Oil Price Determination Research Articles

Oil supply and oil price determination among OPEC and non-OPEC countries: Bayesian Granger network analysis

Oil supply and oil price determination among OPEC and non-OPEC countries: Bayesian Granger network analysis

The predictive effect of risk aversion on oil returns under different market conditions

This paper uses a new risk aversion index to investigate the predictive effect of risk aversion on oil returns under different market conditions. Moreover, we assess whether the US partisan conflict shapes the prediction of risk aversion for oil returns. Based on the quantile regressions of oil returns on lagged risk aversion changes, we find that risk aversion negatively predicts oil returns after oil financialization, and such a predictive effect is stronger under bearish market conditions. Also, we find that the negative predictive effect of risk aversion is weaker with increasing lags in bearish stages, but this negative effect does not last in bullish stages and even becomes positive at a longer lag. Finally, we find that the US partisan conflict mitigates the negative predictive effect of risk aversion on oil returns in the post-financialization period, and this mitigation is stronger in upward market conditions. Our findings provide novel insight into the determinants of oil prices from the perspective of investors' risk appetite.

The determinants of crude oil prices: Evidence from ARDL and nonlinear ARDL approaches

This paper is an innovative attempt to empirically investigate the determinants of crude oil prices. The main objective is to distinguish between short- and long-term effects of some covariates on oil prices. The autoregressive distributed lag (ARDL) approach is applied to daily series spanning the period from January 2, 2003, to May 24, 2021, to analyze long-run relationships and short-run dynamics. The paper also focuses on the asymmetric effects of covariates and a nonlinear ARDL (NARDL) approach is used to explore this asymmetry. The use of an asymmetric error correction model with asymmetric cointegration provides new insights for examining the determinants of oil prices. All investigations of underlying oil price fluctuations are examined both before and in the COVID-19 pandemic. Our results, based on different econometric specifications, have key policy implications for policymakers both with and without COVID-19 potential considerations.

Asymmetric Determinants of Oil Price Movements in Pakistan

In this research we are interested to investigate the presence of asymmetries in the long run and short run relationship between Pakistan oil prices and a set of major determinants of oil prices namely, Saudi oil production, world oil production, exchange rate and spread.We use nonlinear autoregressive distributed lag (NARDL) bounds testing approach that allows possible asymmetric effect in both short and long run. Results provide the evidence of asymmetries in both short and long run relationship among Pakistan oil prices and determinants under consideration. Considering the importance of asymmetric non-linearity in this context, it is shown that exchange rate bears more, a moderate of world oil production and Saudi oil production and up-to a lesser extent spread constitute an important determinant of Pakistan oil prices.Our findings have relevant implications for investors, speculators and particularly for policy makers of Pakistan’s economy.

What are the categories of geopolitical risks that could drive oil prices higher? Acts or threats?

This study characterizes the oil market as a nonlinear-switching phenomenon and examines its dynamics in response to changes in geopolitical risks over low- and high-risk scenarios. We separate the shocks due to geopolitical acts from those due to geopolitical threats to address whether the serious effects of geopolitical risks are mostly due to increased threats of adverse events or to their realization as acts. While we find the acts to generate a positive and strong impact on oil price dynamics, the effect of threats appears to be moderate or non-significant. Imperfect information in the oil price determination, the history of oil supply disruptions emanating from geopolitical events, the continued rise in populism in the world, oil market volatility, multifractility and the time-varying degree of weak-form efficiency have been advanced to explain the unforeseen responses of oil prices to geopolitical threats. To accommodate recent oil-related events, we construct a composite geopolitical risk indicator by accounting for contemporaneous sources of geopolitical risks, namely global trade tensions, US-China relation risks, US-Iran tensions, Saudi Arabia’s uncertainty and Venezuela’s crisis. The combined effects have an outsized impact on oil prices.

