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Explaining Fluctuations in Gasoline Prices: A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market

Lutz Kilian

Year: 2010
Volume: Volume 31
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No2-4
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Abstract:
The distinction between the price of gasoline in the U.S. and the price of crude oil in global markets is often ignored in discussions of the impact of higher energy prices. This article makes explicit the relationship between demand and supply shocks in these two markets. Building on a recently proposed structural VAR model of the global crude oil market, it explores the implications of a joint VAR model of the global market for crude oil and the U.S. market for motor gasoline. It is shown that it is essential to understand the origins of a given gasoline price shock, when assessing the responses of the price of gasoline and of gasoline consumption, since each demand and supply shock is associated with responses of different magnitude, pattern and persistence. The article assesses the overall importance of these shocks in explaining the variation in U.S. gasoline prices and consumption growth, as well as their relative contribution to the evolution of U.S. gasoline prices since 2002.



The Role of Speculation in Oil Markets: What Have We Learned So Far?

Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva

Year: 2013
Volume: Volume 34
Number: Number 3
DOI: 10.5547/01956574.34.3.2
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Abstract:
A popular view is that the surge in the real price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to tighten the regulation of oil derivatives markets. This survey reviews the evidence supporting this view. We identify six strands in the literature and discuss to what extent each sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets.



The Impact of the Fracking Boom on Arab Oil Producers

Lutz Kilian

Year: 2017
Volume: Volume 38
Number: Number 6
DOI: 10.5547/01956574.38.6.lkil
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Abstract:
This article makes four contributions. First, it investigates the extent to which the U.S. fracking boom has caused Arab oil exports to decline since late 2008. Second, the article quantifies for the first time by how much the U.S. fracking boom has lowered the global price of oil. Using a novel econometric methodology, it is shown that in mid-2014, for example, the Brent price of crude oil was lower by $10 than it would have been in the absence of the fracking boom. Third, the article provides evidence that the decline in Saudi net foreign assets between mid2014 and August 2015 would have been reduced by 27% in the absence of the fracking boom. Finally, the article discusses the policy choices faced by Saudi Arabia and other Arab oil producers.



Special Issue "Energy Challenges in an Uncertain World" Editorial

Anna Creti, Duc Khuong Nguyen, and Lutz Kilian

Year: 2018
Volume: Volume 39
Number: Special Issue 2
DOI: 10.5547/01956574.39.SI2.acre
No Abstract



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.





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