How does oil price volatility affect non-energy commodity markets?

The influence of price volatility in the crude oil market is expanding to non-energy commodity markets. With the substitution of fossil fuels by biofuel and hedge strategies against inflation induced by high oil prices, the link between crude oil market and agriculture markets and metal markets has increased. This study measures the influence of the crude oil market on non-energy commodity markets before and after the 2008 financial crisis. By introducing the US dollar index as exogenous shocks, we investigate price and volatility spillover between commodity markets by constructing a bivariate EGARCH model with time-varying correlation construction. The results reveal that the crude oil market has significant volatility spillover effects on non-energy commodity markets, which demonstrates its core position among commodity markets. The overall level of correlation strengthened after the crisis, which indicates that the consistency of market price trends was enhanced affected by economic recession. In addition, the influence of the US dollar index on commodity markets has weakened since the crisis.     

How is volatility in commodity markets linked to oil price shocks?

This study investigates the effects of oil price shocks on volatility of agricultural and metal commodities. We decompose an oil price shock to its underlying components, including macroeconomics and oil specific shocks. The applied method is the structural vector autoregressive (SVAR) model and the time span is from April 1983 to May 2014. The investigation is divided into two subsamples, before and after May 2006 for agriculture taking into account the 2006–2008 food crisis and change in U.S. ethanol production policy, and before and after January 2008 for metals considering the recent global financial crisis. We find that, based on impulse response functions, the response of volatility of each commodity to an oil price shock differs significantly depending on the underlying cause of the shock for the both periods. Moreover, according to variance decomposition the explanatory power of oil shocks becomes stronger after the crisis. The different responses of commodities are described in detail by investigating market characteristics in each period.     

How do daily changes in oil prices affect US monthly industrial output?

Detecting asymmetry has become increasingly difficult using single frequency data. This paper goes beyond the prevailing use of aggregate/averaged data in order to provide a more in-depth treatment of the dynamic effects of the price of crude oil on industrial output growth. To do so, we propose an Asymmetric Mixed Data Sampling (AMIDAS) model to examine if there is any concealed evidence of asymmetry arising from daily effects of the price of crude oil on monthly changes in industrial output in the United States (US). We find that this model is able to detect dynamic asymmetric impacts of a high frequency independent variable on a low frequency dependent variable more effectively than when the high frequency variable is aggregated up at the time interval of the low frequency variable. We find that, in comparison with the marginal lagged effects of a rise in the daily price of crude oil, the effects of a fall in the daily price of crude oil are more sluggish as it takes longer for the effects of the oil price drop to die off over time. This finding implies that a fall in the price of crude oil shifts the supply curve rightward less and at a much slower pace than an equivalent price rise shifts it to the left.     

How does the U.S. natural gas market react to demand and supply shocks in the crude oil market?

In this paper we use monthly data (over the period from January 1976 to December 2012) and a structural VAR model to disentangle demand and supply shocks in the global crude oil market and investigate their effects on the real price of natural gas in the United States. We identify the model by assuming that innovations to the real price of crude oil are predetermined with respect to the natural gas market and show that close to 45% of the variation in the real price of natural gas can be attributed to structural supply and demand shocks in the global crude oil market.     

What drives the commodity price beta of oil industry stocks?

We test theoretical drivers of the oil price beta of oil industry stocks. The strongest statistical and economic support comes for market conditions-type variables as the prime drivers: namely, oil price (+), bond rate (+), volatility of oil returns (−) and cost of carry (+). Though statistically significant, exogenous firm characteristics and oil firms' financing decisions have less compelling economic significance. There is weaker support for the prediction that financial risk management reduces the exposure of oil stocks to crude oil price variation. Finally, extended modelling shows that mean reversion in oil prices also helps explain cross-sectional variation in the oil beta.     

Does the source of oil price shocks matter for South African stock returns? A structural VAR approach

In this paper, we investigate the dynamic relationship between different oil price shocks and the South African stock market using a sign restriction structural VAR approach for the period 1973:01 to 2011:07. The results show that for an oil-importing country like South Africa, stock returns only increase with oil prices when global economic activity improves. In response to oil supply shocks and speculative demand shocks, stock returns and the real price of oil move in opposite directions. The analysis of the variance decomposition shows that the oil supply shock contributes more to the variability in real stock prices. The main conclusion is that different oil price shocks affect stock returns differently and policy makers and investors should always consider the source of the shock before implementing a policy and making investment decisions.     

