Four essays on the characteristics of the oil market

Abstract

The purpose of this thesis is to study the role of oil in the macroeconomy. The thesis consists of an introduction and four independent papers. The first paper studies factors drive the oil prices, in the long run, using a dominant firm-competitive fringe model. The result reveals that global GDP is the main driving force of long-run oil prices. The evidence is provided for OPEC exercising market power. The second paper concerns the effect of permanent income shocks on the oil price using a time series model with cointegrating features. The findings reveal that the price of oil can be predicted by using a stable long-run relationship and, furthermore, that the GDP shock has a permanent effect on the oil price and that the shocks to the oil price are almost transitory. The third paper studies elements explain the formation of short-run oil prices in an extended storage model. The findings reveal that GDP shock generates moderate effects on the oil price in the short run, and the production shock plays an important role in the variance of the oil price. The final paper solves a dynamic asset allocation problem for a commodity sovereign wealth fund (SWF) under incomplete markets. The model is calibrated for the Norwegian SWF that accumulates fluctuated oil income. The solution of the optimal investment strategy suggests that the Norwegian financial wealth should be invested in stocks at a high level initially and then decreased over time.