The relationship between oil prices and US economy revisited

The authors revisit the relationship between US economic growth and crude oil prices considering Industrial Production Index and West Texas Intermediate crude oil spot prices as respective proxies for a period spanning over January 1986 to June 2017. To capture the asymmetric and time-varying relationship, the authors employ maximum overlap discrete wavelet transform (MODWT)-based quantile regression (QR) analysis. Interestingly, MODWT-based QR analysis provides evidence of supply-driven link between crude oil prices and economic growth in the short run. However, in the medium to long run a demand-driven link is dominant. In addition, the QR results without MODWT also advocate a demand-driven link. Overall, the result of this study adds a new dimension to the literature on the relationship between crude oil prices and economic growth by focusing upon the time-frequency varying business cycle fluctuations.     

Modeling the relationship between the oil price and global food prices

The growth of corn-based ethanol production and soybean-based bio-diesel production following the increase in the oil prices have significantly affect the world agricultural grain productions and its prices. The main purpose of this paper is to investigate the relationships between the crude oil price and the global grain prices for corn, soybean, and wheat. The empirical results show that the change in each grain price is significantly influenced by the changes in the crude oil price and other grain prices during the period extending from the 3rd week in 2005 to the 20th week in 2008 which implies that grain commodities are competing with the derived demand for bio-fuels by using soybean or corn to produce ethanol or bio-diesel during the period of higher crude oil prices in these recent years. The subsidy policies in relation to the bio-fuel industries in some nations engaging in bio-fuel production should be considered to avoid the consequences resulting from high oil prices.     

An empirical analysis of the relationship between oil prices and the Chinese macro-economy

Using the quarterly data from the first quarter of 1996 to the fourth quarter of 2014, this paper studies the relationship between oil prices and the Chinese macro-economy. We find output and interest rate respond significantly to oil price shocks. Further analysis reveals that the positive response of output to oil price shocks is attributed to the influences of oil price shocks on exports. The oil price shocks have both longer and deeper effects on the exports of state-owned enterprises than on those of foreign investment enterprises. Moreover, the response of exports to oil price shocks is symmetric. Finally, oil prices are found to be useful for forecasting the China's exports in the periods shorter than about two years.     

Expectations, learning, and the changing relationship between oil prices and the macroeconomy

This paper estimates a structural general equilibrium model to investigate the changing relationship between the oil price and macroeconomic variables. The oil price, through the role of oil in production and consumption, affects aggregate demand and supply in the model. The assumption of rational expectations is relaxed in favor of learning. Oil prices, therefore, affect the economy through an additional channel, i.e. through their effect on the formation of agents' beliefs.The estimated learning dynamics indicates that economic agents' perceptions about the effects of oil prices on the economy have changed over time: oil prices were perceived to have large effects on output and inflation in the 1970s, but only milder effects after the mid-1980s. Since expectations play a large role in the determination of output and inflation, the effects of oil price increases on expectations can magnify the response of macroeconomic variables to oil price shocks. In the estimated model, in fact, the implied responses of output and inflation to oil price shocks were much more pronounced in the 1970s than in 2008. Therefore, through the time variation in the impact of oil prices on beliefs, the paper can successfully explain the observed weakening of the effects of oil price shocks on real activity and inflation.     

Dynamic cyclical comovements between oil prices and US GDP: A wavelet perspective

In this paper, we use wavelet analysis to investigate the cyclical comovements between crude oil prices and US GDP, taking into account the decline in the volatility of US GDP growth that has occurred since the mid-1980s.Our main findings suggest that before 1984:Q1, the crude oil prices were leading the US GDP cycle by 3 quarters and Granger cause US GDP. In contrast, after 1984:Q1, the crude oil prices were lagging the US business cycle, and a reverse causality is found to run from US GDP to oil prices. The multiscale Granger causality tests globally corroborate theses results.     

The relationship between oil prices and rig counts: The importance of lags

This study deals with a timely and relevant issue in the oil market in the wake of the recent drastic drop in oil prices, which is the relationship between changes in oil prices and changes in rig counts, while accounting for other determinants of this relationship. This relationship is of strong interest to analysts, investors and policymakers in the United States and other countries. We empirically verify the impact of changes in oil prices on rig counts, which has lags up to one quarter. This evidence is stable across time and over different linear and non-linear models. The analysis also suggests that the relationship is non-linear, which is verified by both the quantile regression and quantile-on-quantile models. We find evidence of non-linearity that has softened in the most recent years where the relationship between the variables has stabilized.     