Determinants of oil price subsidies in oil and gas exporting countries

This paper investigates the implicit subsidization of refined products in oil and gas exporting countries. Most of these countries, as well as some other countries (mostly developing countries, but one could argue that US gasoline prices do not account for external costs), distribute large subsidies. Subsidies that are offered for a long period, are not only inefficient, but also dangerous due to gradual increases in the energy demand. Low domestic prices have led to immense oil demand growth that cannot continue if these countries wish to continue exporting. Only very high price jumps can stop this development, but politically these price jumps are very costly, if not suicidal, for many governments. Indeed, we argue that the currently low oil prices not only harm oil and gas exporting countries, but also provide a unique opportunity to eliminate this costly subsidy policy at manageable political costs. This paper begins with theoretical, normative and positive explanations of low domestic energy prices, and then addresses how to phase out subsidies, again from a normative and positive perspective. Finally, we empirically address the obstacles that individual countries may face when attempting to eliminate subsidies by quantifying the factors (political, economic, and social) that influence the existing subsidies.

Sustaining Standard of Living Amidst Volatile Oil Prices – Lessons from the Gulf Countries

Improving living standards amidst falling oil prices among countries relying heavily on an ample supply of oil presents numerous challenges. Therefore, the relationship associated with oil price changes with identifiable metrics that explain standards of living becomes critical. The following issues are presented in this paper: the management of wealth; sustaining a standard of living; peculiarities of oil trade; oil price determination; and management and the uncharacteristic application of supply and demand. Since aspects of the world oil market remain unclear and opaque, society is in need of credible research and verifiable theory. Data relating to Kuwait over a 32-year period (1983 ‐ 2014) were obtained. Five independent variables—investment growth, inflation, percentage change in price per barrel, unemployment, and percent change in the number of incarcerations—are regressed with a change in real GDP (dependent variable). Finally, to determine the robustness of the model, the Durbin-Watson test was used. The coefficient of determination (r 2 ) suggests that 66.24% of variations in lifestyle can be explained by variations in the five independent variables (p < 0.01). Standards of living can be sustained by increasing growth in investment, decreasing inflation, decreasing unemployment and incarcerations, and most importantly increasing the price of oil. This study places Kuwait as a proxy for the Gulf Countries and should ideally be extended to the other five Gulf Countries. Comparative studies over multiple periods of time ought to be undertaken to measure the robustness of different sustainability measures.

Macroeconomic effects of oil price fluctuations on emerging and developed economies in a model incorporating monetary variables

The goal of this paper is to examine the impact of crude oil price movements on two macro variables, the gross domestic product (GDP) growth rate and the consumer price index (CPI) inflation rate, in three countries, the People’s Republic of China (an emerging economy), Japan, and the United States (developed economies), in a model incorporating monetary variables (money supply and exchange rate). The main objective of this research is to investigate whether these economies are still reactive to oil price movements and compare their reactions. Monetary variables are included in this survey because our earlier research showed that they have a significant role in oil price determination. To assess the relationship between crude oil prices and macro variables we adopt an N-variable structural vector autoregression (SVAR) model. The results suggest that the impact of oil price fluctuations on developed oil importers’ GDP growth is much milder than on the GDP growth of an emerging economy. On the other hand, however, the impact of oil price fluctuations on the People’s Republic of China’s inflation rate was found to be milder than in the two developed countries that were examined.

Oil price volatility, macro-finance interactions and the role of monetary chocks

&lt;p&gt;This paper deals the impact of major external (monetary, financial, Oil supply, aggregate demand) shocks on the real oil price. For this reason, we use the structural VAR methodology (SVAR) on the basis of which we define five structural shock estimate SVAR models to determine the relationship between these five shocks.&lt;/p&gt;&lt;p&gt;This paper presents the dynamic effects of these shocks on the real oil price and estimates the estimated contribution of these shocks to real oil price during the M11995– M2 2013 periods. Therefore, the objective of this paper is to identify the structural shocks underlying the real oil price.&lt;/p&gt;&lt;p&gt;The results show that financial and monetary chocks are two key determinants of oil prices. The results indicate that the period of financial stress has contributed to the downturn of the economy by boosting the cost of credit and making businesses, households, and financial institutions highly cautious, and consequently to rise of oil price.&lt;/p&gt;

