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Do booms and busts identify bubbles in energy prices?

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Listed:
  • Khan, Khalid
  • Su, Chi Wei
  • Khurshid, Adnan

Abstract

The rapid growth of the energy industry and its impact on the global economy have attracted special attention. This study examines the explosiveness of different energy prices from 2000:01 to 2021:09 through Supremum Augmented Dickey-Fuller (SADF) and Generalized Supremum Augmented Dickey-Fuller (GSADF) and finds multiple bubbles. It explores that liquefied natural gas is the most explosive, followed by crude oil prices and coal prices, which are induced by speculation, economic and political events. Natural gas and heating oil prices are less volatile, indicating a single bubble. The most important period that coincides with the energy price bubble is 2007–2008, driven by strong economic growth and the global financial crisis. Similarly, there is a bubble around 2014–2015, which is caused by slow economic growth and an oversupply of oil. The result is consistent with the present value model, establishing that the energy market prices deviate from its fundamentals, and bubbles appear. The results provide early warning information for governments, investors, regulators and economists. Early warning enables stakeholders to mitigate the impact of potential bubbles. Therefore, setting energy prices at the right time provides regulators and policymakers with a preemptive opportunity.

Suggested Citation

  • Khan, Khalid & Su, Chi Wei & Khurshid, Adnan, 2022. "Do booms and busts identify bubbles in energy prices?," Resources Policy, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:jrpoli:v:76:y:2022:i:c:s0301420722000095
    DOI: 10.1016/j.resourpol.2022.102556
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    JEL classification:

    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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