Pandemics and Oil Shocks

Abstract

This paper investigates the role of the COVID-19 pandemic in oil markets, focusing on the great oil price crash in April 2020. Using a 5-variable structural vector autoregression (SVAR) model, the study identifies an oil price shock arising from the pandemic together with supply, demand, and financial market shocks to global oil markets. The results show that a pandemic shock causes a delayed decrease in oil prices. Moreover, financial market conditions that affect financial investment decisions play a significant role in oil price movements. The study also computes the forecast error variance decomposition and finds that the impact of a pandemic shock, financial speculation shock, and aggregate demand shock are crucial in the short run. The findings offer new opportunities for applications in energy research.

Global Evidence of Oil Supply Shocks and Climate Risk a GARCH-MIDAS Approach

“…Killian (2009) employ a two-staged decoupling method of structural vector autoregression and a few authors use the same approach. Authors in this category include He and Zhou (2018), , Zhao (2020), Azhgaliyeva et al (2022), Mohammed et al (2022), among others. The major setback of the Killian (2009) method is its indecisiveness in separating respective oil shocks (see Ready, 2018).…”