The "Missing" Link: How Does Oil Transportation Trigger Macroeconomic Implications?

This paper uses new granular data of oil tankers to study how the shipping market tightness (i.e., the imbalance between the demand for, and the supply of, shipping services) determines congestion in the oil transportation markets that is critical to the trade and prices of oil and production of a final good. We construct a unique shipping dataset encompassing the entire fleet of product tankers during 2017-2020 and establish three novel facts: (1) the presence of shipping market congestion significantly reduces the contracting probability for oil tankers, (2) tankers switch between operating markets frequently, and (3) oil trade shocks propagate in the economy through a transportation network. We develop a novel search and matching model of oil transportation that centers on the formation of shipping market congestion; the model accounts for the novel facts and incorporates the interactions between oil exporters, tankers, and a final good producer in giving rise to congestion. We show with counterfactual exercises that congestion entails a trade-off as it attenuates over one third of the volatility in oil trade and production of a final good, while increasing oil price fluctuations by more than tenfold. We also show that the endogenous adjustment of the oil transportation network and the resulting congestion effect are almost irrelevant for aggregate fluctuations; it is the exogenous oil trade shocks that generate large fluctuations.