A micro-based model for world oil market

- We build a micro model linking prices, oil production, number of rig counts and world economic activity.
- We solve the problem of endogeneity using a SVAR approach at the micro level.
- We explain that a large proportion of the price move can be explained through a purely demand and supply factors.

In this paper, we study the supply-demand drivers of the price of oil over the last two decades. We address the problem of endogeneity using a novel SVAR approach, which allows us to incorporate technological restrictions that occur at the micro level in the production of crude oil to solve the identification problem in a reduced-form regression analysis that seeks to disentangle the drivers of oil prices. We explore the relationships between oil prices, rig counts, oil production and an index of world economic activity, and provide results for a heterogeneous set of countries. We find that when oil prices peaked in mid-2008-reaching almost US$150 compared to US$14 in 1998, a large proportion of the price move can be explained through a purely demand and supply factors.