Oil price regimes and their role in price diversions from market fundamentals

Abstract

Speculative bubbles, market governance and property rights are thought to affect oil prices, but their timing and magnitude are uncertain. Here, we quantify these effects using econometric techniques that identify periods between 1938:1 and 2018:3 (denoting year:quarter) when prices strayed from the levels implied by market fundamentals. We identify nine price regimes that are associated with the Organization of the Petroleum Exporting Countries gaining control over the marginal supply of crude oil, US energy legislation, a precautionary demand shock, the Arab Spring and speculative bubbles. These bubbles raised real oil prices by US$14.31 and US$4.65 per barrel in 2007:4–2008:3 and 2010:1–2011:1, respectively, which transferred US$42.8 billion from US consumers to US oil producers and US$87.4 billion from the US economy to oil exporting nations. Conversely, some sharp changes, such as the price decline associated with the Asian financial crisis, can be explained by market fundamentals. Oil prices are thought to be affected by speculation but the exact impact of speculation on price is not known. Kaufmann and Connelly quantify this effect and identify its beneficiaries by building a price model based on supply and demand, market fundamentals and associating deviations with historical geopolitical events.