Tuesday, July 7, 2009

Oil price volatility

The NYT has an excellent graphic highlighting the magnitude of price volatility that oil prices have seen since the middle of last year.

Unlike last year, when soaring demand drove up prices, this time the global economy is in recession, demand is weak, spare production capacity with OPEC is large and inventories have been building up, making the price rise surprising. Supply fears from Nigeria and Iran, OPEC's resolve to rein in production to drive prices to the range of $75 per barrel, fall of dollar against many currencies, and possibly speculative activity in the commodity markets may be behind the spike. It is feared that the oil price increases may adversely affect a limping global economy and seriously hurt the automobile and airline industries, besides consumer spending as people are forced to fork out an increasing share of incomes for their energy uses.

Update 1
Since oil inventories have been building up in off-shore tankers and other conventional storage locations, Paul Krugman feels that speculation may be behind the oil price rises this time.

Update 2
Superb post by the excellent Simon Johnson on the factors responsible for oil price volatility - uncertainty about economic growth, inability to converge on global climate change policies discourages investments in energy sector, cheap money policies of central banks encourage financial institutions to take large positions in commodities markets.

Update 3
Oil prices at $70-80 a barrel is seen as something which is good for both producers and consumers (goldilocks price). It will also keep alternative energy generators interested. OPEC spare capacity at 6 million barrels per day is among the highest since the late nineties and gives them ample space to increase production to keep prices under control.


Anonymous said...


Anonymous said...

Post above excellent and thought provoking.

Persuasively builds step by step case that everyone has it backwards - oil volatility caused the financial crisis!

Better link here.


Anonymous said...

Did oil price volatility cause the financial crisis?