Whether you’re driving a car or heating your home, you probably watch prices rise and fall as the cost of oil fluctuates. It’s important to understand why these fluctuations occur and what impact they can have on the economy.
Like any product, oil is subject to laws of supply and demand. When production costs are high, prices increase; when supply is low, prices drop. Prices are also influenced by the Organization of Petroleum Exporting Countries (OPEC), independent petro-states, and private companies that produce and market oil. In addition, natural disasters can have a significant impact on prices.
When oil prices spike, companies that rely on fuel for machinery and transportation suffer because of increased costs, which they pass on to consumers. This reduces consumer discretionary income, slowing economic growth. Conversely, declining oil prices boost growth by lowering costs for businesses and consumers.
Several studies have examined the relationship between oil prices and stock market performance. Using techniques such as the GARCH framework, wavelet breakdown, and copulas, researchers have found that the effect is time-varying. While some studies show that oil-stock correlations are negatively correlated, others find a positive relationship. This article examines the long-short run symmetric effect of oil price fluctuation on business climate, macroeconomic indicators, and economic growth using daily data from 2012-2022. Structural vector autoregressive and autoregressive distributed lag (ARDL) methodologies are employed.