Global Crude Oil Market Shocks and Global Commodity Prices

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 ([Kilian, L., 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.