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Storage scarcity and oil price uncertainty

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  • Oglend, Atle
  • Kleppe, Tore Selland

Abstract

Recent research has shown how oil price uncertainty tends to switch endogenously between low and high volatility regimes, with high volatility regimes coinciding with declining prices (Cuñado and de Gracia 2003). This is at odds with the canonical storage model - the primary economic model of commodity price volatility. The model predicts lower volatility at lower prices. The purpose of this paper is to show how a reasonable specification of the U.S. oil market with increasing marginal storage cost and constrained storage capacity can explain the major volatility regimes in the market from 2007 to 2023. Volatility increases following negative demand shocks (or positive supply shocks) due to storage capacity becoming increasingly scarce, leading the market to price in higher uncertainty due to less flexible inventory response to supply/demand.

Suggested Citation

  • Oglend, Atle & Kleppe, Tore Selland, 2025. "Storage scarcity and oil price uncertainty," Energy Economics, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:eneeco:v:144:y:2025:i:c:s0140988325002178
    DOI: 10.1016/j.eneco.2025.108393
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    References listed on IDEAS

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    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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