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Is the Discretionary Income Effect of Oil Price Shocks a Hoax?

Christiane Baumeister, Lutz Kilian, and Xiaoqing Zhou

Year: 2018
Volume: Volume 39
Number: Special Issue 2
DOI: 10.5547/01956574.39.SI2.cbau
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Abstract:
The transmission of oil price shocks has been a question of central interest in macroeconomics since the 1970s. There has been renewed interest in this question since the large and persistent fall in the real price of oil in 2014-16. In the context of this debate, Ramey (2017) makes the striking claim that the existing literature on the transmission of oil price shocks is fundamentally confused about the question of how to quantify the effect of oil price shocks. In particular, she asserts that the discretionary income effect on private consumption, which plays a central role in contemporary accounts of the transmission of oil price shocks to the U.S. economy, makes no economic sense and has no economic foundation. Ramey suggests that the literature has too often confused the terms-of-trade effect with this discretionary income effect, and she makes the case that the effects of the oil price decline of 2014-16 on private consumption are smaller for a multitude of reasons than suggested by empirical models of the discretionary income effect. We review the main arguments in Ramey (2017) and show that none of her claims hold up to scrutiny. Our analysis highlights the theoretical basis of the discretionary income effect. We also discuss improved regression-based estimates of this effect that allow for changes in the dependence on oil and gasoline imports, and we highlight the fact that alternative estimates used by policymakers involve strong simplifying assumptions.



A Quantitative Model of the Oil Tanker Market in the Arabian Gulf

Lutz Kilian, Nikos Nomikos, and Xiaoqing Zhou

Year: 2023
Volume: Volume 44
Number: Number 5
DOI: 10.5547/01956574.44.4.lkil
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Abstract:
Using a novel dataset, we develop a structural model of the Very Large Crude Carrier (VLCC) market between the Arabian Gulf and the Far East. We study how fluctuations in oil tanker rates, oil exports, shipowner profits, and bunker fuel prices are determined by shocks to the supply and demand for oil tankers, to the utilization of tankers, and to the cost of operating tankers, including bunker fuel costs. Our analysis shows that time charter rates are largely unresponsive to tanker cost shocks. In response to higher costs, voyage profits decline, as cost shocks are only partially passed on to round-trip voyage rates. Oil exports from the Arabian Gulf also decline, reflecting lower demand for VLCCs. Positive utilization shocks are associated with higher profits, a slight increase in time charter rates and lower fuel prices and oil export volumes. Tanker supply and tanker demand shocks have persistent effects on time charter rates, round-trip voyage rates, the volume of oil exports, fuel prices, and profits with the expected sign.





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