Publications: The Petroleum Economics Monthly

Understanding Price Behavior During Oil Market Disruptions (March 2018)

 

This issue of The Petroleum Economics Monthly provides a detailed analysis of market behavior during the various disruptions, starting with the 1973 embargo. The next issue will examine the economic impact of price increases with a focus on consumers.

 

The discussion here is based on research first published in 1983 in Oil Markets in Turmoil (OMT).[1] OMT analyzed market behavior during the 1973 embargo, the collapse of production in Iran, subsequent actions by Saudi Arabia to tighten the market after Iran’s Shah was deposed, the taking of hostages at the US embassy in Tehran, and finally the outbreak of war between Iraq and Iran. For this work, a simple stylized model was developed using the available data (there were no published spot crude prices) to predict the oil price increase that would occur following a market disruption.

 

Here, we extend the OMTmodel to cover the nineteen disruptions that have occurred over the last four decades. These include two actions by OPEC to cut production, several interruptions that contributed to the price increases in 2008, four hurricanes, Iraq’s invasion of Kuwait, and two separate collapses of Libyan production. In doing so, we found that our simple statistical model, which ties price changes to changes in production and inventory levels, continues to work well.

 

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