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Faculty of Economics

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Mohaddes, K. and Raissi, M.

The US oil supply revolution and the global economy

Empirical Economics


Abstract: This paper investigates the global macroeconomic consequences of falling oil prices due to the oil revolution in the USA, using a global VAR model estimated for 38 countries/regions over the period 1979Q2–2011Q2. Set identification of the US oil supply shock is achieved through imposing dynamic sign restrictions on the impulse responses of the model. The results show that there are considerable heterogeneities in the responses of different countries to a US supply-driven oil price shock, with real GDP increasing in both advanced and emerging market oil-importing economies, output declining in commodity exporters, inflation falling in most countries, and equity prices rising worldwide. Overall, our results suggest that a US supply-driven oil price shock (equivalent to a 10–12% fall per quarter in the price of oil) results in an increase in global growth by 0.16–0.37 percentage points in the medium term. This is mainly due to an increase in spending by oil-importing countries, which exceeds the decline in expenditure by oil exporters.

Keywords: Fracking revolution, Global macroeconomic modeling, International business cycle, Oil price decline, Oil supply, Shale oil, Tight oil.

Author links: Kamiar Mohaddes  

Publisher's Link:

Cambridge Working Paper in Economics Version of Paper: The U.S. Oil Supply Revolution and the Global Economy, Mohaddes, K. and Raissi, M., (2016)

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