Artículos, Libros y Tesis.

The model estimated can be described as such:

( )

Where is the first differenced of the world oil production, is the shipping index representing world aggregate demand and price is the first differenced of the real oil price. All variables are expressed in logs. This leads to the following structural VAR:

44 The unrestricted SVAR is presented in equation 5.13.

( ) [ ] ( ) (5.13)

The restrictions imposed on the impact matrix can be seen below where the parameters and from equation 5.13 takes the value of zero.

( ) [ ] ( ) (5.14)

Following the discussion in section 4.1, the identification scheme is highly relevant for the analysis and the plausibility of the applied restrictions must be presented and discussed. A restriction in this SVAR setting means a variable cannot respond immediately to changes in other variables. An immediate response is defined as a reaction within the same time period the observation is done. That is, a restricted variable is assumed to not react to innovations in another variable in the same month. The first two restricted parameters are and which refers to the restrictions that economic activity and the oil price not immediately influences the production of oil. This restriction is based on the assumption that oil producers slowly change their production due to demand and price changes. This is based firstly on the costs of changing oil production and the uncertainty which exists in the crude oil market. Support for this view is that the state owned Saudi-Arabian oil company, Saudi Aramco, produces forecasts of oil demand only once a year thus indicating slowly changes of production. A further support is the extraction restrictions the Norwegian government put on North Sea oil producers during the 1980s and 1990s (Drzwi, 2005). The restrictions were reviewed every six months and are a further indication that oil production decisions are not updated on a high- frequency basis. Thirdly, Kirchene (2006) reports that oil supply is rigid and inelastic in the short run, while Ringlund, Rosendahl & Skjerpen (2008) and Farzin (2001) reports that oil price changes influence production mainly through their impact on investments in exploration

45 activity and field development, implying a long term effect. This argument would apply for most oil producers, but could be weakened by the fact that some significant oil producers have large excess capacity. The excess capacity of Saudi-Arabia has given them the term swing producer. The term implies that the Saudi-Arabian production adapts to the market situation. The estimation of the excess capacity of Saudi-Arabia is rather uncertain. The Oil Market Report published by OPEC in March 2011 states that the organization`s total excess capacity is roughly 6 million barrels a day, roughly half of which stem from Saudi-Arabia. Estimations gathered by The Economist (March, 2011) however suggest OPEC`s level of excess capacity at roughly 4 million barrels a day.1 This excess capacity of Saudi-Arabia could allow production increases in the short term if demand pressure is strong enough. The political turmoil in North-Africa and Middle-East at the start of 2011 exemplify this. The turmoil led to higher oil prices due to increased uncertainty about future production and minor supply disruptions. Eventually Saudi-Arabia declared increased production to meet higher demand pressure and to reduce uncertainty of future oil supply. Even though there excess extraction capacity exists the supply curve of oil can be very steep due to other constraints as pipelines, regional storage capacity and available tankers. It should also be mentioned that different oil types could have significantly different characteristics such that not all refineries are compatible to all oil types. The situation in North-Africa and Middle-East explains this as well. As most of the European refineries which depended on Libyan oil import are relatively old, they have constraints on which oil types to process. The Saudi-Arabian oil is not

compatible to these refineries which mean a supply increase from the Saudi-Arabians not simply replaces the previous Libyan import (The Economist, March 2011)2. Consequently, if increased extraction from Saudi-Arabian reservoirs should reach the market the refineries compatible to Saudi-Arabian oil must have excess capacity or replace current input (which other refineries then can use as input) with Saudi-Arabian oil. Consequently, although it is very possible that Saudi-Arabian oil production accommodates to higher demand there are short-run constraints which obstruct rapid production changes or that the increased production reach the global market within the month. These constraints are however regarding the

physical supply of oil, but in some cases where the perceived risks are high, Saudi-Arabia could influence the price by signaling increased oil production which would lower risks and price within the month. As such, the identification scheme is not a perfect representation of the aggregate oil market, but I deem the identification in equation 5.13 to be valid.

1

http://www.economist.com/node/18285768?story_id=18285768&CFID=165794558&CFTOKEN=32601482

46 The last restriction means that the oil price have no immediate effect on world economic activity. As seen in the discussion related to the economic index, fuel costs represents a major share of total ship operating cost. It is then no doubt that shipping companies are focused on the price of fuel and the model allows the oil prices to affect the shipping rates. The question is whether innovations in oil price have an immediate effect on shipping prices. Kilian (2009) points to the fact that the contemporaneous correlation between shipping rates and bunker fuels are very low. This might be due to the insight offered by Bunkerworld (Wilson-Roberts, 2010:4) which point to bunker prices in a given location are determined by regional fuel oil markets in addition to the behavior of buyers and sellers. That is, by using aggregated crude and bunker oil prices on the global level, high correlation is observed, but by splitting up in regional level, low or even negative correlation can be observed. Consequently bunker oil prices may differ significantly between Caribbean, Rotterdam or Singapore ports. Thus, the identity assumption may hold since shipping agents focus on the regional price which is the price of relevance for the respective ships operating costs.