Factors causing oil price shocks with emphasis on the behavior of large producers
Since late 2019, the oil price has increased constantly due to the cessation of significant reductions in OPEC Plus oil supply (OPEC and Russia), the recovery of economies after the severe shock caused by the Covid19 crisis, and the increase in geopolitical tensions. But the sharp fall in prices from 2018 to 2020, which caused a sharp drop in prices from $ 70 to $ 21, once again draw attention to the oil market and the reasons for the oil shocks. The recent shock, unlike previous shocks, cannot be explained only by supply-side factors, but the global economic recession and specific oil market shocks should be considered as well. Much empirical evidence, as well as theoretical literature in this field, suggests that supply and demand shocks are not alike and do not have the same effect on oil prices, neither in size nor in duration. In fact, not all oil price shocks are the same, and the same treatment of supply and demand shocks is misleading. The idea of the article is taken from the model developed by Kilian (2008). However, Kilian model has been developed and modified in accordance with recent developments. The results show that the recent price war has been waged to counter US oil production, which along with the outbreak of the Coronavirus (demand shock) has led to a sharp drop in oil prices and a shortening of the price war.
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