<img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/O9vDjj6wrhai0tVuwficDggwzAYi5SzU0l1ziZkra2rrIAA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/O9vDjj6wrhai0tVuwficDggwzAYi5SzU0l1ziZkra2rrIAA/641"/>
At the end of February 2026, the outbreak of the US-Iran conflict led to a disruption in shipping through the Strait of Hormuz, causing Brent crude oil futures to surge by 63.3% in March, marking the largest monthly increase since 1988. On April 8 local time, the Strait of Hormuz briefly reopened before closing again, forcing several oil tankers to turn back.
The oil market is a complex mega-system that influences global inflation, geopolitical dynamics, and macroeconomic cycles. Each significant fluctuation in oil prices can trigger substantial chain reactions in the macroeconomy. The &#34;Peking University Financial Review&#34; interviewed Lutz Kilian, Senior Economic Policy Advisor and Vice President of the Federal Reserve Bank of Dallas.
As a leading scholar in the global oil market, Kilian has published a series of papers over the past 20 years that dissect the underlying drivers of oil price changes, and he has been repeatedly recognized as a &#34;Highly Cited Researcher&#34; by Clarivate Analytics. In the interview, he stated that geopolitical risks have always been crucial in the oil market. Beyond the most direct supply shocks, the greater challenge lies in the fact that oil price expectations are unobservable. So how do we know when the market is reacting to risks? We actually do not need to measure expectations directly, as any reaction to oil price expectations (or uncertainty) will be reflected in higher demand for oil storage.
The full article will be published in the 27th issue of the &#34;Peking University Financial Review.&#34;
With oil prices soaring, central bank officials in major economies have already sounded the alarm in their meeting rooms—not because they are trying to predict the next second's oil price, but because each significant fluctuation in oil prices can trigger substantial chain reactions in the macroeconomy: rising oil prices directly increase costs in transportation, manufacturing, and other sectors, forcing imported inflation to seep into CPI and PPI, and even driving core inflation or reshaping public inflation expectations; if oil prices continue to rise, forming a &#34;wage-price spiral,&#34; central banks will have to walk a tightrope between stabilizing growth and controlling inflation, potentially adjusting interest rate rhythms at any time to balance risks.
Traditional views hold that surging oil prices are primarily driven by supply disruptions—such as OPEC production cuts, geopolitical conflicts, or pipeline failures. However, research by Lutz Kilian, Senior Economic Policy Advisor and Vice President of the Federal Reserve Bank of Dallas, overturns this narrative. He has pioneered the decomposition of oil price shocks into three categories: crude oil supply shocks, global aggregate demand shocks, and precautionary demand shocks. This distinction is not merely academic: misjudging the root causes of oil price shocks can lead to erroneous policy responses; policymakers, such as central banks, should not mechanically respond to oil price changes but should accurately identify the fundamental drivers of rising oil prices and formulate policies accordingly.
As a leading scholar in the global oil market, Kilian has published a series of papers over the past 20 years that dissect the underlying drivers of oil price changes, and he has been repeatedly recognized as a &#34;Highly Cited Researcher&#34; by Clarivate Analytics. From assessing strategic petroleum reserves and estimating the impact of energy sanctions to providing a basis for central bank interest rate decisions, Kilian's research repeatedly demonstrates that the true logic of the oil market is far more complex than news headlines suggest
The Real Story of Oil Prices
The oil market is a complex mega-system that influences global inflation, geopolitical dynamics, and macroeconomic cycles. Kilian is not satisfied with the common media narrative that simply attributes fluctuations in oil prices to geopolitical conflicts or speculative trading. Instead, he strives to dissect vast amounts of data using rigorous econometric models to reveal the true driving logic behind oil price volatility and its complex consequences.
In 2009, Kilian published the foundational work of his oil research series, &#34;Not All Oil Price Shocks Are Alike,&#34; in the American Economic Review (AER). This paper directly challenged the consensus in the economics community since the 1970s that overly emphasized supply shocks. In this classic study, he innovatively constructed a Structural Vector Autoregression (SVAR) model to decompose oil price changes into three types of shocks: crude oil supply shocks (such as physical supply disruptions caused by geopolitical conflicts), global aggregate demand shocks (such as the pull of global economic expansion), and precautionary demand shocks (such as stockpiling demand driven by market panic over future shortages).
Kilian's empirical findings overturned previous understandings: different types of oil price increases have distinctly different impacts on the global economy. Oil price increases driven by global economic prosperity often have their negative drag offset by strong macro demand; surprisingly, pure supply disruptions have relatively limited negative impacts on the economy; the most severe stagflationary blows to consuming countries often come from surges in precautionary demand triggered by panic and uncertainty. This work provides crucial theoretical support for central banks in accurately assessing the sources of oil price fluctuations and implementing differentiated monetary policies.
Taking the oil price crash from 2014 to 2016 as an example, when oil prices plummeted from over $100 per barrel to below $30, many analysts initially attributed this to the U.S. shale revolution injecting excessive supply into the market. Kilian's framework offers a more complex story: the slowdown in global real economic activity played a substantial role, rather than merely a supply shock. This paper has now been cited over 5,800 times and has profoundly influenced subsequent research in energy economics and macro monetary policy.
Beyond Oil
In 1996, Kilian earned his Ph.D. in economics from the University of Pennsylvania and subsequently taught at the University of Michigan for nearly two decades, establishing his reputation as a leading expert in energy economics and applied econometrics.
In 2019, he joined the Federal Reserve Bank of Dallas. Texas, as the core oil and gas production region in the U.S., provides the Dallas Fed with a rich foundation in energy market research and offers Kilian an ideal platform to directly apply cutting-edge academic research to policy practice.
Prior to this, economists typically used the industrial production index of OECD countries or global GDP to measure global oil or commodity demand. Kilian astutely pointed out the limitations of these traditional indicators: low data frequency, significant lags, frequent large revisions, difficulty in fully reflecting demand growth in emerging markets, and output indicators that cannot accurately represent the true demand pressures for industrial commodities
To address these issues, he creatively proposed using the global dry bulk shipping one-way freight rate index as a proxy variable to construct the &#34;Global Real Economic Activity Index&#34; (Kilian Index). In his view, in the short term, the supply of global dry bulk carriers (such as iron ore, coal, grains, and other raw materials) is extremely inelastic, and the dramatic fluctuations in shipping freight rates can most timely and accurately reflect changes in global industrial commodity demand.
<img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/Ogo9CXWrUeGQ90sVsavvWGIy-rI_80LoPrxa7MofEqiyoAA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/Ogo9CXWrUeGQ90sVsavvWGIy-rI_80LoPrxa7MofEqiyoAA/641"/>
The birth of the Kilian Index allows econometric models to effectively separate global aggregate demand shocks from oil price fluctuations. With the help of this index, Kilian demonstrated that the significant rise in oil prices from 2003 to 2008 and the oil price collapse from 2014 to 2016 were primarily driven by global demand-side factors, rather than the supply shocks traditionally believed.
