Fundamentals or Expectation in the oil Price — Bruegel.org

In a post entitled ‘Is the oil price-GDP link broken’ Domenico Favoino and Georg Zachman discuss the link between oil price expectations and the EU economy.

Key Chart — Post 2008 expectations are playing a much bigger part in oil price shocks.

Key Points Made

The key impression that I was left with from the piece is the idea that financialisation is playing a much bigger part in the evolution of oil prices, the empirical nature of the study provides fairly solid evidence for that.

Paper conclusion

In conclusion, the observed drop in oil prices should have a slightly positive in pact on the EU economy. However, this prediction presumes that past relations between oil demand, oil supply, oil prices and GDP still hold. In fact, the structural increase in the importance of expectations in oil price formation raises doubts about the stability of these past relations. The true impact of the oil price drop therefore remains to be seen — and could prove disappointing in the end.

The authors reference Killian(2009) link is pdf — In the American economic Review that provides a methodology for breaking down impacts upon oil prices. As with all quantitative methods, healthy scepticism is encouraged (in this case a structural VAR model is used).