Oil and its markets

Oil markets are extremely complex, being characterized by the interplay of economic, political, technological and ecological factors. The paper reviews the various critiques of the idea that oil prices are determined by supply and demand, with supply scarcity-constrained, and briefly recalls the model of ‘trilateral oligopoly’. This interpretative lens is applied with special reference to the golden period of the oil majors and the increasing importance of OPEC in the 1970s. However, the counter-crisis in the 1980s highlighted the limits of OPEC’s hold on the markets and the increasing role of financial markets in the determination of oil prices. Considering shale oil as an instance of technical change and its importance in the oil sector, the paper draws some basic conclusions. Among these is the author’s forecast that oil prices are likely to remain low in the medium run. JEL codes : L13, L71, Q40, Q41, Q43

Determinants of Oil Price: Going Beyond the Traditional Factors

Determinants of Oil Price: Going Beyond the Traditional Factors

Monetary policies and oil price determination: an empirical analysis

AbstractWhile the oil price shocks of 1970s can be explained by pure supply factors, starting in the 1980s oil prices increasingly began to come under a different type of pressure. Oil prices accelerated from about $35/barrel in 1981 to beyond $111/barrel in 2011. At the same time interest rates subsided from 16.7 per cent per annum to about 0.1. This paper explains how this long‐term price increase was, in most cases, caused by expansionary monetary policies that heightened oil prices through interest rate channels. Aggressive monetary policies stimulated oil demand and blew up oil prices, a trend that led to slower economic growth. As for elasticities, the results described in this paper show that oil demand price elasticity is low value and unlike some earlier literature states, supply price elasticity is statistically significant. In last section, the results show that oil prices adjust instantly, declaring the existence of equilibrium in the oil market during the period from 1960 to 2011.

Oil price dynamics, macro-finance interactions and the role of financial speculation

What is the role of financial speculation in determining the real oil price? We find that while macroeconomic shocks have been the main real oil price upward driver since mid-1980s, financial shocks have sizably contributed since early 2000s as well, and at a much larger extent since mid-2000s. Even though financial shocks contribute 44% out of the 65% real oil price increase over the period 2004–2010, the third oil price shock is a macro-finance episode: macroeconomic shocks actually largely account for the 2007–2008 oil price swing. While we then find support to the demand side view of real oil price determination, we however also find a much larger role for financial shocks than previously noted in the literature.

Oil Price Dynamics, Macro-Finance Interactions and the Role of Financial Speculation

What is the role of financial speculation in determining the real oil price? We find that while macroeconomic shocks have been the major upward driver of the real oil price since the mid 1980s, also financial shocks have sizably contributed since the early 2000s, and at a much larger extent since the mid 2000s: over the period 2004:1 through 2010:3, the real oil price increased 65%; of the latter, 33% is related to fundamental financial shocks, 11% to non fundamental financial shocks, with macroeconomic and oil market supply side shocks contributing with a 5% and 3% increase, respectively. Yet, it would be inaccurate describing the third oil price shock as a purely financial episode: macroeconomic shocks largely accounted for the 65% real oil price run up over the 2007(2)-2008 (2) period, and similarly for the -67% and -31% contractions in 2008(4) and 2009(1); only over the 2009(2) through 2009(4) period macroeconomic and financial shocks equally contributed to the 54% real oil price increase. Hence, while we find support to the demand side view of real oil price determination, we also find a much larger role for financial shocks than previously noted in the literature.

Uncertainty, expectations, and fundamentals: whatever happened to long-term oil prices?

