The Impact of Supply and Demand Driven Oil Price Uncertainty on the Cost of Bank Loans

We study the effect of supply and demand-induced oil price uncertainty on the cost of debt for a sample of US loans credited during the 1990 to 2019 period. We estimate oil price uncertainty following Jurado et al.’s study, whereby oil price uncertainty is captured by forecasting the unpredictable fluctuations of oil prices. Interestingly, our findings reveal that oil price uncertainty induced by supply shocks increases cost of credit, while oil price uncertainty driven by demand shocks decreases the cost of bank loans. In further analysis, the positive association between supply induced oil price uncertainty and interest loan spread is more pronounced for major users of oil, while the negative effect of demand driven oil price uncertainty on the cost of bank loans is stronger for firms that belong to industries that produce oil. Overall, our findings feed into the emerging discussion of the differentiating effects of oil price uncertainty on micro-level outcomes and provide useful implications for both bankers and borrowing firms.

JEL Classification: G20 - Financial Institutions and Services: General; Q41 - Energy: Demand and Supply; Prices; Q43 - Energy and the Macroeconomy