Abstract
This paper considers price movements in the oil markets between 2003 and 2010 and seeks to explain the significant trends in this period. It notes that the oil market is by its very nature inherently volatile because of the nature of oil as a storable and exhaustible resource and the influence of geopolitical factors on price. It concludes that fundamentals continue to anchor the market, but that speculative investment flows may bring about temporary departures from equilibrium. It is proposed that the type of volatility that matters most macroeconomically is medium-term price trends. The paper then discusses possible policy actions that could prevent or mitigate such trends, concluding that proposals solely related to the operation of the financial markets will not address the fundamental drivers of instability. It may, however, be useful to consider policies aimed at stabilizing the market, but these must be rooted in developed consumer--producer dialogue. Copyright 2011, Oxford University Press.
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