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Basil Oberholzer

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Conclusion

Prices, Production and Consumption

Basil Oberholzer

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The crude oil market and its driving forces

Prices, Production and Consumption

Basil Oberholzer

This chapter is an introduction to the most important topics regarding the crude oil market. Several data and facts of the market are briefly presented. An outstanding feature of crude oil at the core of public debates is its character as a fossil and non-renewable fuel. The chapter enlightens what this means in economic terms and how it is connected to the investigation at hand. As another issue, recent research on the oil market has, to a great part, focused on the driving forces of the oil price. In particular, our interest is in the question of whether economic fundamentals are the only factors influencing the price or whether speculation may also be effective. Finally, the role of OPEC and its potential power to impact on the oil market is considered.

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Economic policy propositions: an overview

Prices, Production and Consumption

Basil Oberholzer

This chapter starts with the identification of the main problems arising from the connections of monetary policy and financial markets with the crude oil market. First, financial investment in the oil futures market enhances oil price volatility and hence financial and economic instability. Second, since an increased oil price caused by speculation raises investment in the spot market, we end up with higher oil production and consumption, which is a problem against the background of climate change. Several existing policy propositions aiming at addressing stability and ecological sustainability are considered. These are futures market regulation, counteracting oil market interventions, an oil supply target and a tax on oil production. All of the approaches feature some strengths and some weaknesses.

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An economically stable way out of fossil energies

Prices, Production and Consumption

Basil Oberholzer

The final chapter summarizes the previously discussed policy approaches and develops a new proposition that merges the advantages but avoids the shortcomings of the former. In the so-called oil price targeting system, monetary policy determines the level of the oil price. Thereby, economic stability and ecological sustainability can be achieved. To prevent spot market imbalances, this monetary policy instrument is combined with fiscal policy. The approach is illustrated by means of the stock-flow consistent model. Potential critical arguments like the feasibility of the oil price targeting system, central bank independence or impacts on inflation are debated.

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Basil Oberholzer

To begin with the empirical investigation in this chapter, the theoretical conclusions are summarized in a stock-flow consistent model, which is able to integrate the oil spot and futures markets and to reflect the dynamic effects of monetary policy. Subsequently, the two respective periods of conventional and unconventional monetary policy in the time frame of consideration (2000–14) are analyzed by means of structural VARs and a large number of Granger causality tests. These methods are supplemented by a new approach to oil inventories. All in all, despite many difficulties, the causal chain from monetary policy to changes in oil production and consumption can be broadly confirmed.

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Monetary Policy and Crude Oil

Prices, Production and Consumption

Basil Oberholzer

The global crude oil market is critically important in many respects. It is the fuel that drives the global economy and, as such, is the focus of climate policies. Moreover, crude oil is the basis of a tradable financial asset. It is therefore connected to several outstanding macroeconomic developments of recent years, including financial market fluctuations, the financial crisis and the exceptional conduct of monetary policy. This book investigates the impacts of monetary policy and the financial system on the global crude oil market. Furthermore, it outlines how monetary policy may also be used to guarantee stability and to contribute to ecological sustainability.
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Monetary policy and crude oil: a theoretical analysis

Prices, Production and Consumption

Basil Oberholzer

The first section of this chapter is dedicated to theories of money and financial markets in general. By confronting them we argue that the economy can be best understood by perceiving money as endogenous. Moreover, financial markets are not a mere reflection of the real economy determined by general equilibrium as claimed by neoclassical economics but may themselves well impact on economic fundamentals. These general features then are applied to the crude oil market. The central characteristic of crude oil is its dual nature: it is a physical good but serves as well as a financial asset in the form of futures contracts. Monetary policy effects through transmission channels are analyzed. It is found that monetary policy influences the oil price mainly through the futures market by means of speculation. The oil price itself affects investment behaviour in the spot market. We suggest that expansive monetary policy finally gives rise to a higher oil intensity of the economy.

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US monetary policy and the global crude oil market

Prices, Production and Consumption

Basil Oberholzer

When applying the hitherto theoretical analysis to the real world, there are some additional issues that should be enlightened. In this chapter, the specific case of US monetary policy and its implementation mechanisms are taken into account both for the period of conventional and so-called unconventional policies. Moreover, the global crude oil pricing system is presented. It shows that there are many factors, in addition to theory, which contribute to uncertainty in the market. An additional section investigates how the market for crude oil is related to other energy sources like natural coal and gas. Finally, we examine how monetary policy of a single country can influence the globally integrated oil market.

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Clive L. Spash and Heinz Schandl