Oil Markets and Price Movements: A Survey of Models

Abstract

During the 1970s, oil market models offered a framework for understanding the growing market power being exercised by major oil producing countries. Few such models have been developed in recent years. Moreover, most large institutions do not use models directly for explaining recent oil price trends or projecting their future levels. Models of oil prices have become more computational, more data driven, less structural and increasingly short run since 2004. Quantitative analysis has shifted strongly towards identifying the role of financial instruments in shaping oil price movements. Although it is important to understand these short-run issues, a large vacuum exists between explanations that track short-run volatility within the context of long-run equilibrium conditions. The theories and models of oil demand and supply that are reviewed in this paper, although imperfect in many respects, offer a clear and well-defined perspective on the forces that are shaping the markets for crude oil and refined products.