Oil Prices: Why are they so volatile and
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© JE 013 Oil Prices: Why are they so volatile and should we care? John Elder Colorado State University [email protected] http://lamar.colostate.edu/~jelder Copyright © John Elder 2013 May not be reproduced whole or in part without express written consent
Transcript of Oil Prices: Why are they so volatile and
© JE 013
Oil Prices:Why are they so volatile and
should we care?
John ElderColorado State [email protected]
http://lamar.colostate.edu/~jelder
Copyright © John Elder 2013May not be reproduced whole or in part without express
written consent
© JE 013
Oil Prices
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Why are oil prices so volatile?• Why have oil prices been volatile?
– Difficult to identify strong links between oil prices and economic news.
– April, 15 2013 – change in Non-farm payrolls: 88,000; SP500 opens down 1%; Oil futures down ~1%; End of day?
• Jumps at 5-minute intervals (Elder, Miao, Ramchander, 2013).
– Jumps in oil prices may be linked with macroeconomic news.
– Jumps occur as markets adjust to signals about future economic activity.
– Jumps are not “speculation” unrelated to the economic environment.
• Notes– Speculation is complex topic, see Fattouh, Kilian, Mahadeva, 2013.– For history of oil prices, see Hamilton, Historical Oil Shocks, 2013.
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Oil prices and economic news (1)• Oil futures prices at 5-minute intervals;
– Pit trading 9:00-2:30pm ET and electronic trading 6:00-5:15 pm
• Economic news announcements (8:30 am) – examples– Advanced Retail sales Housing Starts– Nonfarm payrolls Personal Consumption Expenditure– Change in Crude Oil Inventory (10:30 am) from DoE
– Surprise Si,t is standardized as ,, ,
• Employment Situation report (US) –– Household survey -
survey of ~60k households.– Establishment survey –
survey of 141k businesses and govt agencies.
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Oil prices and economic news (2)
© JE 013Oil Prices and economic news (3)
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Oil and economic news (4)• Conclusion on oil prices and economic news
– Considerable variation in oil price variation at is linked to macroeconomic fundamentals.
– Reflects markets interpreting signals about future economic activity.
– More difficult to relate sign of jumps to sign of surpriseDifficult to measure expected macro outcome
• The result is volatility. Should we care?
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Why care about oil price volatility?• Theory suggests that oil price volatility depresses current economic activity.
• Uncertainty is seen to retard investment independently of considerations of risk or expected return. Introduction of uncertainty can be associated with slack investment, resolution of uncertainty with an investment boom.– Ben Bernanke, Federal Reserve, 1979 PhD thesis.
• If energy prices will trend higher, you invest one way; if energy prices will be lower, you invest a different way. But if you don’t know what prices will do, often you do not invest at all.– Lawrence H. Summers, Harvard University.
• Empirical evidence is that Oil price volatility depresses – GDP, investment, durables consumption; Elder et al (2010)– Canada, France, UK, US (Bredin et al, 2011)– Drilling activity (Kellog, 2012)– Manufacture of durables, support activity for mining, (Elder 2013)
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Oil Price Volatility (1)• Measuring effect of oil price volatility
– VAR with MGARCH-M, controlling for other factors.– But model does not really matter much; see also Jin (2013).
• Analysis– Coefficients (point estimates) after controlling for relevant variables– Impulse responses – How does a shock to oil prices affect output
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Oil Price Volatility (2)Industrial Production Proportion 1980:1-2009:12
total index Coefficient T-Stat
Mining NAICS=21 13.23 -0.055** -2.38
Manufacturing 72.39 -0.040*** -3.41Durables NAICS= 321, 327, 331-339 38.03 -0.059*** -3.62Non-Durables 311-316, 322—326 34.38 -0.020* -1.82Other Manufacturing 1133, 5111 3.16 -0.021 -1.42
Electric and Gas Utilities NAICS=2211,2 11.22 -0.046 -1.52
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Conclusions• Oil price volatility
– Linked to identifiable economic events, not random movements.
– Has a negative and significant effect on ouput• Real GDP / Consumer durables / Real PFI in Structures• Manufacturing output in 4 countries• Durables manufacturing and mining support activities.
– Exacerbates declines in output associated with unfavorable oil shocks.
– Temper gains in output associated with favorable oil shocks.
• Is there a role for public policy to reduce energy price volatility?
– Stabilize infrastructure? Sensible polity regarding sustainable alternatives? – Stabilize policy? Appropriately tax?