The relationship between oil prices and exchange rates: Revisiting theory and evidence

This paper reviews existing theoretical and empirical research on the relationship between oil prices and exchange rates. We start with theoretical transmission channels—which point to bi-directional causality. Empirical research is classified and shows that the evidence varies substantially depending on sample, country choice and empirical method. Yet there are some common patterns: (i) strong links between exchange rates and oil prices are frequently observed over the long-run; and (ii) either exchange rates or oil prices are a potentially useful predictor of the other variable in the short-run, but the effects are strongly time-varying. We also identify some important avenues for future research.     

Gas market prospects and relationship with oil prices

This paper explains how the international natural gas market is vulnerable because of several specific features and how it will be saturated at least until the year 1990. The share of the gas rent is seen to be the main stake in the negotiations between sellers and buyers. The purpose of this paper is to present some elements enabling an understanding of the logic of gas pricing (net-back method versus parity approach). The paper also analyses to what extent the future price of gas will be ‘disconnected’ from that of crude oil, in the same way as coal.     

Revisiting the relationship between spot and futures oil prices: Evidence from quantile cointegrating regression

Since most real decisions depend upon current market states or whether it is advantageous to the participants themselves, this paper revisits the relationship between spot and futures oil prices of West Texas Intermediate covering 1986 to 2009 with an innovative approach named quantile cointegration. Different to previous perspectives, we target the issues of cointegrating relationships, causalities, and market efficiency based on different market states under different maturities of oil futures. In our empirical analysis, except for market efficiency, long-run cointegrating relationships and causalities between spot and futures oil prices have significant differentials among futures maturities and the performances of spot oil markets. Furthermore, the response of spot prices to shocks in 1-month futures oil prices is much steeper in high spot prices than in low spot prices. This phenomenon is consistent with the prospect theory (Kahneman and Tversky, 1979), in that the value function is generally steeper for losses than for gains.     

Dynamic correlations between oil prices and the stock prices of clean energy and technology firms: The role of reserve currency (US dollar)

There is increased interest in the dynamic relationships between the stock prices of clean energy and technology firms and oil prices in the literature. Existing works suggest a time-dependent link between them, but there is a gap of knowledge regarding the drivers of this time-dependent relationship. To contribute to this literature, we first identify dynamic conditional correlations (DCCs) between the prices of clean energy and technology stocks and oil prices to investigate the nature of these dynamic correlations. Our findings suggest the existence of significant asymmetric effects in the DCCs. Using the autoregressive distributed lag (ARDL) model, we then investigate the impact of reserve currency (US dollar) value changes on the DCCs while also controlling for business cycles, monetary conditions, and financial stress. Our results highlight the dominant role of US dollar appreciations in driving the DCCs. This role intensifies when asymmetric impacts are taken into account. The implications of this study are important for clean energy investments and for optimal risk management strategies in the energy and financial markets.     

The dynamics of a nonlinear relationship between crude oil spot and futures prices: A multivariate threshold regression approach

This paper segments daily data from January of 1986 to April of 2007 into three periods based on certain important events. Both periods I and II indicate that the spot prices in general are higher than futures prices as was well-known in the literature. Only period-III (2001/9/11–2007/4/30) displays a reverse phenomenon: futures prices, in general, exceed spot prices. When the absolute value of a basis (futures-spot) is greater than the threshold value in the arbitrage area (regime 1 and 3), at least one of the error correction coefficients, representing adjustment towards equilibrium, is statistically significant. That is, there exists a tendency in the oil market in which prices move toward equilibrium. With respect to the short-run dynamic interaction between spot price change (Δs_t) and futures price change (Δf_t), our results indicate that when the spot price is higher than futures price, and the basis is less than certain threshold value (regime 3), there exists at least one causal relationship between Δs_t and Δf_t. Conversely, when the futures price is higher than spot price and the basis is higher than certain threshold value (regime 1), there exists at least one causal relationship between Δs_t and Δf_t. Finally, we use the method suggested by Diebold and Mariano [Diebold, Francis X., Mariano, Roberto S., 1995. Comparing predictive accuracy. Journal of Business and Economic Statistics 13 (3), 253–263] to compare the predictive power between the linear and nonlinear models. Our empirical results indicate that the in-sample prediction of the nonlinear model is clearly superior to that of the linear model.     

