What Drives Oil Prices? Emerging Versus Developed Economies



We explore the role of demand from emerging and developed economies as drivers of the real price of oil. Using a FAVAR model that identifies shocks from different regions of the world, we find that demand from emerging economies (most notably from Asian countries) is more than twice as important as demand from developed countries in accounting for the fluctuations in the real oil price and in oil production. Furthermore, geographical regions respond differently to adverse oil market shocks that drive up oil prices, with Europe and North America being more negatively affected than countries in Asia and South America. Copyright © 2014 John Wiley & Sons, Ltd.