Empirical Analysis of Global Oil Price Determinants at the Disaggregated Level Over the Last Two Decades

Abstract

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. This research will provide theoretical and empirical examination on 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. In this study, global oil demand is disaggregated into demand from the Organization 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, and the industrial production (IP) index is considered as a determinant of the oil demand side. It is found that among these three, the OECD and the PRC’s IP had a positive impact on oil prices in the estimated period. Moreover, among all 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. Another contribution of this paper is that it examines the equilibrium of the oil market during the estimated period and shows that oil prices were adjusting instantly, which confirms the existence of the equilibrium.