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Empirical Economics

14.05.2024

Do consumer price indices in oil-producing economies respond differently to oil market shocks? Evidence from Canada

verfasst von: Andre Harrison, Annika Segelhorst

Erschienen in: Empirical Economics

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Abstract

Using a structural vector autoregression (SVAR) model, we demonstrate that the response of consumer prices in oil-producing Canadian provinces to oil market shocks is similar to that of consumer prices in non-oil-producing provinces, though the magnitudes and durations vary. In particular, the effects of oil supply and oil-specific demand shocks lead to significant consumer price increases while unanticipated expansions in global demand only lead to modest increases in consumer prices across both sets of provinces. Our results suggest that oil market shocks are transmitted from consumer prices in oil-producing provinces to non-oil-producing ones largely through changes in the labor market. Further, we find that roughly 41% of the long-run variation in consumer price inflation in oil-producing provinces is attributable to oil market shocks while it is about 46% in non-oil-producing provinces on average. Finally, we show that historically, oil market shocks have contributed to fluctuations in consumer price inflation in each province with different signs at different points in time. Consequently, our results suggest that policymakers should pay close attention to the effects of oil market shocks on subnational consumer prices in order to curb the impacts of adverse supply shocks and to mediate demand-side forces.

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Fußnoten
1
For example, Park et al. (2011), Yoshizaki and Haomori (2014), Dong et al. (2020), and Sakashita and Yoshizaki (2016) provide regional and country-level comparisons for the effects of oil price shocks on macroeconomic indicators.
 
2
Canada’s three territories (Nunavut, Northwest Territories, and Yukon) are excluded from this study due to limited data availability for the time frame analyzed.
 
3
For each year of data available at the time of writing (1997–2020), we divide the sum of the North American Industry Classification System’s sector categories 21111 (oil and gas extraction except oil sands) and 21114 (oil sands extraction) by all-industry total provincial gross domestic product (GDP). The annual share of output attributed to oil and gas extractive activities fluctuates considerably over time for productive provinces, so we use the average annual share of GDP attributable to hydrocarbon extraction as the key criteria for differentiation. Although this period of time does not entirely capture the data used in our analysis, prior historical production is consistent with the ranking of these for units as the key oil-producing economies.
 
4
See Inoue and Kilian (2013) for a more detailed discussion.
 
5
This result is in line with Kilian and Zhou (2022) who find that changes in labor demand are important in transmitting oil price shocks from oil-rich regions to oil-poor ones. Moreover, they find that higher real oil prices increase overall employment in all regions, with the effect being more pronounced in the oil-rich regions. We provide the labor market results in the Appendix.
 
6
As previously mentioned, most of Canada’s oil production is concentrated in three provinces—Alberta, Newfoundland and Labrador, and Saskatchewan. Kilian and Zhou (2022) notes that this amounts to about 95% of Canada’s total oil production.
 
7
See also Herwartz and Plodt (2016) who use this strategy to assess the effects of oil shocks on country-level macroeconomic aggregates in the USA, the euro area, and China.
 
8
Specifically, in Newfoundland and Labrador, there are limited onshore oil and gas reserves. Yet, its offshore reserves are vast. Once in the production phase, offshore drilling rigs offer flexibility in operational decision-making and high expected returns relative to sustained operating costs in other extractive projects (see Guedes and Santos 2016). Newfoundland and Labrador’s offshore production facilitates access to the global oil market, enabling it to fetch premium prices at the Brent Crude benchmark. However, with long exploration timelines for its offshore oil rigs, one would expect that oil market shocks transmit quicker into oil price changes such that smaller shifts in oil production and larger responses of oil price are expected to clear the market.
 
9
It would have been worthwhile to consider other channels. For instance, the government redistribution channel is an important one as noted by Kilian and Zhou (2022), but limited data on government revenue at the provincial level and at the monthly frequency prevented us from considering this channel. In particular, the data is available at the annual frequency in most cases and the quarterly frequency in some cases. However, we have monthly data.
 
