Empirical Analysis of Global Oil Price Determinants at the Disaggregated Level Over the Last Two Decades
The paradigm of the oil market has shifted during the last 20 years―recently, the oil demand side has affected oil prices more than the supply side. While until the mid-1990s the Organization of the Petroleum Exporting Countries played a key role in oil pricing, during recent decades, rapid economic growth in developing economies has boosted the demand for oil, making oil prices vulnerable to a wider range of factors. We examine the impacts of oil supply and demand factors on Brent crude oil prices by developing an oil aggregate demand-aggregate supply model and empirically estimating using a vector autoregressive approach and monthly time series data from 1999 to 2017. We disaggregate global oil demand into demand from the Organisation for Economic Co-operation and Development (OECD), the People’s Republic of China (PRC), and India to measure the scale of their contributions to global oil price movements. We consider the industrial production (IP) index as a determinant of the oil demand side. We find that among these three, the OECD and the PRC’s IP had a positive impact on oil prices during the estimated period. Moreover, among the factors included in the model, an appreciation of the US dollar exchange rate had a significant negative impact on oil prices over the last 2 decades. We also examine the equilibrium of the oil market during the estimated period and show that oil prices were adjusting instantly, confirming the existence of the equilibrium.