An Empirical Analysis of Supply and Demand Determinants of Global Oil Prices: The Role of OPEC
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Abstract
This paper examines the key determinants influencing global oil prices from both supply and demand perspectives, including structural and shock-related factors such as the COVID-19 pandemic. Particular emphasis is placed on the influence of OPEC production quotas, non-OPEC production volumes, trade openness, industrial production, and shock-related factors such as the pandemic and major geopolitical events. The analysis covers the period from 2000 to 2023 and applies multiple linear regression, including OLS, Newey-West, and Bootstrap techniques, to test three primary hypotheses concerning the relationship between oil prices and these explanatory variables. The results reveal that a one percent reduction in OPEC quotas leads to a 1.59 percent increase in global oil prices, confirming the organization’s significant influence on the supply side. Additionally, the findings show that a one percent increase in global industrial production results in a 12.06 percent price increase, underscoring the strong link between economic activity and oil demand. Conversely, greater trade openness is associated with lower oil prices; specifically, a one percent increase in openness correlates with a 1.62 percent price decrease, likely due to enhanced competition and greater supply efficiency. The COVID-19 variable was also found to have a statistically significant and negative effect on oil prices during the crisis period. These relationships are statistically significant and robust across all model specifications. In contrast, the variable representing non-OPEC production volumes yields a statistically significant positive effect only in the OLS and Newey-West models, while turning statistically insignificant in both Bootstrap models, highlighting potential sensitivity to distributional assumptions and underlying structural heterogeneity. Additionally, the 2001 geopolitical shift, included as a structural dummy variable, did not show statistical significance, suggesting that global oil markets may have absorbed its impact without lasting price disruption.
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