As an invoice currency the US dollar is frequently cited to cause changes in real oil prices through a demand and supply channel. The aim of this paper is to shed more light on whether the US dollar is driving oil prices.
In order to do so, we incorporate the bivariate relationship in a broader demand and supply framework in which real oil prices are determined by demand and supply factors. We find cointegration among the variables involved and that the value of the US dollar is a significant part in the long-run relationship. The causal links within the long-run relationship are examined using the procedure suggested by Toda & Yamamoto (1995) to test for Granger causality in the presence of I(1) variables.
The results show that no causal effect of the US dollar on oil prices can be found. This contradicts the view that the US dollar is driving real oil prices. There is even evidence that none of the fundamentals is causing real oil prices. Moreover, real oil prices are found to have an indirect causal effect on the US dollar. This contradicts standard models such as the Krugman (1983) model which suggest a direct link.
Table of Contents
1 Introduction
2 Literature review
3 Theoretical foundations
4 Data
5 Methodology
6 Empirical results
7 Conclusion
References
Appendix
A1 Figures
A2 Tables
A3 Autocorrelation tests
A4 Newey-West variance-covariance estimator
A5 Ensuring strict exogeneity in DOLS
Research Objectives and Topics
This paper investigates whether the value of the US dollar acts as a demand and supply factor that drives real oil prices. By incorporating the US dollar into a broader demand and supply framework that accounts for additional macroeconomic variables, the research seeks to clarify the causal relationship between these variables and determine whether the commonly held assumption of a direct causal link from the US dollar to oil prices holds under rigorous empirical testing.
- The relationship between the US dollar and real oil prices.
- Demand and supply factors in the crude oil market.
- Econometric testing for cointegration and long-run relationships.
- Granger causality analysis to determine the direction of influence between variables.
- The role of global economic activity and world real interest rates as fundamentals.
Excerpt from the Book
1 Introduction
Crude oil is one of the most important sources of energy and therefore a key element of our worldwide economy. The constant increases in oil prices in recent years led to an intense public debate about the drivers of oil prices. In this debate, the value of the US dollar is frequently cited as a significant contributing factor to changes in oil prices. This conclusion is often drawn by comparing the series of oil prices and the value of the dollar which indicates an inverse comovement (see Figure 1 in appendix A1). Clearly, this is only a casual observation and more profound statistical evidence is needed. The rationale behind the argument that the US dollar is driving oil prices relies on the fact that crude oil is priced in US dollars. Through this property as an invoice currency, the US dollar is supposed to be a demand and supply factor of crude oil. Thus, the US dollar is supposed to cause changes in oil prices through a demand and supply channel. However, this direction of causality is not obvious as there is theoretical and empirical evidence which suggests that oil prices are driving the value of the US dollar and not vice versa.
Summary of Chapters
1 Introduction: Introduces the research question concerning the US dollar's role in driving oil prices and outlines the motivation for the study within a broader economic framework.
2 Literature review: Surveys existing research on demand and supply models and real exchange-rate studies to contextualize the relationship between oil prices and the US dollar.
3 Theoretical foundations: Outlines the theoretical demand and supply model of the crude oil market and identifies the fundamental variables involved.
4 Data: Describes the measurements of variables used in the analysis, including oil prices, the US dollar, global economic activity, and interest rates, and justifies the chosen sample period.
5 Methodology: Details the econometric approach, including unit root testing, cointegration analysis, the Dynamic OLS (DOLS) estimator, and the procedures for testing Granger causality.
6 Empirical results: Presents the findings from the econometric tests, including the unit root and cointegration analysis, the estimated long-run parameters, and the Granger causality tests.
7 Conclusion: Summarizes the study's findings, noting the absence of evidence that the US dollar drives oil prices and highlighting the indirect causal effects found instead.
Keywords
US dollar, oil prices, demand and supply, cointegration, Granger causality, DOLS, real exchange rate, crude oil market, global economic activity, interest rates, invoice currency, econometrics, time series analysis.
Frequently Asked Questions
What is the primary objective of this research paper?
The paper aims to empirically determine whether the value of the US dollar serves as a primary driver of real oil prices through a demand and supply channel.
What are the central themes discussed in this work?
The work focuses on the intersection of commodity pricing, currency values, macroeconomic fundamentals, and the econometric methods required to test for long-run causal relationships.
What is the central research question?
The research asks whether the US dollar is actually driving real oil prices, given that it is frequently cited as a major influence due to its role as an invoice currency.
Which econometric methods are utilized?
The study employs unit root tests (ADF), cointegration testing (Johansen rank test), Dynamic OLS (DOLS) estimation, and the Toda-Yamamoto (TY) procedure for Granger causality testing.
What does the main body of the paper cover?
The main body covers the development of a theoretical demand and supply framework, the selection and measurement of data, the methodological setup for time-series analysis, and the presentation of empirical results.
Which keywords best characterize this work?
The paper is characterized by terms such as US dollar, oil prices, cointegration, Granger causality, and demand and supply models.
How does the author define the role of the US dollar as an invoice currency?
The author discusses how the pricing of crude oil in US dollars implies a potential demand and supply channel through which changes in dollar value might theoretically influence global oil demand and production incentives.
What is the significance of the empirical finding regarding the causality between oil prices and the dollar?
The findings contradict the common view that the US dollar drives oil prices, instead suggesting that there is no causal effect from the dollar to oil prices and indicating that oil prices may actually exert indirect influence on the dollar through other macroeconomic fundamentals.
- Arbeit zitieren
- Etienne Jungbluth (Autor:in), 2012, Is the Value of the US Dollar Driving Oil Prices?, München, GRIN Verlag, https://www.grin.com/document/358681
