An Empirical Analysis of Supply and Demand Factors Influencing Global Oil Prices: A Panel Data Approach

Abstract

This study examines the factors that impact global oil prices, focusing on the relationship between supply and demand in international markets. The authors used an econometric panel methodology to identify the primary factors influencing global oil prices, using Brent crude oil prices as the dependent variable. The study also considered alternative measures, such as Dubai and West Texas Intermediate (WTI) prices, as well as a composite global price index derived from the average of WTI, Dubai, and Brent prices, to ensure the robustness of the findings. The study found that key factors influencing global oil prices remained consistent across different dependent variables introduced into the model. The research emphasizes the critical role of supply and demand dynamics as the main drivers shaping global oil prices. On the supply side, variables such as oil reserves, international oil trade, and the number of active oil rigs were considered. The results indicated that an increase in active oil rigs is associated with increased oil prices, while an increase in international oil trade leads to price reductions. When oil prices rise, active oil rigs often increase, but with a specific time lag. This rig increase can further drive up oil prices, particularly when the market expects continued price growth or when investments in new rigs are financed by anticipated higher revenues from oil sales. Increased international trade in oil leads to a more excellent supply of oil in the global market, which drives down global oil prices. Although oil reserves showed a positive coefficient, they were marginally significant, suggesting a potential upward pressure on prices when reserves increase. This positive relationship between oil reserves and prices may reflect market perceptions of future supply constraints, where increased reserves signal potential future scarcity rather than immediate availability, thereby exerting upward pressure on prices due to speculative behavior and strategic stockpiling. On the demand side, industrial growth was a critical factor that significantly drove oil prices higher. At the same time, renewable energy consumption had a statistically significant adverse impact, reducing global oil demand and lowering oil prices. The study also examined the impact of major global events, including the COVID-19 pandemic and the effects of the Global Financial Crisis. It revealed that the COVID-19 pandemic had a statistically significant negative impact on oil prices due to worldwide lockdowns and economic slowdowns. However, the Global Financial Crisis did not exhibit statistical significance in the model using WTI prices, though it still negatively affected all models. The study employed various panel data regression techniques, including pooled, fixed effects (FE), and random effects (RE) models. Diagnostic tests for heteroskedasticity and autocorrelation were conducted, leading to the application of Robust Hausman tests that identified the fixed effects model as the most appropriate for this analysis. Moreover, the study used Driscoll-Kraay standard errors to correct for heteroskedasticity, autocorrelation, and cross-sectional dependence, which reinforced the fixed-effects model's validity. The key findings highlighted the importance of supply and demand as pivotal factors influencing global oil prices.