Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003-2008?

Recently developed structural models of the global crude oil market imply that the surge in the real price of oil between mid-2003 and mid-2008 was driven by repeated positive shocks to the demand for all industrial commodities, reflecting unexpectedly high growth mainly in emerging Asia. This note evaluates this proposition using an alternative data source and a different econometric methodology. Rather than inferring demand shocks from an econometric model, we utilize a direct measure of global demand shocks based on revisions of professional real GDP growth forecasts. We show that recent forecast surprises were associated primarily with unexpected growth in emerging economies (and to a lesser extent in Japan), that markets were repeatedly surprised by the strength of this growth, that these surprises were associated with a hump-shaped response of the real price of oil that reaches its peak after 12 to 16 months, and that news about global growth predict much of the surge in the real price of oil from mid-2003 until mid-2008 and much of its subsequent decline.