The relationship between spot and contract gas prices in Europe

Following deregulations in the European gas market, spot trading of natural gas has been established in the UK, Belgium and the Netherlands, while long-term contracts remain the dominant pricing process in continental Europe. In this paper we investigate the degree of market integration between the three spot markets, the contract gas price in Germany and the oil price. The results indicate a highly integrated market, and there is no evidence of an independent price determination process for natural gas.     

Risk appetite and oil prices

We demonstrate that oil prices and their volatility are no longer determined solely by real economic shocks to supply of and demand for oil, but are also driven by shocks originating in the economic uncertainty and risk appetite of investors that prevail in the equity market. The contribution of the latter factor has become particularly remarkable since the mid-2000s. To establish these results, we dismantle the squared VIX index, determined in the S&P 500 options market, into the conditional variance in stock returns (to proxy for economic uncertainty) and the equity variance risk premium (to proxy for risk appetite). Using threshold-GARCH, structural vector auto regression and causality models, we provide evidence about the link between risk appetite, oil price returns and volatility. Furthermore, investors' appetite for risk drives changes in the OVX, which measures perceptions about future oil volatility, but not vice versa. Our results provide a better understanding of the relationship between oil, the VIX and its two proposed components. In particular, we show that changes in the risk appetite of investors are an important determinant not only for the price of equities but also for that of the most important energy resource – oil.     

Wavelet-based test of co-movement and causality between oil and renewable energy stock prices

We studied co-movement and causality between oil and renewable energy stock prices using continuous and discrete wavelets, firstly, to obtain information on dynamic correlations over time and for different time scales from wavelet coherence and, secondly, to obtain information on linear and non-linear Granger causality in the time-frequency domain. For general and sectoral renewable energy indices for the period 2006–2015, our findings indicate that dependence between oil and renewable energy returns in the short run was weak but gradually strengthened towards the long run, mainly for the period 2008–2012. Our causality tests provide evidence against linear causality at higher frequencies and in favour of unidirectional and bidirectional linear causality at lower frequencies. In contrast, we found consistent evidence of non-linear causality running from renewable energy indices to oil prices at different time horizons and mixed evidence of causality running from oil to renewable energy prices. These results have potential implications for investors in terms of hedging and for policymakers in terms of policy support decisions regarding the development of renewable energy.     

Dynamic link between oil prices and exchange rates: A non-linear approach

We explore the non-linear relationship between crude oil prices and exchange rates of major currencies from quantitative and structural perspectives, by utilizing bivariate normal mixture model. The correlation coefficients between oil prices and exchange rates demonstrate that their dependences typically start from 2004 then dynamically change over time. Then we investigate whether business cycle and oil price shocks as two possible exogenous factors affect the dependence structure of oil-FX linkage. We find significant structural heterogeneity during economic expansion while little evidence of heterogeneity in recession. This finding provides alternative interpretations for the enhanced dependence between oil prices and exchange rates and generates implications of financialization in commodity market. In terms of oil price shocks (Kilian, 2009), the normal mixture model captures significant heterogeneity, implying that unstable oil-FX dependence structure is frequently associated with oil aggregate demand shocks and oil-specific demand shocks. With an emphasis on the dynamic weights of two underlying states, we interestingly find that structural heterogeneities coincide with a variety of geopolitical and economic events. The application of normal mixture not only provide us knowledge of non-linear relationship between oil prices and exchange rates but also guidance for investors in risk management and portfolio diversification complementary to the traditional portfolio theory based on normal distribution.     

Disentangling the determinants of real oil prices

In this study, we quantify the impacts of economic fundamentals and derivative market speculation on the real price of crude oil. Using a structural VAR with sign restriction, we determine that oil demand from the US and China, particularly the latter one, plays a crucial role in oil price changes after the year 2000. The contribution of speculation does not exceed 10% of oil price variations in our sample period.     