10
The stimulative impacts of oil shocks on domestic aggregate demand are well documented for Canada and other countries (Blanchard and Gali 2017; Hou et al. 2016; Delpachitra et al. 2020). Our study’s province-level analysis yields further precision to understanding of this phenomenon.
 
11
The role of oil price shocks in instigating Canadian currency appreciation was documented in Hou et al. (2016).
 
12
See Yoshizaki and Haomori (2014) who compare the baskets of the USA and Japan. However, the CPI data is not without limitations. To begin, there have been shifts throughout our sample in the frequency at which the basket weights are calculated. Such shifts could affect the precision of the CPI measure. For instance, the basket weights were updated only every five years before 2011. Since then, the weights are updated every 1–2 years to better capture changes in consumption patterns. Moreover, the accuracy of the CPI measure is subject to sampling errors, since information about price and spending patterns are collected through sample surveys. In addition, imputation methods may be used when price data is missing. At finer geographic scales, price changes in other areas are used as a benchmark to substitute for price movements in places where prices are not observable which may compromise its accuracy. Nonetheless, the CPI is widely accepted to be adequately precise for most practical purposes.
 
13
Intensive oil production in the twentieth century in the Northwest Territories qualifies the territory for our analysis as an oil producer, but we opted to exclude the territory based on its small permanent population and limited supporting macroeconomic data.
 
14
Monthly values for the 3-month interbank rate represent values for the last Wednesday of each month.
 
15
Monthly values of the Canadian dollar to US dollar spot exchange rate are averages of the daily data series.
 
16
See for example, Inoue and Kilian (2013, 2019).
 
17
The oil price as measured by the West Texas Intermediate (WTI) crude oil price benchmark was deflated by US CPI before the growth rate was calculated. This procedure follows that done by Baumeister and Hamilton (2019), among others.
 
18
See also Yoshizaki and Haomori (2014), among others.
 
19
See also Kilian and Murphy (2012), Kilian (2014) among others.
 
20
In addition, Yoshizaki and Haomori (2014) note that increases in the price of oil driven by shocks that are specific to the oil market would have delayed effect on the volume of world trade (global economic activity) for at least one month.
 
21
See Kilian (2009) for a more detailed discussion.
 
22
This approach has been adopted in previous work that studies the effects of oil market shocks on CPI (Yoshizaki and Haomori 2014) and relating to the US economy (Kilian 2009). Further, in robustness checks, we consider different orderings of the variables at the national and provincial level and find that our results are largely unaltered. These are discussed in Sect. 6.4.
 
23
See Inoue and Kilian (2013, 2019) for a more detailed discussion.
 
24
In calculating the impulse responses at the national level, we employ the following ordering of the variables: \(y_{t}=\left[ q_{t},g_{t},p_{t},emp_{t},inf_{t},i_{t},ex_{t}\right] ^{'}\) where identification occurs through a block-recursive structure. In this manner, monetary policy responds contemporaneously to changes in national macroeconomic aggregates.
 
25
Kilian (2009) argued that the decline in the real price of oil in the aftermath of OPEC collapsing had more to do with a negative oil market-specific demand shocks rather than positive oil supply shocks or negative aggregate demand shocks. He posited that there was an initial consensus that this collapse was irrevocable, and hence, contributed largely to the fall in the demand for oil at this particular time.
 
26
The results from these robustness checks were not reported because of their similarity to the main results and space constraints. However, these can be made available upon request.
 
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Metadaten
Titel
Do consumer price indices in oil-producing economies respond differently to oil market shocks? Evidence from Canada
verfasst von
Andre Harrison
Annika Segelhorst
Publikationsdatum
14.05.2024
Verlag
Springer Berlin Heidelberg
Erschienen in
Empirical Economics
Print ISSN: 0377-7332
Elektronische ISSN: 1435-8921
DOI
https://doi.org/10.1007/s00181-024-02606-y

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