Non-Linear Unit Root Properties of Crude Oil Production

While there is good reason to expect crude oil production to be non-linear, previous studies that have examined the stochastic properties of crude oil production have assumed that crude oil production follows a linear process. If crude oil production is a non-linear process, conventional unit root tests, which assume linear and systematic adjustment, could interpret departure from linearity as permanent stochastic disturbances. The objective of this paper is to test for non-linearities and unit roots in crude oil production. To realize our objective, this study applies a threshold autoregressive model with an autoregressive unit root to monthly crude oil production levels for 16 OPEC and non-OPEC countries over the period January 1973 to December 2006. Specifically, first we test for the presence of non-linearities (threshold effects) in the production of crude oil in two regimes. Second, we test for a unit root against a non-linear stationary process in two regimes and a partial unit root process when the unit root is present in one regime only. We find that crude oil production is characterized by threshold effects. We find that for ten of the countries a unit root was present in both regimes, while for the others a partial unit root was found to be present in either the first regime or second regime.