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The Role of Time-Varying Price Elasticities in Accounting for Volatility Changes in the Crude Oil Market

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Author Info

  • Christiane Baumeister
  • Gert Peersman

Abstract

There has been a systematic increase in the volatility of the real price of crude oil since 1986, followed by a decline in the volatility of oil production since the early 1990s. We explore reasons for this evolution. We show that a likely explanation of this empirical fact is that both the short-run price elasticities of oil demand and of oil supply have declined considerably since the second half of the 1980s. This implies that small disturbances on either side of the oil market can generate large price responses without large quantity movements, which helps explain the latest run-up and subsequent collapse in the price of oil. Our analysis suggests that the variability of oil demand and supply shocks actually has decreased in the more recent past preventing even larger oil price fluctuations than observed in the data.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 11-28.

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Length: 35 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bca:bocawp:11-28

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Keywords: Econometric and statistical methods; International topics;

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References

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  1. Regnier, Eva, 2007. "Oil and energy price volatility," Energy Economics, Elsevier, vol. 29(3), pages 405-427, May.
  2. Gert Peersman & Christiane Baumeister, 2009. "Time-Varying Effects of Oil Supply Shocks on the US Economy," 2009 Meeting Papers 171, Society for Economic Dynamics.
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Citations

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Cited by:
  1. Imran Shah, 2012. "Revisiting the Dynamic Effects of Oil Price Shock on Small Developing Economies," Bristol Economics Discussion Papers 12/626, Department of Economics, University of Bristol, UK.
  2. Soojin Jo, 2012. "The Effects of Oil Price Uncertainty on the Macroeconomy," Working Papers 12-40, Bank of Canada.
  3. C. Baumeister & G. Peersman, 2008. "Time-Varying Effects of Oil Supply Shocks on the US Economy," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/515, Ghent University, Faculty of Economics and Business Administration.
  4. Christiane Baumeister & Lutz Kilian, 2012. "Real-Time Analysis of Oil Price Risks Using Forecast Scenarios," Working Papers 12-1, Bank of Canada.
  5. Ine Van Robays, 2012. "Macroeconomic Uncertainty and the Impact of Oil Shocks," CESifo Working Paper Series 3937, CESifo Group Munich.
  6. Knut Are Aastveit & Hilde C. Bjørnland & Leif Anders Thorsrud, 2012. "What drives oil prices? Emerging versus developed economies," Working Paper 2012/11, Norges Bank.
  7. Goodness C. Aye & Rangan Gupta & Mampho P. Modise, 2012. "Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model," Working Papers 201224, University of Pretoria, Department of Economics.
  8. Christiane Baumeister & Luca Benati, 2012. "Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound," Working Papers 12-21, Bank of Canada.

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