Once bitten twice shy? Evidence from the U.S. banking industry during the crash of the energy market

We explore whether banks learn from past experience and modify their risk culture. Evaluating bank risk culture during the 2014 energy crash fueled by excessive bank lending, we find banks with a quick recovery after the 2007 subprime crisis find it unnecessary to change their risk culture, and banks that struggled to recover modify their risk culture following the subprime crisis. As a result, banks with poorer stock performance and a lower z-score during the subprime crisis that had a quick recovery are more likely to underperform during the energy crash. However, results show that while these banks do not modify their overall risk culture, they have learned from the subprime crisis by better positioning themselves for potential losses. In addition, larger banks and banks that did not receive TARP funding have not significantly changed their risk culture following the subprime crisis.     

Effects of oil price shocks on the stock market performance: Do nature of shocks and economies matter?

The main focus of this study is to examine how oil price fluctuations influence the performance of stock markets. This study used the causality approach developed by Toda and Yamamoto (1995) to explore the causality between oil prices and stock prices in the long-run and their short-term impact. The generalized impulse response functions were applied to the monthly data in the period from January 1997 to July 2013. In this study, to capture the different characteristics of oil refining, exporting and importing, three Asian economies were examined. The results indicate that the manner in which a market reacts to hikes in oil prices varies between different markets and periods. This depends on differences in the oil characteristics of the economy and the nature of the shock in oil prices.     

U.S. oil dependence 2014: Is energy independence in sight?

The importance of reducing U.S. oil dependence may have changed in light of developments in the world oil market over the past two decades. Since 2005, increased domestic production and decreased oil use have cut U.S. import dependence in half. The direct costs of oil dependence to the U.S. economy are estimated under four U.S. Energy Information Administration Scenarios to 2040. The key premises of the analysis are that the primary oil market failure is the use of market power by OPEC and that U.S. economic vulnerability is a result of the quantity of oil consumed, the lack of readily available, economical substitutes and the quantity of oil imported. Monte Carlo simulations of future oil market conditions indicate that the costs of U.S. oil dependence are likely to increase in constant dollars but decrease relative to U.S. gross domestic product unless oil resources are larger than estimated by the U.S. Energy Information Administration. Reducing oil dependence therefore remains a valuable goal for U.S. energy policy and an important co-benefit of mitigating greenhouse gas emissions.     

Does oil price affect the value of firms? Evidence from Tunisian listed firms

A new debate on the potential impact of oil price changes on the value of firms was initiated in this paper. Using a stochastic frontier approach, an attempt was made to derive the optimal value Q* of firms and calculate the Q value observed. Then the shortfall (Q*–Q) which represents the inefficiency term was explained. Starting from 19 industrial Tunisian firms listed on the Tunis Stock Exchange between 2007 and 2011, the fact that variation of oil prices can largely explain distortions in the value of firms was empirically demonstrated.     

Decarbonization of the U.S. electricity sector: Are state energy policy portfolios the solution?

State governments have taken the lead on U.S. energy and climate policy. It is not yet clear, however, whether state energy policy portfolios can generate results in a similar magnitude or manner to their presumed carbon mitigation potential. This article seeks to address this lack of policy evidence and contribute empirical insights on the carbon mitigation effects of state energy portfolios within the U.S. electricity sector. Using a dynamic, long-term electricity dispatch model with U.S. power plant, utility, and transmission and distribution data between 2010 and 2030, this analysis builds a series of state-level policy portfolio scenarios and performs a comparative scenario analysis. Results reveal that state policy portfolios have modest to minimal carbon mitigation effects in the long run if surrounding states do not adopt similar portfolios as well. The difference in decarbonization potential between isolated state policies and larger, more coordinated policy efforts is due in large part to carbon leakage, which is the export of carbon intensive fossil fuel-based electricity across state lines. Results also confirm that a carbon price of $50/metric ton CO₂e can generate substantial carbon savings. Although both policy options – an energy policy portfolio or a carbon price – are effective at reducing carbon emissions in the present analysis, neither is as effective alone as when the two strategies are combined.     