Non-linearities in the dynamics of oil prices

Examining stationarity is of particular importance and represents the first step in empirical time-series research. Non-stationarity invalidates many of the results obtained from standard techniques and, therefore, requires special treatment. Because oil prices play an important role in affecting economic variables, this paper examines the stationarity of real oil prices (Brent, Dubai, WTI and the World) over the period 1973:2–2011:2. Real oil prices are expressed in the currencies of seven Asian countries (Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore and Thailand) and in the U.S. dollar. While using linear unit root tests without structural breaks shows no evidence of stationarity, allowing for breaks shows very limited evidence of stationarity. We argue that these results are attributed to the presence of nonlinearities in the behavior of oil prices. Testing for nonlinearity shows significant evidence of nonlinearity in all the cases with evidence of exponential smooth transition autoregression (ESTAR) nonlinearity-type in most cases. Applying unit root tests that account for two types of nonlinearities (smooth transition and nonlinear deterministic trends) reveals evidence of stationarity in all the cases.     

China and the relationship between the oil price and the dollar

We study cointegration and causality between the real price of oil and the real price of the dollar over the 1974–2004 period. Our results suggest that a 10% rise in the oil price coincides with a 4.3% appreciation of the dollar in the long run, and that the causality runs from oil to the dollar. Through the development of a theoretical model, we then investigate possible reasons why this relationship could be reversed in the future due to the emergence of China as a major player on both the oil and the foreign exchange markets.     

Market conditions and future oil prices

This paper analyses the relationship between price elasticities of oil demand and supply and the real price of oil. With the help of a two-equation model it is shown that under market conditions prevailing during the 1973–1978 period. OPEC countries could have imposed even higher real oil prices if they had acted as a revenue-maximizing cartel. It is also shown that market conditions in the longer term were not supportive of the oil price escalation of 1979–1980.The real price of oil has already receded from its level in 1980 and further downward adjustments may be necessary to restore balance in the market if the world economy does not resume sustained growth and the pace of off-oil substitution does not subside.     

The pass through of oil prices into euro area consumer liquid fuel prices in an environment of high and volatile oil prices

Crude and refined oil prices have been relatively high and volatile on a sustained basis since 1999. This paper considers the pass through of oil prices into consumer liquid (i.e. petrol, diesel and heating) fuel prices in such an environment.The pass through of oil prices into consumer liquid fuel prices has already been addressed extensively in the literature. Nonetheless much of this literature has either focused on the United States or on a time period when oil prices were relatively stable, or has used monthly data. The main contribution of this paper is a comprehensive combination of many features that have been considered before but rarely jointly. These features include: (1) the analysis of the euro area as an aggregate and a large number of countries (the initial 12 member states); (2) the consideration of different time periods; (3) the modelling of the data in raw levels rather than in log levels. This turns out to have important implications for our findings; (4) the use of high frequency (weekly) data, which, as results will suggest, are the lowest frequency one should consider; (5) the investigation of the different stages of the production chain from crude oil prices to retail distribution — refining costs and margins, distribution and retailing costs and margins; (6) the examination of prices including and excluding taxes — excise and value-added; (7) the modelling of prices for three fuel types — passenger car petrol and diesel separately and home heating fuel oil; (8) lastly we also address the issue of possible asymmetries, allowing for the pass through to vary according to (a) whether price are increasing or decreasing and (b) whether price levels are above or below their equilibrium level.The main findings are as follows: First, as distribution and retailing costs and margins have been broadly stable on average, the modelling of the relationship between consumer prices excluding taxes and upstream prices in raw levels rather than in logarithms has important implications for the stability of estimates of pass through when oil price levels rise significantly. Second, considering spot prices for refined prices improves significantly the fit of the estimated models relative to using crude oil prices. It also results in more economically meaningful results concerning the extent of pass through. Third, oil price pass through occurs quickly, with 90% occurring within three to five weeks. Fourth, using a relatively broad specification allowing for asymmetry in the pass through from upstream to downstream prices, there is little evidence of statistically significant asymmetries. Furthermore, even where asymmetry is found to be statistically significant, it is generally not economically significant. Lastly, these results generally hold across most euro area countries with few exceptions.