Supply and Demand shocks: the short-term and long-term drivers of oil price uncertainty

We empirically show the role of supply and demand shocks as drivers of short and long-run price uncertainty in the crude oil market. We first define oil price uncertainty as the purely unforecastable component of oil price fluctuations and show that uncertainty of the short-run oil price fluctuations is driven by oil supply shocks, while the uncertainty for medium and long-run forecast horizons is mainly caused by aggregate demand. While our findings on the impact of oil supply disruptions on oil price uncertainty are in line with the implications of the theory of storage, we do not find similar results for the medium and the long, whereby the global demand shocks are found to be the main driver for the increasing oil price uncertainty. Interestingly, we show that the recessionary effect of short and medium-horizon uncertainty shocks, we find that long-run oil price uncertainty shocks lead to expansions in global economic activity.