One of the major features of the oil market during the 1990s was the relative stability of the long-term oil price. While the spot price exhibited sharp price volatility, that volatility was only partially transmitted to the back end of the futures curve which was anchored around the $20–22 per barrel range. However, as oil prices rose sharply during the boom years, the consensus on the oil price that would balance the long-term fundamentals of the oil market broke down and the whole futures curve became subject to a series of shifts. Our empirical evidence suggests that in the late 1990s and early 2000s there was limited evidence of adjustment between short-term and long-term oil prices. These dynamics, however, changed in early 2005 with the long-term price making most of the adjustment towards the prompt price. We suggest an interpretation of the long-term behaviour of oil prices based on the insights of two models. The first is based on a signal extraction mechanism and shows that when the private beliefs by investors about the long-run determinants of oil prices become less precise relative to the information contained in the current spot price, then the expected future oil price becomes closer to the current spot price. The second model is based on Bayesian updating and shows that if the variability of the spot price increases and/or if the spot price remains higher over a sustained period of time than anticipated by investors, then the probability distribution of the parameter capturing the speed of mean reversion will shift and the expected future price will move closer to the current spot price. Our analysis predicts that in the face of increased uncertainty the long-term and short-term prices are bound to exhibit similar movements. These changes have important consequences on the oil price formation process.

An Econometric Analysis of the Link between Biodiesel Demand and Malaysian Palm Oil Market

The objective of this study is to describe the important factors affecting Malaysian palm oil industry especiallybiodiesel demand. To that end a market model representing palm oil production, import, world excess demand,domestic consumption, export demand, rest of the world excess supply and palm oil prices is formulated. Asystem of equations of eight structural equations and four identities is estimated by two stage least squaresmethod using annual data for the period 1976-2008. The domestic price equation is formed to investigate the linkbetween biodiesel demand and the Malaysian palm oil market. The domestic price is significantly affected byMalaysian ending stock, world palm oil price, biodiesel demand and lagged domestic price. The elasticity ofMalaysian palm oil domestic price with respect to biodiesel demand is then obtained. Results suggest thatbiodiesel demand has a positive impact on the Malaysian palm oil domestic price. Thus, significant growth inbiodiesel demand is important in explaining Malaysian palm oil price determination.

The determination of oil prices 1945–1995: A diagrammatic interpretation

The paper provides a theoretical framework to explain the determination of international oil prices based upon the interaction of supply and demand curves. The analysis of components of the framework identifies important characteristics of the global market for crude oil. The paper applies the framework to the oil market from 1945. In particular, it incorporates key changes in the market to enhance understanding of how the market has been and is working. Finally, the framework is used to explain why oil prices have become more volatile and what issues and questions arise from current oil market behaviour.

Oil: Economics and Political

This article deals with the evolution of the international petroleum sector since 1973 with a special view to interdependence between the economic and political factors that influence it. Two issues are focused upon: (1) the effects of the nationalization of oil companies on the sharing of oil rents and on changes in the structure of the oil market; and (2) the determination of oil prices. The latter involves a discussion of, on the one hand, the political and economic behaviour of the United States and Saudi Arabia and, on the other, the combination of cooperation and conflict that has tended to characterize relations among OPEC countries.

The Determinants of Oil Prices

Three factors work together to determine the price of oil: in the short term, the balance between supply and demand; in the medium term, the structure of the oil industry; and in the long term, the marginal production cost consistent with world oil demand. Using this analytical framework, one can forecast that, in the year 2000, oil prices will not be significantly different from those of today.

Oil prices in the short, medium and long-term

OPEC countries continue to remain an important force in the determination of oil prices. Though they are able to impact supplies, they will have little influence on demand. In the short term, OPEC nations will manage their supplies through ad hoc agreements on production discipline, though there are many who would desire higher quotas. They will not allow their wishes to result in a free-for-all oil war with a collapse in prices. Instead they will bargain and negotiate for a compromise. In the medium to long term, scenarios of oil supply and demand indicate that demand for OPEC oil will approach and exceed OPEC's ‘preferred’ capacity. Indeed, once OPEC's ‘preferred’ capacity is approached, prices are likely to rise significantly. As of 1992/1993 there will be a possibility of substantial increase in the price of crude oil. The base case scenario points to US$23/bbl oil in 1995 and $29 in the year 2000.