The importance of supply and demand for oil prices: evidence from non-Gaussianity

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 17 December 2021

Staff Working Paper No. 957

By Robin Braun

When quantifying the importance of supply and demand for oil price fluctuations, a wide range of estimates have been reported. Models identified via a sharp upper bound on the short-run price elasticity of supply, find supply shocks to be minor drivers. In turn, when replacing the upper bound with a fairly uninformative prior, supply shocks turn out to be quite important. In this paper, I revisit the evidence with a model identified by a combination of weakly informative priors and non-Gaussianity. For this purpose, a structural vector autoregressive (SVAR) model is developed where the distributions of the structural shocks are modelled non-parametrically. The empirical findings indicate that once non‑Gaussianity is incorporated into the model, posterior mass of the short-run oil supply elasticity shifts towards zero and oil supply shocks become minor drivers of oil prices. In terms of contributions to the forecast error variance of oil prices, the model arrives at median estimates of just 6% over a 16-month horizon.

The importance of supply and demand for oil prices: evidence from non-Gaussianity

Give your feedback

Was this page useful?
Yes
No
Add your details...