Shale oil revolution, the global oil market and the US economy

Abstract This study provides a novel perspective on the role of US oil production in the global oil market and the US economy. It employs a Bayesian Structural Vector Autoregression to identify distinct demand and supply oil market shocks. Although several studies have already used models that distinguish explicitly between US and non-US oil production, the present study does so by adopting a more flexible identification scheme as well as by allowing for time variation. In addition, a rolling-sample estimation approach is employed to investigate oil market shocks in a dynamic framework. The study finds considerable time variation in the effects of oil market shocks on the US economy. In particular, it identifies a sharp increase in the price elasticity of US oil supply after the shale oil revolution. This increased price responsiveness of US oil production is partly responsible for the resilience of the US economy to global oil market shocks in recent years. This conclusion remains robust regardless of whether the global oil market shocks originate from the demand or supply side.