Maugeri - Understanding Oil Price Behavior through an Analysis of a Crisis

Maugeri - Understanding Oil Price Behavior through an Analysis of a Crisis

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Unformatted text preview: 147 Understanding Oil Price Behavior through an Analysis of a Crisis Leonardo Maugeri Introduction Another petroleum boom-and-bust cycle has left its mark on the beginning of the new century. After hovering around $18$20 per barrel through most of the 1990s, oil prices collapsed to $10 in 1998 and 1999, before beginning a climb that led to a record-shattering $147 per barrel in New York on July 11, 2008. However, this was followed by a steady decline that turned into a rout after the onset of the global economic crisis in mid-September, driving down the price of crude oil to as low as $32 per barrel in December 2008, less than a quarter of what it had been just four months earlier. The rapid rise in the price of oil and its sudden and dramatic fall caught many industry analysts and experts by surprise, as has been the case with many earlier boom-and-bust cycles. This raises once again a fundamental question about the oil industry: Why is it so difficult to come up with reasonable predictions about the price of oil? The root of the problem is the extreme complexity of the oil market, which involves a multitude of interacting players, intricate and unsatisfactory models used to set prices, com- plicated interactions between crude oil and its derivative products, and unique geopolitical pressures that shape the industry. These complexities are unknown to the vast majority of policymakers and the media, who tend to view the world of oil simplistically and in terms of stereotypes. A second problem, even less understood, plagues the oil market: the scarcity of reliable current data about the industry. The daily flow of information about oil demand, supply, inventories, and reserves is qualitatively suspect, consisting of estimates rather than reliable facts, and the product of a system that has not yet managed to produce accurate real-time numbers. A third problem that has clouded our understanding of the petroleum industry is the long- standing and widespread misperception that in the face of constantly growing demand, oil supplies will dwindle and then abruptly decline in the future. Despite having been disproved by history on many occasions, this myth persists even as economic and geologic studies repeatedly challenge it. Throughout the history of the oil industry, these three elements have often worked together to create a distorted psychology among the industrys players. The objective of this article Senior Executive Vice President, Strategies and Development, Eni; e-mail: leonardo.maugeri@eni.it. Review of Environmental Economics and Policy , volume 3, issue 2, summer 2009, pp. 147166 doi:10.1093/reep/rep007 Advance Access publication on June 28, 2009 C The Author 2009. Published by Oxford University Press on behalf of the Association of Environmental and Resource Economists. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org 148 L. Maugeri is to try to bring some clarity to these issues, utilizing the most recent boom-and-bust cycle...
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This note was uploaded on 12/16/2009 for the course AEM 2500 taught by Professor Poe,g. during the Fall '07 term at Cornell University (Engineering School).

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Maugeri - Understanding Oil Price Behavior through an Analysis of a Crisis

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