Oil price shocks and policy uncertainty: New evidence on the effects of US and non-US oil production

- Positive innovations in US oil production are associated with decreases in US economic policy uncertainty.
- Oil supply shocks identified by US and non-US origins explain 21% of variation in US economic policy uncertainty.
- Shocks to US oil production affect forecast interquartile ranges for US CPI and federal/state/local government expenditures.
- Increased shock to US oil supply disruption raise US CPI and expenditure forecast uncertainty.
- Shock to US oil supply accounts for 21% of variation in CPI forecaster disagreement after 60 months.

Important interaction has been established for US economic policy uncertainty with a number of economic and financial variables including oil prices. This paper examines the dynamic effects of US and non-US oil production shocks on economic policy uncertainty using a structural VAR model. Such an examination is motivated by the substantial increases in US oil production in recent years with implications for US political and economic security. Positive innovations in US oil production are associated with decreases in US economic policy uncertainty. The economic forecast interquartile ranges about the US CPI and about federal/state/local government expenditures are particularly sensitive to innovations in US oil supply shocks. Shocks to US oil supply disruption causes rises in the CPI forecast uncertainty and accounts for 21% of the overall variation of the CPI forecaster disagreement. Dis-aggregation of oil production shocks into US and non-US oil production yields novel results. Oil supply shocks identified by US and non-US origins explain as much of the variation in economic policy uncertainty as structural shocks on the demand side of the oil market.