Is There Evidence of Super Cycles in Oil Prices?

Abstract

Abstract A number of authors have claimed that the strong upward movement in commodity prices since 2000 represents the early phase of a ‘super cycle’ (SC) driven by industrialization and urbanization in the BRIC countries (Brazil, Russia, India and China), especially China. Moreover, Heap (2005), Cuddington and Jerrett (2008), Jerrett and Cuddington (2008) and others have found evidence of SC (20-70 years in length from peak to peak or trough to trough) in metals prices associated with earlier industrialization episodes in Europe, the U.S., and Japan. These cycles are much longer in duration than the typical business cycle, defined as 2-8 years. The purpose of this paper is to address the question: is there evidence of super cycles in crude oil prices? Our approach to the empirical question posed in the title applies the asymmetric Christiano-Fitzgerald band-pass filter to real crude oil prices from 1861 to 2010 in order to extract a cyclical component with a period between 20 and 70 years. Our results suggest the existence of SC in energy commodities with a strong correlation between the SC of coal and oil prices after World War II. The SC analysis is carried out using both nominal and real prices in order to determine whether these SCs are an artifact of the price deflator used. There appear to be three obvious SCs in oil prices, the first one between 1861 and 1884, and the last two from 1966 to date. The period 1884-1966 is harder to interpret and has been aggregated into one SC. These results are consistent with the recent work performed by Dvir and Rogoff (2009) on the changes in real oil price persistence and volatility. There has been renewed interest in commodity prices over the past decade. Evidence on the presence of SCs in energy commodities is valuable for national and state governments, financial institutions and oil and gas companies. At the government level, countries that rely on the import or export of energy commodities need to take SCs into account when formulating resource extraction as well as revenue and expenditure policies. At the firm level, the exploration-development-production-distribution-research-and-development cycle of energy projects often spans several decades, as do SCs. Hence the investment decisions made by oil and gas companies should take into account the presence of these SCs.