Global crude oil market shocks and global commodity prices

• Published date: 01 March 2019
• DOI: http://doi.org/10.1111/opec.12143
• Author: Bebonchu Atems,Mark Melichar
• Date: 01 March 2019

Global crude oil market shocks and global

commodity prices

Mark Melichar* and Bebonchu Atems**

*Department of Economics, Finance, and Marketing, Tennessee Tech University, Box 5083,

38505-0001 Cookeville, TN, USA. Email: mmelichar@tntech.edu

**Department of Economics and Financial Studies, Clarkson University, Potsdam, NY, USA.

Email: batems@clarkson.edu

Abstract

This paper examines the relationship between shocks to the global crude oil market and

commodity prices, and whether recent changes in US renewable energy policy have altered this

relationship. Although other papers have studied the effect of oil price shocks on commodity prices

(particularly agricultural commodity prices), this paper contributes to the literature in that it

accounts for endogenous oil price shocks as in Kilian (2009). We find asymmetric responses in

commodity index prices to endogenous oil price shocks, with oil demand shocks leading to higher

energy and non-energy commodity index prices for the full sample period and oil supply shocks

producing less of an impact. We also find evidence of heterogeneity after changes in US energy

policy in 2006, with a stronger relationship between oil and other commodity prices. Specifically,

oil-specific demand shocks lead to responses of greater magnitude and statistical significance for

non-energy commodity indexes.

1. Introduction

The effect of oil price shocks on macroeconomic variables has been studied extensively

over the last 40 years but less is known about its effects on commodity prices.

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The

purpose of this paper is to examine the impact of oil prices on commodity prices, and

whether recent changes in energy policy have altered the relationship. Contrary to

previous papers on the effects of oil shocks on commodity prices, we estimate a

structural VAR model that allows oil prices to be endogenous with respect to the

economy. Our empirical methodology closely follows, among others, Kilian (2009) and

Kilian and Park (2009) who decompose oil market shocks into distinct demand and

supply shocks that characterise the crude oil market, and then examine the response of

US GDP, CPI and stock returns to these shocks. Our paper builds on that methodology

JEL classification: Q02, G15, Q43.

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