An Econometric Analysis of the Effect of Oil Price Fluctuations on Private Consumption in Norway

Katrine Aakvaag & Vibeke Kolberg Grødem

Student thesis: Master thesis


The financial crisis of 2008 and the plunge in the oil price in 2014 have both had severe impacts on the Norwegian economy. The petroleum sector accounts for a crucial share of the industry, and the government has implemented measures to preserve the revenues from this sector. The purpose is to create a buffer in difficult times and to secure the value of the revenues for future generations. Previous literature shows an asymmetric relation between the oil price and consumption in netimporting countries. This thesis concerns a net-exporting economy, and the objective is to examine whether there exists a relationship between the oil price and aggregate private consumption in Norway. Time series analysis is applied to study this relationship, and all time series are found integrated at order one. Cointegration is furthermore detected between the control variables income and net wealth, and consumption. An error correction model is hereby estimated to correct for deviations from the long-run equilibrium. The analysis finds a positive, but insignificant relationship between the oil price and consumption. A Granger causality test also substantiates these results. Moreover, impulse response functions reveal that a positive shock in the oil price has a positive effect on consumption. A decomposition of the forecast error variance additionally illustrates that variations in the oil price do not account for a great share of the variance in consumption. These results are somewhat in line with the expectations, as the legislative measures implemented limit the effect of oil on private consumers. The dataset is split in two at the financial crisis. The analysis shows that the effect of oil on consumption is insignificant, but the explanatory power is slightly higher after the crisis. Variations in the oil price furthermore account for a larger share of the variance in consumption after the crisis. As the second subsample consists of very few observations, no conclusion may be drawn, but the results may signal that consumption behavior has changed somewhat after the financial crisis. Finally, the key variable, Brent, is exchanged with an alternative measure. The net oil price increase (NOPI) yields similar results as the analysis conducted using Brent. However, the effect of oil price on consumption is slightly greater, and variations in NOPI accounts for a smaller share of the variance in consumption than Brent does. This may indicate that Norwegian consumers are more affected by changes in the oil price when decreases are included and might point to the existence of an opposite asymmetric relation in a net-exporting country.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2018
Number of pages154
SupervisorsJimmy Martínez-Correa