Daniel P. Murphy

Category: Oil Markets

  • Drilling and Debt

    with Erik P. Gilje adn Elena Loutskina
    The Journal of Finance, 75(3), 1287-1325, Read

    Abstract

    This paper documents a previously unrecognized debt-related investment distortion. Using detailed project-level data for 69 firms in the oil and gas industry, we find that highly levered firms pull forward investment, completing projects early at the expense of long-run project returns and project value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long-run project returns to enhance collateral values and, by extension, mitigate lending frictions at debt renegotiations.

  • The role of inventories and speculative trading in the global market for crude oil

    with Lutz Kilian
    Journal of Applied Economics, 29(3), 454-478, Read

    Abstract

    We develop a structural model of the global market for crude oil that for the first time explicitly allows for shocks to the speculative demand for oil as well as shocks to flow demand and flow supply. The speculative component of the real price of oil is identified with the help of data on oil inventories. Our estimates rule out explanations of the 2003–2008 oil price surge based on unexpectedly diminishing oil supplies and based on speculative trading. Instead, this surge was caused by unexpected increases in world oil consumption driven by the global business cycle. There is evidence, however, that speculative demand shifts played an important role during earlier oil price shock episodes including 1979, 1986 and 1990. Our analysis implies that additional regulation of oil markets would not have prevented the 2003–2008 oil price surge. We also show that, even after accounting for the role of inventories in smoothing oil consumption, our estimate of the short-run price elasticity of oil demand is much higher than traditional estimates from dynamic models that do not account for for the endogeneity of the price of oil. Copyright © 2013 John Wiley & Sons, Ltd.

  • Why Agnostic Sign Restrictions Are Not Enough: Understanding the Dynamics of Oil Market Var Models

    with Lutz Kilian
    Journal of the European Economic Association, 10(5), 1166-1188, Read

    Abstract

    Sign restrictions on the responses generated by structural vector autoregressive models have been proposed as an alternative approach to the use of exclusion restrictions on the impact multiplier matrix. In recent years such models have been increasingly used to identify demand and supply shocks in the market for crude oil. We demonstrate that sign restrictions alone are insufficient to infer the responses of the real price of oil to such shocks. Moreover, the conventional assumption that all admissible models are equally likely is routinely violated in oil market models, calling into question the use of posterior median responses to characterize the responses to structural shocks. When combining sign restrictions with additional empirically plausible bounds on the magnitude of the short-run oil supply elasticity and on the impact response of real activity, however, it is possible to reduce the set of admissible model solutions to a small number of qualitatively similar estimates. The resulting model estimates are broadly consistent with earlier results regarding the relative importance of demand and supply shocks for the real price of oil based on structural vector autoregressive (VAR) models identified by exclusion restrictions, but imply very different dynamics from the posterior median responses in VAR models based on sign restrictions only.