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The aim of this paper is to observe and interpret the correlations between oil price changes, and changes to key macroeconomic indicators. From this we will be able to observe if there are any relationships between the oil price hikes and the macroeconomy. Due to the increased need for oil in the UK one might estimate that the impacts from an oil price shock should be greater than it was in past empirical studies. However, it can be argued that this effect may be reduced and that the overall impact could be less than shown in previous studies due to the increase in the discovery and usage of renewable energy sources and the continuous discoveries of semi-substitutes i.e. gas heaters.
The method used to produce these results will be VAR analysis, enabling variables to be tested against each other without any theories or policies being analysed. The correlations between the variables will offer an insight into the relationship between them. At the conclusion of this paper we will be able to see the impulse functions of the key macroeconomic indicators when the oil price has been subject to a shock i.e. when the oil price variable has been subject to a sudden increase by the value of one standard deviation. From this we will be able to observe and interpret the effects on other macroeconomic indicators and to see what the sample period suggests about the relationship between oil prices and the macroeconomy.
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