Are Oil Price Shocks Alike? Understanding the Drivers of Oil Price Shocks and Their Impact on Key Macroeconomic Indicators

Abstract

In this thesis, we investigate which shocks determine oil price fluctuations and how these shocks affect the macroeconomy in two countries that differ in their oil importexport relationships, Sweden and Norway. Using data on world oil production, global real economic activity, and the real price of oil, we first employ a Structural Vector Autoregressive model to disentangle the real price of oil into three structural shocks, respectively an oil supply shock, an aggregate demand shock, and an oil-specific demand shock. We then specify Distributed Lag models using data on real GDP growth, inflation, and unemployment from Sweden and Norway to investigate the effects of the structural shocks on the macroeconomy via dynamic multipliers. Our findings indicate that all three structural shocks have contributed to the fluctuations in the real price of oil, both on average and cumulatively. For the estimation of the effects of structural shocks on macroeconomic variables, our findings show that real GDP growth, inflation, and unemployment are affected differently depending on both the underlying structural shock and the oil import-export relationship of the given economy. An oil supply shock causes different reactions for real GDP and inflation in Sweden and Norway, as does an oilmarket specific demand shock for real GDP growth and the unemployment rate. This could be explained by the two countries’ differing import-export relationships, with Sweden being an oil net-importer and Norway being a net-exporter. These results have implications for consumers, businesses, and policymakers in the respective countries, since not all oil price shocks are alike, and they affect the macroeconomy differently depending on the underlying structural shock.