How does Germany's green energy policy affect electricity market volatility? An application of conditional autoregressive range models

Based on a dynamic model for the high/low range of electricity prices, this article analyses the effects of Germany's green energy policy on the volatility of the electricity market. Using European Energy Exchange data from 2000 to 2015, we find rather high volatility in the years 2000–2009 but also that the weekly price range has significantly declined in the period following the year 2009. This period is characterised by active regulation under the Energy Industry Law (EnWG), the EU Emissions Trading Directive (ETD) and the Renewable Energy Law (EEG). In contrast to the preceding period, price jumps are smaller and less frequent (especially for day-time hours), implying that current policy measures are effective in promoting renewable energies while simultaneously upholding electricity market stability. This is because the regulations strive towards a more and more flexible and market-oriented structure which allows better integration of renewable energies and supports an efficient alignment of renewable electricity supply with demand.     

Coal lumps vs. electrons: How do Chinese bulk energy transport decisions affect the global steam coal market?

This paper demonstrates the ways in which different Chinese bulk energy transport strategies affect the future steam coal market in China and in the rest of the world. An increase in Chinese demand for steam coal will lead to a growing need for additional domestic infrastructure as production hubs and demand centers are spatially separated, and domestic transport costs could influence the future Chinese steam coal supply mix. If domestic transport capacity is available only at elevated costs, Chinese power generators could turn to the global trade markets and further increase steam coal imports. Increased Chinese imports could then yield significant changes in steam coal market economics on a global scale. This effect is analyzed in China, where coal is mainly transported by railway, and in another setting where coal energy is transported as electricity. For this purpose, a spatial equilibrium model for the global steam coal market has been developed. One major finding is that if coal is converted into electricity early in the supply chain, worldwide marginal costs of supply are lower than if coal is transported via railway. Furthermore, China's dependence on international imports is significantly reduced in this context. Allocation of welfare changes particularly in favor of Chinese consumers while rents of international producers decrease.     

How do China's petrochemical markets react to oil price jumps? A comparative analysis of stocks and commodities

The profound impacts of oil price jumps have caught the attention of scholars. Because the 2008 global financial crisis has seemingly already passed, the existence of oil price jumps is in doubt. In this paper, we provide evidence that the threat of dynamic jumps still exists in the global oil market in the post-crisis period, while the stocks and commodities of China's petrochemical markets are both affected by those jumps. To the best of our knowledge, this is the first study of the reaction of petrochemical markets to oil price jumps in the post-crisis period. In addition, a comparative analysis of petrochemical stocks and petrochemical commodity market is provided. In particular, we analyze the reactions of the returns and volatility of these markets to oil price jumps. We obtained the following findings. First, the returns of petrochemical stocks and petrochemical commodities are both negatively affected by current oil price jumps, while the effects of lagged jumps on these returns are opposite. Theoretically, the former is a reflection of panic induced by extreme risk information, while the latter is a reflection of rationality in speculators. Second, the volatilities of petrochemical stocks and petrochemical commodities respond differently to oil price jumps. The former is not affected, whereas the latter is positively and negatively affected by current and last oil price jumps, respectively. Finally, all the above conclusions still hold when considering the effects of normal oil price volatility, even after the co-movement between oil prices and petrochemical markets is eliminated.     

How the removal of energy subsidy affects general price in China: A study based on input–output model

In China, most energy prices are controlled by the government and are under-priced, which means energy subsidies existing. Reforming energy subsidies have important implications for sustainable development through their effects on energy price, energy use and CO₂ emission. This paper applies a price-gap approach to estimate China's fossil-fuel related subsidies with the consideration of the external cost. Results indicate that the magnitude of subsidies amounted to CNY 1214.24 billion in 2008, equivalent to 4.04% of GDP of that year. Subsidies for oil products are the largest, followed by subsidies for the coal and electricity. Furthermore, an input–output model is used to analyze the impacts of energy subsidies reform on different industries and general price indexes. The findings show that removal of energy subsidies will have significant impact on energy-intensive industry, and consequently push up the general price level, yet with a small variation. Removing oil products subsidies will have the largest impact, followed by electricity, coal and natural gas. However, no matter which energy price increases, PPI is always the most affected, then GDP deflator, with CPI being the least. Corresponding compensation measures should be accordingly designed to offset the negative impact caused by energy subsidies reform.     

