oil demand and supply shocks. Among the shocks that occurred after June 2014, the most influential shock resembles a negative shock to the demand for oil associated with a weakening economy in December 2014. In contrast, there is no evidence of any large positive oil supply shocks between June and December. We conclude that the difference in the evolution of the price of oil, which declined by 44% over this period, compared with other commodity prices, which on average only declined by about 5%-15%, reflects oil-market specific developments that took place prior to June 2014.
Keywords: oil demand; oil price declines; oil supply; OPEC; shale oil
JEL Codes: C53; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| earlier demand and supply shocks (E39) | decline in oil prices (Q31) |
| negative demand shock (E31) | decline in oil prices (Q31) |
| weakening global economy (F69) | negative demand shock (E31) |
| economic expectations (D84) | decline in oil prices (Q31) |
| earlier shocks (E32) | decline in oil prices (Q31) |
| unexpected reduction in storage demand (E21) | observed forecast errors in oil price predictions (Q47) |