Why are crude oil prices high when global activity is weak?

There have been substantial increases in liquidity in recent years and real oil prices have almost returned to the high levels achieved before the Global financial crisis. Unanticipated increases in global real M2 lead to statistically significant increases in real oil prices. The cumulative impact of global real M2 on the real price of crude oil is important in the recovery of oil price over 2009 to 2011

Why are crude oil prices high when global activity is weak?

1.Introduction
Given that global liquidity has risen substantially in recent years the question arises of whether there has been spill-over from liquidity to crude oil prices.The substantial increase in nominal M2 for the largest four economies from 13,500 billion U.S. dollars in 1997 to 45,000 billion U.S. dollars in 2011 is illustrated in Figure 1.In Figure 1 Belke et al. (2010) show that global liquidity has risen sharply since 2001 and find significant impacts on an OECD commodity price index (dominated by oil with a weight of 63%).Anzuini et al. (2012) find support for a significant (but small) effect of U.S. monetary policy on oil prices over 1970-2008. 1  In this paper we seek to determine the influence of structural oil price shocks and liquidity as it arises from the major economies on the price of crude oil.A structural VAR model is employed in the analysis.(2)

Impulse response function results
Figure

Historical decomposition of real oil price
The cumulative contribution to the real price of oil of the structural shocks to global oil production, global real aggregate demand, oil-specific demand and global real M2 are reported in Figure 3, from estimating the SVAR model in equation ( 4).Striking facts from

Discussion and Conclusion
There   Notes: GO is global oil production, AD is global demand for commodities (from Kilian (2009), RP is real oil price, GLOBM2 is real M2 of U.S., Eurozone, Japan and China.The dashed lines represent one and two standard error confidence bands around the estimates of the coefficients of the impulse response functions.The confidence bands are obtained using Monte Carlo integration as described by Sims (1980), where 5000 draws were used from the asymptotic distribution of the VAR coefficient.
Figure2shows the responses of the variables in the SVAR to one-standard deviation

Figure 3
Figure 3 are that the cumulative contribution to real oil price of shocks to global oil have been substantial increases in liquidity in recent years and real oil prices have returned to high levels following the Global financial crisis.Unanticipated increases in global real M2 lead to statistically significant increases in real oil prices.The cumulative contributions of shocks to global real aggregate demand and to global real M2 to real oil prices 1997:01-2011:12 are of comparable size.The cumulative impact of global real M2 on the real price of crude oil is important in the recovery of oil price during 2009 and 2010.Barsky and Kilian (2002) argue that change in monetary policy regimes was a key factor behind the oil price increases of the 1970s and show that the substantial increase in industrial commodity prices that preceded the increase in oil prices in 1973-1974 is consistent with the view that rising demand based on increased global liquidity drove oil prices higher.Alquist et al. (2012) confirm theGillman and Nakov (2009) findings that monetary factors5 Our results are robust to different lag structure, alternative monetary aggregates and when different indicator for aggregate demand is used.Results are similar in magnitude and statistical significance with lag structures between three to eighteen in the SVAR model (with standard errors becoming larger due to reduction of degrees of freedom).Results are robust to use of global M1 or global M3 instead of global M2 as monetary aggregate and when OECD country industrial production (reported by OECD) replaces Kilian's measure of global aggregate demand.

Figure 1 .
Figure 1.Log of real global liquidity vs. log of real oil price

Figure 3 .
Figure 3. Cumulative effect of structural shocks on real price of oil