Modeling the Impact of Agricultural Shocks on Oil Price in the US: A New Approach

The current literature has generally considered prices of the agricultural commodity as an endogenous factor to crude oil price. As such, the role of the agricultural market in the energy sector has been largely ignored. We argue that the expansion of agricultural production may trigger a significan...

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Bibliographic Details
Published inJournal of risk and financial management Vol. 12; no. 3; p. 147
Main Authors Vu, Tan, Vo, Duc, Ho, Chi, Van, Loan
Format Journal Article
LanguageEnglish
Published Basel MDPI AG 01.09.2019
Subjects
Agricultural commodities
Agricultural production
Alternative energy sources
Biodiesel fuels
Biofuels
Causality
Consumption
Corn
Crude oil
Crude oil prices
Developing countries
Energy consumption
Error correction & detection
Ethanol
Food prices
Influence
LDCs
Raw materials
Renewable resources
Supply & demand
Volatility
United States > US
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Summary:The current literature has generally considered prices of the agricultural commodity as an endogenous factor to crude oil price. As such, the role of the agricultural market in the energy sector has been largely ignored. We argue that the expansion of agricultural production may trigger a significant increase in oil price. In addition, the world has recently witnessed a growth in biofuel production, leading to an increase in the size of the agricultural sector. This study is conducted to examine the impact of different agricultural shocks on the oil and agricultural markets in the US for the period from 1986 to 2018. The study utilizes the Structural Vector Autoregressive (SVAR) model to estimate the relationship between the agricultural market and the crude oil market. Moreover, the variance decomposition is also used to quantify the contribution of agricultural demand shocks on oil price variations. Findings from this paper indicate that different agricultural shocks can have different effects on oil price and that corn use in ethanol plays an important role in the impact of corn demand shocks on oil price. We find evidence that the agricultural market can have an impact on oil prices through two main channels: indirect cost push effect and direct biofuel effect. Of these, the biofuel channel unexpectedly suggests that the expansion of bioethanol may in fact foster the dependency of the economy on fossil fuel use and prices.
ISSN:1911-8074
1911-8066
1911-8074
DOI:10.3390/jrfm12030147