A global oil market model with shipping costs

This paper investigates the role of shipping costs in global crude oil and refined petroleum markets and their effects on regional and country-level inflation and real activity. For this purpose a Global VAR (GVAR) model is estimated jointly for the oil and refined petroleum markets; this includes the Baltic Dirty Tanker Index (BDTI) and the Baltic Clean Tanker Index (BCTI) as measures of the cost of shipping crude oil and refined petroleum commodities, respectively. The results suggest that shocks to the cost of shipping petroleum commodities have a particularly severe negative impact on real economic activity and on petroleum consumption in most regions, while shocks to the price of crude oil and petroleum have inflationary effects, especially in oil-importing countries. Further, it appears that the relationship between commodity prices and their respective shipping costs has broken down since the beginning of the Covid-19 pandemic. Specifically, a counterfactual analysis shows that the pandemic moved the prices of crude oil and petroleum and their costs of shipping in opposite directions.