The impact of oil price shocks on household consumption : The case of Norway

Abstract: Since the end of World War II, oil price shocks and its impact on the economy have been a hot topic among economic researchers and agents. The price of oil has experienced several fluctuations during the late 20th century and the initial empirical findings suggest that these unexpected changes have several negative effects within countries’ economies. However, most of the research apply only on oil-importing countries and the same results from oil shocks aren´t expected for oil-exporting countries. Furthermore, the robustness of the relationship has recently come to be revaluated since many countries move towards alternative energy resources, thus moving away from its oil dependence.The purpose of this study is to examine the relationship between oil shocks and consumption for the small democratic economy of Norway. The choice of selecting an oil-exporting country for this analysis is somewhat unique since many of the world economies are oil-importers and the research made up until now are focusing on these economies. To do this, the study ends up with analyzing the short-run effects of oil shocks on household consumption by using a Vector autoregression model, Granger-causality test and an Impulse response function. The result suggests that there is a granger causality between oil shocks and consumption. Also, for Norway, we find that a shock due to increased crude oil prices has a positive short effect on household consumption.