Long Run Relationship Between Oil Prices and Aggregate Oil Investment: Empirical Evidence

22 Pages Posted: 17 Jan 2008

See all articles by Sergio Guerra

Sergio Guerra

Catholic University Andres Bello (UCAB)

Date Written: January 8, 2007

Abstract

Using the aggregate number of oil rigs as a proxy of oil investment, I evaluate the bidirectional relationship between oil prices and oil investment in OPEC and Non-OPEC countries. We take advantage of Bayesian estimation techniques and innovation accounting to incorporate the long run dynamics of the oil market without imposing strong restrictions on its structural form. Our results suggest that aggregate oil investment reacts to oil price changes as predicted in the traditional Hotteling model, but the response of oil price to shocks in oil investment (when controlling for world oil demand and oil production in both groups) is barely significant and usually transitory.

Keywords: Energy Prices, Oil Investments, Vector autoregression, Bayesian methods

JEL Classification: C11, C32, C53, L71, Q41, Q43

Suggested Citation

Guerra, Sergio, Long Run Relationship Between Oil Prices and Aggregate Oil Investment: Empirical Evidence (January 8, 2007). USAEE Working Paper No. 08-001, Available at SSRN: https://ssrn.com/abstract=1081667 or http://dx.doi.org/10.2139/ssrn.1081667

Sergio Guerra (Contact Author)

Catholic University Andres Bello (UCAB) ( email )

Final Prolongacion Av Paez
Caracas, Montalban 1021
Venezuela

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