How do OPEC news and structural breaks impact returns and volatility in crude oil markets? Further evidence from a long memory process

Since its formation, OPEC through its conference decisions has been a major player in the world oil markets. The purpose of this paper is to examine the impacts of OPEC's different news announcements on the conditional expectations and volatility of crude oil markets in the presence of long memory and structural changes. To do so, we first discern OPEC's oil production behavior in response to its “cut”, “maintain”, and “increase” decisions. Then by applying the ARMA–GARCH class models to the two global benchmarks WTI and Brent over the period May 1987 through December 2012, we find strong evidence of long memory. The empirical evidence also shows that OPEC's announcements especially the “cut” and the “maintain” decisions have a significant effect on both returns and volatility of the crude oil markets, particularly that of the WTI. Moreover, we explore the possibility of structural breaks in the crude oil prices and detect five (six) breakpoints for the WTI (Brent) oil markets. The presence of structural breaks reduces the persistence of volatility. Accounting for OPEC's scheduled news announcements in the presence of structural changes reduces the degree of volatility persistence and enhances the understanding of this volatility in the oil markets. These results have several implications for policy makers, oil traders and other participants in the crude oil markets.     

Effects of a carbon price in the U.S. on economic sectors,resource use,and emissions: An input–output approach

Despite differences in their implementation, most carbon policies aim to have similar outcomes: effectively raising the price of carbon-intensive products relative to non-carbon-intensive products. While it is possible to predict the simple broad-scale economic impacts of raising the price of carbon-intensive products—the demand for non-carbon-intensive products will increase—understanding the economic and environmental impacts of carbon policies throughout the life cycle of both types of products is more difficult. Using the example of a carbon tax, this study proposes a methodology that integrates short-term policy-induced consumer demand changes into the input–output framework to analyze the environmental and economic repercussions of a policy. Environmental repercussions include the direct and the indirect impacts on emissions, materials flow in the economy, and the reliance on various ecosystem goods and services. The approach combines economic data with data about physical flow of fossil fuels between sectors, consumption of natural resources and emissions from each sector. It applies several input–output modeling equations sequentially and uses various levels of aggregation/disaggregation. It is illustrated with the data for the 2002 U.S. economy and physical flows. The framework provides insight into the short-term complex interactions between carbon price and its economic and environmental effects.     

Are shocks to natural gas consumption temporary or permanent? Evidence from a panel of U.S. states

This short communication examines whether or not U.S. natural gas consumption follows a stationary process. Unlike previous research that has focused on regional country or industrial sector-based panel studies, this study undertakes a sub-national investigation of natural gas consumption for the 50 U.S. states. Levin et al. (2002), Im et al. (2003), Maddala and Wu (1999), and Hadri (2000) panel unit root and stationarity tests reveal that natural gas consumption is integrated of order one. However, once allowance is made for endogenously determined structural breaks, the Carrion-i-Silvestre et al. (2005), Im et al. (2005), and Westerlund (2005) panel unit root and stationarity tests indicate that natural gas consumption is integrated of order zero. Discussion of the structural breaks is briefly surveyed in relation to the natural gas industry’s response to legislative actions.     

Does the U.S. economic policy uncertainty connect financial markets? Evidence from oil and commodity currencies

We provide novel insight to the emerging literature on the role of U.S. monetary policy as a driver of a global financial cycle by examining the possible causal effect of U.S. economic policy uncertainty on the connectedness of crude oil and currency markets, using a sample of commodity currencies from advanced and emerging nations. A battery of linear and nonlinear Granger-based causality tests indicate the presence of a causal relationship between economic policy uncertainty and the connectedness of oil and currency markets, particularly at low frequencies and more significantly after the outburst of the global financial crisis. While crude oil generally serves as a net transmitter of shocks to currencies across all frequency bands, the spillover effects from oil are largely concentrated towards the G10 currencies of Australian and New Zealand dollar that are often used as investment currencies in global carry trade strategies. Overall, our findings suggest the presence of a significant pass-through effect of economic policy uncertainty via oil prices, spilling over to the currency market, in line with the emerging evidence that the monetary policy by the U.S. Fed serves as a major driver of a global financial cycle that describes patterns in global capital flows, credit activity and asset prices across financial markets.