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Why do oil prices jump (or fall)?

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  • Wirl, Franz

Abstract

This paper discusses theories that can explain the zig-zags of oil prices in general and in particular the recent jump. More precisely, the following explanations are discussed: Homo oeconomicus (pure profit maximization if demand is dynamic and convex), price reaction function (price increases and respectively declines depend on capacity utilization), cartelization contingent on output or revenues of which the latter can lead to backward bending supply segments and multiple equilibria, statistical descriptions (mean reversion), homo politicus, i.e., arguments for price hikes that are rational (Public Choice) despite the (long-run) economic loss. Finally two approaches are presented that emphasize demand uncertainty: one extending the above-mentioned dynamic demand framework and the other considers a dynamic game of non-competitive suppliers with lumpy investments. Summing up, a demand shock seems to be the most suitable explanation of today's high prices (indeed a shock given that International Energy Agency (IEA) and Department of Energy (DoE) were promising just a couple of years ago that we are going to have lots of oil at low prices), while others and in particular politics have surprisingly little or no explanatory power.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 36 (2008)
Issue (Month): 3 (March)
Pages: 1029-1043

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Handle: RePEc:eee:enepol:v:36:y:2008:i:3:p:1029-1043

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Cited by:
  1. Jakobsson, Kristofer & Söderbergh, Bengt & Snowden, Simon & Li, Chuan-Zhong & Aleklett, Kjell, 2012. "Oil exploration and perceptions of scarcity: The fallacy of early success," Energy Economics, Elsevier, vol. 34(4), pages 1226-1233.
  2. Gronwald, Marc, 2012. "A characterization of oil price behavior — Evidence from jump models," Energy Economics, Elsevier, vol. 34(5), pages 1310-1317.
  3. Khalid Kisswani, 2014. "OPEC and political considerations when deciding on oil extraction," Journal of Economics and Finance, Springer, vol. 38(1), pages 96-118, January.
  4. Kisswani, Khalid/ M., 2011. "The effects of the U.S. price control policies on OPEC: lessons from the past," MPRA Paper 34624, University Library of Munich, Germany.
  5. He, Yanan & Wang, Shouyang & Lai, Kin Keung, 2010. "Global economic activity and crude oil prices: A cointegration analysis," Energy Economics, Elsevier, vol. 32(4), pages 868-876, July.
  6. Du, Xiaodong & Yu, Cindy L. & Hayes, Dermot J., 2011. "Speculation and volatility spillover in the crude oil and agricultural commodity markets: A Bayesian analysis," Energy Economics, Elsevier, vol. 33(3), pages 497-503, May.
  7. Julien-Joern Mueller & Liam Wagner, 2013. "The Devil’s Tears from the Tournament of Shadows: Oil Supply, Markets and Unstable Producers," Energy Economics and Management Group Working Papers 5-2013, School of Economics, University of Queensland, Australia.
  8. van Ruijven, Bas & van Vuuren, Detlef P., 2009. "Oil and natural gas prices and greenhouse gas emission mitigation," Energy Policy, Elsevier, vol. 37(11), pages 4797-4808, November.

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