Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective
AbstractAccording to the standard analysis of commodity prices, stockpiling is a necessary signature of speculation. This paper develops an approach suggesting that speculation may temporarily push crude oil prices above the level justified by physical-market fundamentals, without necessarily resulting in a significant increase in oil inventories. Looking beyond debate on the value of oil-demand price-elasticity, showing a demand curve makes sense only if we consider a fixed time horizon (e.g. short-run). The scenario of oil demand slowly but continuously adjusting to a price fuelled by speculation implies that price elasticity of demand is an increasing function of the time horizon considered. Short- and long-run elasticities can then be used to calibrate this function. A very low very-short-run price elasticity suggests that an exogenously-driven rise in crude oil price has a very slight impact on demand in the very short run and therefore, with supply constant, leads to a minimal increase in inventories. This interpretation differs from the traditional view, according to which storage of just a few barrels is enough to raise prices when elasticity is very low. We present several analytical and numerical illustrations (with oil-demand adjustment following Gompertz, logistic and exponential paths). The role that speculation may have played in recent movements in oil prices is also discussed.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research in its series Working Papers with number 1004.
Date of creation: Apr 2010
Date of revision:
Contact details of provider:
Postal: 77 Massachusetts Ave. (Building E40-279), Cambridge, MA 02139-4307
Phone: (617) 253-3551
Fax: (617) 253-9845
Web page: http://tisiphone.mit.edu/RePEc
More information through EDIRC
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sharmila Ganguly).
If references are entirely missing, you can add them using this form.