Currently, the Kilian Index is regularly updated by the Dallas Federal Reserve and publicly available in the Federal Reserve Economic Data (FRED) database, becoming a standard tool in the fields of energy economics and commodity market research. Although energy economics remains its main focus, Kilian has also made significant contributions to broader applications of econometrics. His co-authored book with Helmut Lütkepohl, &#34;Structural Vector Autoregressive Analysis,&#34; systematically reviews the econometric foundations, identification strategies, and practical applications of structural VAR, becoming a classic textbook in the field.
Facing New Challenges
With the profound evolution of the global energy landscape, Kilian's research continues to face new questions: How do oil price shocks genuinely affect current inflation dynamics? What are the transmission mechanisms of geopolitical conflicts on the global economy? In the context of potential structural changes in the energy market over the next twenty years, how should economists construct forward-looking models?
Kilian maintains the caution characteristic of an empiricist. He acknowledges that the energy transition will ultimately reshape the market, but he warns against hastily declaring that traditional supply and demand logic is outdated. &#34;From the current situation, renewable energy will meet the additional energy demand generated by global continuous growth, while the growth of oil demand is slower and may even slightly decline,&#34; Kilian said. &#34;However, in the petrochemical industry and long-distance transportation, there are currently no obvious substitutes for oil and gas.&#34;
In Kilian's view, the energy transition will be a long process spanning several decades. During this period, the fundamental economic laws of the oil market remain remarkably stable, and he will continue to seek the truth in the fog of the oil market using data and logic.
Dialogue with Lutz Kilian
Peking University Financial Review: Your pioneering research on decomposing oil price shocks into supply disruptions, aggregate demand shocks, and precautionary demand shocks has laid the foundation for understanding the oil market. However, since the Russia-Ukraine conflict and the intensification of geopolitical fragmentation, many believe that geopolitical risk premiums have dominated traditional supply and demand fundamentals. Do you think the structural drivers of oil prices have fundamentally changed?
Lutz Killian: Geopolitical risks have always been crucial in the oil market, dating back to the rise of the global oil market in the 1970s. For example, in my early research in 2001 with Robert Barsky, we strongly argued that even in the 1970s, 80s, and 90s, geopolitical risks were significant drivers of oil prices.
In fact, there is a long history of academic research modeling geopolitical and other oil price risks. The &#34;preventive demand shocks&#34; you mentioned in the empirical models of the global oil market are precisely the first step we took—it acknowledges that uncertainty about future oil prices (including geopolitical oil price risks) can drive oil prices, and this driving force transcends the traditional flow supply and flow demand shocks in textbook models.
However, preventive demand driven by oil price uncertainty is only part of this transmission mechanism. Equally important (if not more so) is the shift in oil price expectations, as the market anticipates future geopolitical supply disruptions or expansions and contractions in the global economy. For example, if I expect oil prices to rise (perhaps because I anticipate the closure of the Strait of Hormuz), I would buy oil at the current low price and store it, then sell it at a high price for profit after the supply disruption occurs. This would cause both inventories and oil prices to rise immediately.
The challenge is that oil price expectations are unobservable, so how do we know when the market is reacting to risks? We actually do not need to directly measure expectations, as any response to oil price expectations (or uncertainty) will be reflected in higher demand for oil storage. By incorporating a proxy variable for changes in global oil inventories into the model and simulating the determinants of these inventories, we can infer whether expectations have changed and to what extent they have altered oil prices and other variables.
Recently, in collaborative research with colleagues at the Dallas Federal Reserve, I further advanced this analysis, attempting to jointly model expectations and inventories while allowing the impact of geopolitical risks to exhibit nonlinear characteristics. We developed a global economic dynamic nonlinear model that includes oil prices, enabling oil prices to respond to shifts in supply and demand in the economy. The innovation of this model lies in its allowance for the probability of significant disruptions in global oil supply to change over time. This enables us to track the global economy's response to probabilistic shocks based on the scale of oil supply shortages, expected duration, and persistence of probabilities. The model captures not only the anticipation of geopolitical events but also the process of their realization. This is particularly useful in analyzing potential conflict contexts such as the Persian Gulf.
Peking University Financial Review: Your research emphasizes the critical role of global aggregate demand in driving commodity price cycles. Given the global economic slowdown, demographic shifts in major economies, and energy transition, do you think we are witnessing the end of the commodity &#34;supercycle&#34; that began in the early 21st century? Or are we entering a fragmented new cycle driven by different structural forces?
Lutz Killian: I am cautious about the existence of a &#34;supercycle.&#34; In the 1920s, there was significant interest in identifying long and short cycles in economic fluctuations
However, relevant literature has long disappeared because it is very difficult to identify cycles based on relatively short data spans, and ultimately, this does not contribute much to understanding what drives the data. The recently emerging literature on commodity price cycles faces the same issues.
I completely agree that changes in the demographic structure of many countries, the trend of de-globalization in trade, the energy transition, and recent disruptions in energy flows have made modeling the oil and other commodity markets more challenging. But the issue is not that the fundamental factors determining oil prices have changed; rather, one of the challenges is that incompletely segmented regional energy markets are harder to model than a single global market. Another challenge is that temporary misalignments in energy markets can affect transportation costs, which we often overlook. A third challenge is that the structure of many economies is changing. For example, the United States was once a major net importer of oil, but now oil trade is nearly balanced, which changes the way oil price shocks are transmitted to the economy.
This means that the time series data from the 1970s and 1980s has diminished in value for current empirical work. We are back to relying on extremely short sample work. This is why I believe that quantitative theoretical models will become increasingly important in understanding future changes in the energy market.
Written by: Zhong Longjun, Du Wenxin
······
The full text of this article will be published in the 27th issue of the Peking University Financial Review.
Subscribe to the annual or three-year edition.
<img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OoUQ_HqlHD1J49eYaPmOGIR-NoSuz6ImSRU4QwyWQ4wXoAA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OoUQ_HqlHD1J49eYaPmOGIR-NoSuz6ImSRU4QwyWQ4wXoAA/641"/> Enjoy exclusive discounts! <img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/ONyIf5fww9v19oavdAWryPirWIYUuZ3ZDTKD9TbUi3VBAAA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/ONyIf5fww9v19oavdAWryPirWIYUuZ3ZDTKD9TbUi3VBAAA/641"/>
Article edited by: Ju Yanran

