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Discussion Paper
Lower Oil Prices and U.S. Economic Activity
After a period of stability, oil prices started to decline in mid-2015, and this downward trend continued into early 2016. As we noted in an earlier post, it is important to assess whether these price declines reflect demand shocks or supply shocks, since the two types of shocks have different implications for the U.S. economic outlook. In this post, we again use correlations of weekly oil price changes with a broad array of financial variables to quantify the drivers of oil price movements, finding that the decline since mid-2015 is due to a mix of weaker demand and increased supply. Given ...
Working Paper
Oil Price Elasticities and Oil Price Fluctuations
We study the identification of oil shocks in a structural vector autoregressive (SVAR) model of the oil market. First, we show that the cross-equation restrictions of a SVAR impose a nonlinear relation between the short-run price elasticities of oil supply and oil demand. This relation implies that seemingly plausible restrictions on oil supply elasticity may map into implausible values of the oil demand elasticity, and vice versa. Second, we propose an identification scheme that restricts these elasticities by minimizing the distance between the elasticities allowed by the SVAR and target ...
Journal Article
Drilling Productivity in the United States: What Lies Beneath
We construct new measures of drilling productivity and find that productivity increased sixfold from the mid-2000s to early 2017. Gains in below-ground efficiency?the number of barrels produced per foot of drilled wells?have largely driven this increase in overall productivity. The large oil price declines during the Great Recession and from 2014 to 2016 also played a role. However, further large increases in productivity are unlikely absent additional improvements in technology or a subsequent large downturn in oil prices.
Discussion Paper
Is Cheaper Oil Good News or Bad News for U.S. Economy?
Oil prices have declined substantially since the summer of 2014. If these price declines reflect demand shocks, then this would suggest a slowdown in global economic activity. Alternatively, if the declines are driven by supply shocks, then the drop in prices might indicate a forthcoming boost in spending as firms and households benefit from lower energy costs. In this post, we use correlations of oil price changes with a broad array of financial variables to confirm that this recent fall in oil prices has been mostly the result of increased global oil supply. We then use a model to assess ...
Discussion Paper
Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?
Oil prices plunged 65 percent between July 2014 and December of the following year. During this period, the yield spread?the yield of a corporate bond minus the yield of a Treasury bond of the same maturity?of energy companies shot up, indicating increased credit risk. Surprisingly, the yield spread of non?energy firms also rose even though many non?energy firms might be expected to benefit from lower energy?related costs. In this blog post, we examine this counterintuitive result. We find evidence of a liquidity spillover, whereby the bonds of more liquid non?energy firms had to be sold to ...