The U.S. Shale Oil Revolution and the Behavior of Commodity Prices

Afees Adebare Salisu; Idris A. Adediran

doi:10.33119/ERFIN.2018.3.1.2

Afees Adebare Salisu Centre for Econometric and Allied Research, University of Ibadan and Department of Economics, Obafemi Awolowo University, Nigeria
Idris A. Adediran Centre for Econometric and Allied Research, University of Ibadan, Nigeria

DOI: https://doi.org/10.33119/ERFIN.2018.3.1.2

Keywords: U.S. Shale Oil Revolution, Oil Shocks, Commodity Prices, SVAR

Abstract

The United States is committed to technological improvements in horizontal drilling and hydraulic fracturing in its drive of toppling the world's leading oil producers by the mid-2020s and evolving into a net oil exporter by 2030. Consequently, these technological innovations revolutionized the U.S. oil sector and the international oil market with increasing relevance of the shale oil and attendant shock spillovers to financial and commodity markets. Upon these attractions and consistent with evidence in the literature, we trace the oil price and commodity price dynamics to the shale oil revolution using a recursive structural VAR model of the shale supply shocks. In line with the standard practice of ensuring sensitivity of results, we conduct analyses such as impulse responses, forecast-error variance decomposition, and historical decompositions to accommodate energy and nonenergy commodity components. We show, in addition to the popular view in the extant literature, that the shale oil revolution is not only associated with the recent oil price plunge, but also responsible for the tumble in the total energy-based commodity prices with crude oil price being just a component.

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