The impact of Temporary and Permanent Price Shocks on the Usage of Oil

Price shocks are periods of time in which prices drastically increase or decrease over a rather short period of time. They are caused by certain events, such as geopolitical or natural disasters or the introduction of new technologies within an industry. Understanding these shocks allows for a deeper understanding of the relationship between prices and the usage of a resource, such as oil. There is a difference between temporary and permanent price shocks, with the latter having a longer duration and more lasting prices. According to the World Bank’s Commodity Market Outlook of October 2020, temporary and permanent price shocks both affect price variability by almost the same amount (53% versus 47%, respectively). The importance of understanding price shocks is paramount, as understanding how they affect the global usage of oil allows for a more thorough and complete understanding of global economics and geopolitical actions. Certain price shocks may have long-lasting effects and may shape the usage of a resource until the next shock, highlighting the importance of understanding how the usage of resources varies due to temporary versus permanent price shocks. This study aims to examine the impact of temporary versus permanent price shocks on the usage of oil in various industries and markets. Specifically, we will define a permanent price shock as one that lasts for a period of more than two years and one which is caused by a structural change, i.e., technological innovation or government policy change, as highlighted by the World Bank’s Commodity Market Outlook of 2020.