The response of the U.S. aviation industry to demand and supply shocks in the oil and jet fuel markets

Abstract

The article disentangles shocks to the global crude oil and U.S. jet fuel markets into demand and supply shocks that underlie both markets, and then examines the effects of these shocks on the U.S. airline industry. I specify a block-recursive structural vector autoregressive (VAR) model that allows for global crude oil market variables to affect the jet fuel market contemporaneously, but not vice versa. Impulse response functions show that oil supply shocks have no significant impact on oil and jet fuel prices, while aggregate demand and precautionary demand shocks cause oil and jet fuel prices to rise. In addition, my results indicate that jet fuel shocks, whether demand or supply, have no significant effects on global crude oil prices. On the other hand, jet fuel demand and supply shocks both significantly increase the price of jet fuel. Furthermore, jet fuel demand shocks have positive impacts on the U.S. aviation industry, while the effects of jet fuel supply shocks are generally negative.

Keywords

• Jet fuel
• Crude oil
• Vector autoregression
• Airline industry