Abstract
This paper surveys the literature on the economic effects of oil market developments. It assesses the economic theory behind oil price impacts and presents how the existing literature has analysed the link between oil markets—oil prices, oil price shocks, and oil price volatility—and economic outcomes. This review documents the general consensus amongst economists that the significance of moderate oil price movements is low if not inexistent, with clear impacts only present on financial markets. However, the evidence for significant macroeconomic effects of energy price shocks is strong, although methodological challenges such as causality and endogeneity remain an issue.
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Notes
- 1.
For the analysis of certain periods Hamilton (1983) makes use of detrended oil price change variables.
- 2.
Most authors use real oil prices, i.e., deflated nominal oil prices, in their analyses. In this sense, I refer to oil t as a real oil price series throughout this paper.
- 3.
This is illustrated by the success of estimators of the ARCH-class (cp., e.g., Engle 2001) that model volatility by dynamic processes.
- 4.
In this respect, e.g., Lin (2008) emphasizes the role of recently rising Chinese demand for increases in the oil price.
- 5.
However, recent energy efficiency data provided by the IEA suggest that this global trend towards energy efficiency halted or at least paused in 2008 and 2009.
- 6.
This result may also be explained by the fact that most renewable energy sources are not competitive in many energy markets and therefore profit from different kinds of public support. Several renewable energy support schemes such as feed-in-tariffs applied in many countries eliminate price risks for renewable energy generation so that the prices of fossil fuels such as oil should have a minor impact—or no impact at all—on renewable companies’ businesses.
- 7.
Further methodological issues that can drive the results of oil-to-macroeconomy and oil-to-financial markets analyses are the choice of empirical approaches and specifications.
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Oberndorfer, U. (2014). Oil Prices, Volatility, and Shocks: A Survey. In: Ramos, S., Veiga, H. (eds) The Interrelationship Between Financial and Energy Markets. Lecture Notes in Energy, vol 54. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-55382-0_3
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