The Strait of Hormuz has been closed again, leading to sharp fluctuations in oil prices. Brent crude oil futures rose by 63.3% in March, marking the largest monthly increase since 1988. Lutz Kilian, Vice President of the Dallas Federal Reserve Bank, pointed out that geopolitical risks have a profound impact on oil price expectations, and oil price volatility could trigger macroeconomic ripple effects, affecting central bank interest rate decisions. Kilian's research categorizes oil price shocks into three types: supply, demand, and precautionary demand, challenging traditional views

腾讯新闻 - 财经

United States Oil Fund LP

VG Energy

SPDR O&G Equip

Us Brent Oil

SPDR Energy Select

Invesco Great Wall CNI Oil&Gas ETF

Pro Ultr Bloomberg Crude Oil

Occidental Petroleum

China Universal CSI Oil & Gas Resources ETF

Bosera CSI Oil & Gas Resources Index ETF

HSPC

VanEck Oil Refiners ETF

ISHRS S&P Glb Engy

VanEck Oil Services ETF

ChinaAMC CSI Petrochemical Industry ETF

SPDR O&G Ex & Prd

Fullgoal S&P Oil & Gas Exploration & Production Select Industry ETF(QDII)

Tong Petrotech

China Southern Crude Oil Fund-A

iShares US Oil Equip & Svcs

Guotai CSI Oil & Gas Industry ETF

BP p.l.c.

iShares US Oil & Gas Expl & Prod

How to Anchor Oil Price Expectations with the Closure of the Hormuz Strait Again?