Oil price fluctuation is a major economic issue that can significantly impact consumers and businesses, from transportation to manufacturing. Sudden spikes in prices can impose a tax on households and push costs up for companies, reducing profits and overall growth. When oil prices fall, consumers and businesses benefit from lower costs, boosting growth and consumer confidence.
Natural disasters, including hurricanes and earthquakes, can also affect the availability of oil by destroying or blocking pipelines. This can increase the cost of oil as the needed repairs are made and shipments have to be routed to alternative sources, often through harsh climates.
In addition, shifts in oil prices can influence stock markets. Energy companies’ stocks usually rise when prices increase, while transportation and manufacturing companies’ shares drop when prices fall. These impacts can destabilize investment income and create uncertainty and risk for businesses and investors.
We investigate the causes of recent oil price fluctuations and determine that a combination of supply, demand, and speculation shocks contributed to the sharp fall in crude oil prices. Historical decompositions of SVARs indicate that disruptions in oil supplies account for the majority of changes in oil prices, while demand and financial market-related shocks explain less. In the short term, the increase in Covid-19 pandemic cases, US economic policy uncertainty, expected market volatility, and the Russia-Saudi Arabia oil price war pushed the price of WTI crude to negative levels. However, the long-run implications are less clear.
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