Understanding the Decline in the Price of Oil Since June 2014

Some observers conjecture that oil supply shocks in the United States and in other countries are behind the plunge in the price of oil since June 2014. Others suggest a major shock to oil price expectations occurred in late November 2014 when OPEC announced it would maintain current production levels despite the steady increase in non-OPEC oil production. Both conjectures are perfectly reasonable ex ante, yet we provide quantitative evidence that neither explanation appears supported by the data. This presentation by economics professor Lutz Kilian of the University of Michigan shows that more than half of the decline in the price of oil was predictable in real time as of June 2014 and therefore must have reflected the cumulative effects of earlier oil demand and supply shocks. A reception will follow the presentation.