Exploring the core factors and its dynamic effects on oil price: An application on path analysis and BVAR-TVP model

As the uncertainty of oil price increases, impacts of the influential factors on oil price vary over time. It is of great importance to explore the core factors and its time-varying influence on oil price. In view of this, based on the PATH-ANALYSIS model, this paper obtains the core factors, builds an oil price system VAR model, which uses demand, supply, price, and inventory as endogenous variables, and China's net imports as well as dollar index as exogenous variables. Then we set up a BVAR-TVP (Time varying parameter) model to analyze dynamic impacts of core factors on oil price. The results show that: (1) oil prices became more sensitive to oil supply changes, and the influence delays became shorter; (2) the impact of oil inventories on oil prices with a time lag of two quarters but has a downward trend; (3) the impact of oil consumption on oil prices with a time lag of two quarters, and this effect is increasingly greater; (4) the US dollar index is always the important factor of oil price and its control power increases gradually, and the financial crisis (occurred in 2008) further strengthens the influence of US dollar.

► We build an oil price VAR model based on the PATH-ANALYSIS results.
► The dynamic effects of core factors on oil price was studied by BVAR-TVP model.
► Oil prices became more sensitive to oil supply changes.
► The effect of oil consumption on oil prices is increasingly greater.
► Financial crisis further strengthens the influence of US dollar on oil price.