Effects of Oil Price Shocks on the Norwegian Economy

Nora Bucher Holm & Sigrid Holte Igesund

Student thesis: Master thesis

Abstract

In this thesis, we assess the underlying causes of changes in the price of oil and the effect of these changes on the Norwegian economy. By the use of a structural vector autoregression, we are able to identify the underlying supply and demand shocks in the global crude oil market. This allows us to decompose the price of oil into three components; oil supply shocks, aggregate demand shocks and oil-specific demand shocks. The analysis indicates that the effects of changes in the price of oil are highly dependent on the underlying causes of the oil price shock. Our results provide an historical evolution identifying the causes of oil price shocks from 1990 to 2015, and impulse response functions show that demand, rather that supply, have the largest and most significant effect on changes in the price of oil. The estimated structural shocks also allowus to assess the effects of a change in the price of oil on both Norwegian macroeconomic aggregates and industry-level stock indices, and identify how the effects differ depending on the cause of the oil price fluctuations. We find that there are large differences in how different variables in the Norwegian macroeconomic environment respond to a change in the price of oil, depending on the underlying cause. An aggregate demand shock generally affects the Norwegian economy positively, while uncertainties relating to the global geopolitical situation underlying an oil supply shock tend to decrease the overall performance of the variables, despite the associated increase in the price of oil. The effects of an oil-specific demand shock varies to a greater extent across both country- and industry-level variables, indicating that oil-specific demand shocks capture the largest differences in how the Norwegian economy respond to a change in the price of oil.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages150
SupervisorsSøren Plesner