Working Paper: NBER ID: w14927
Authors: Eyal Dvir; Kenneth S. Rogoff
Abstract: We test for changes in price behavior in the longest crude oil price series available (1861-2008). We find strong evidence for changes in persistence and in volatility of price across three well defined periods. We argue that historically, the real price of oil has tended to be highly persistent and volatile whenever rapid industrialization in a major world economy coincided with uncertainty regarding access to supply. We present a modified commodity storage model that fully incorporates demand, and further can accommodate both transitory and permanent shocks. We show that the role of storage when demand is subject to persistent growth shocks is speculative, instead of its classic mitigating role. This result helps to account for the increased volatility of oil price we observe in these periods.
Keywords: oil prices; persistence; volatility; commodity storage model; industrialization
JEL Codes: E0; L7; N5; Q4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| persistent growth shocks (E32) | increased volatility in oil prices (Q31) |
| monopolistic supply conditions (D42) | increased volatility in oil prices (Q31) |
| real price of oil during rapid industrialization (N71) | high persistence and volatility (E32) |
| supply constraints (D10) | persistent price behavior (E32) |
| uncertainty regarding demand trends (D89) | volatility in price trends (E32) |
| persistent growth shocks + monopolistic supply conditions (F41) | increased volatility in oil prices (Q31) |