Crude oil and stock markets: Stability,instability, and bubbles

We analyze the long-run relationship between the world price of crude oil and international stock markets over 1971:1–2008:3 using a cointegrated vector error correction model with additional regressors. Allowing for endogenously identified breaks in the cointegrating and error correction matrices, we find evidence for breaks after 1980:5, 1988:1, and 1999:9. There is a clear long-run relationship between these series for six OECD countries for 1971:1–1980.5 and 1988:2–1999.9, suggesting that stock market indices respond negatively to increases in the oil price in the long run. During 1980.6–1988.1, we find relationships that are not statistically significantly different from either zero or from the relationships of the previous period. The expected negative long-run relationship appears to disintegrate after 1999.9. This finding supports a conjecture of change in the relationship between real oil price and real stock prices in the last decade compared to earlier years, which may suggest the presence of several stock market bubbles and/or oil price bubbles since the turn of the century.     

OPEC and non-OPEC oil production and the global economy

Hamilton identifies 1973 to 1996 as “the age of OPEC” and 1997 to the present as “a new industrial age.” During 1974–1996 growth in non-OPEC oil production Granger causes growth in OPEC oil production. OPEC oil production decreases significantly with positive shocks to non-OPEC oil production in the earlier period, but does not do so in the “new industrial age”. In the “new industrial age” OPEC oil production rises significantly with an increase in oil prices, unlike during “the age of OPEC” period. OPEC oil production responds significantly to positive innovations in global GDP throughout. Over 1997:Q1–2012:Q4 the negative effect on real oil price of positive shocks to non-OPEC oil production is larger in absolute value than that of positive shocks to OPEC oil production. The cumulative effects of structural shocks to non-OPEC oil production and to real oil price on OPEC oil production are large. The cumulative effects of structural shocks to OPEC production and real oil price on non-OPEC production are small. Results are robust to changes in model specification. An econometric technique to predict growth in OPEC oil production provides support for the results from the SVAR analysis. Results are consistent with important changes in the global oil market.     

Oil prices without OPEC: A walk on the supply-side

The rapid increases of oil prices during the 1970s are commonly regarded asprima facie evidence of monopoly power. This paper applies the theory of exhaustible resources to estimate the equilibrium oil prices (also known as ‘efficiency prices’) which would have prevailed in the absence of monopoly profits. The theory incorporates an extraction cost function wherein cost is a rising function of the cumulative amount of oil extracted. The model is used to simulate efficiency price paths under a variety of assumptions about extraction costs and real interest rates which are representative of perceptions at various times in recent history. These simulations show that the price increases of 1974 and 1979–1980 can be explained as a response to supply-side changes, espicially changes in the perceived cost of the backstop technology and the fall in real interest rates in the mid and late 1970s. Thus, while efficiency prices were high in the 1970s, relative to extraction costs, it is plausible that average monopoly profits were negligible. This situation appears to have changed in the early 1980s due to the return of real interest rates to their historic levels. In early 1982, even spot prices, already below official prices, were substantially above the estimated efficiency or competitive price level. On the other hand, efficiency prices remain far above extraction costs. Thus, even if the price-setting power of OPEC were eroded by competition, the real price of oil would not fall below the level established in 1974.     

Disentangling the determinants of real oil prices

In this study, we quantify the impacts of economic fundamentals and derivative market speculation on the real price of crude oil. Using a structural VAR with sign restriction, we determine that oil demand from the US and China, particularly the latter one, plays a crucial role in oil price changes after the year 2000. The contribution of speculation does not exceed 10% of oil price variations in our sample period.     

Modelling the world oil market: Assessment of a quarterly econometric model

This paper describes a structural econometric model of the world oil market that can be used to analyse oil market developments and risks. Oil demand depends on domestic economic activity and the real price of oil. Oil supply for non-OPEC producers, based on competitive behaviours, is constrained by geological and institutional conditions. Oil prices are determined by a “price rule” that includes market conditions and OPEC behaviour. Policy simulations indicate that oil demand and non-OPEC supply are rather inelastic to changes in price, while OPEC decisions about quota and capacity utilisation have a significant, immediate impact on oil prices.     

A model of the world oil market with an OPEC cartel

A world oil market model (WOM) with OPEC treated as a Stackelberg cartel has been developed within the framework of the Generalized Equilibrium Modeling System (GEMS) that is available from Decision Focus, Inc. The U.S. sector of the model is represented by a Liquid Fuels Supply model that was presented previously. The WOM model is described and results obtained with the model for the period 1980–2040 are presented. For comparative purposes, results obtained with the model when OPEC is treated as a competitive producer are also presented. By comparing the world oil price as a function of time from the two calculations, the influence that OPEC may have on the oil market by exploiting all of its market power is quantified. The world oil price as obtained with the WOM model is also compared with world oil price projections from a variety of sources.     

Impact of the price of energy on the use of conservation tillage in agriculture in the USA

The relationship between energy expenditure and the use of conservation tillage is of special importance in addressing concerns about the impact of agricultural production on the environment in the US. After establishing that a relationship exists between the price of energy and the use of conservation tillage via the Granger causality, the relationship is quantified. It is shown that while the real price of crude oil, the proxy used for the price of energy, does not affect the rate of adoption of conservation tillage, it does impact upon the extent to which it is used. Finally, there is no structural instability in the relationship between the relative use of conservation tillage and the real price of crude oil over the period 1963–1997.     

Optimal oil import tariffs: An international perspective for the 1980s

Since the oil price explosion of 1973–74, oil policy has focused on two problem areas: firstly, chronically high international oil prices and secondly, vulnerability to disruptions in oil supply. Until recently, many held that measures designed to reduce the level of oil imports would mitigate both of these problems. Oil import reductions would put downward pressure on world oil prices during normal supply conditions, while simultaneously reducing the importer's exposure to oil supply interruptions. By the end of the 1970s, however, several analysts had concluded that certain characteristics of the world oil market would minimize both of these potential benefits of oil import reductions. Now, after more than two years of glut on the world oil market, many doubt that policy-induced import reductions would have any beneficial effects at all. This paper assesses the value of oil import reduction policies during the oil market conditions that are expected to prevail during the 1980s. The conclusion is that there are still substantial benefits to be gained by implementing efficient import reductions. This conclusion is robust over a broad range of assumptions about OPEC objectives and other key determinants of world oil market behaviour.     

Primary energy demand in Japan: an empirical analysis of long-term trends and future CO2 emissions

This paper examines the long-run relationship between energy demand, GNP and the real energy price in Japan using data covering 1887–2001. It is found that, if an Underlying Energy Demand Trend is appropriately incorporated, the resulting econometric model produces a long-run income elasticity of about unity and a long-run price elasticity of about–0.2. The estimated model is utilised to forecast energy consumption and CO₂ emissions up to 2012. It is shown that given current economic conditions and policies there is considerable uncertainty about whether Japan will be able to meet its Kyoto target by reducing CO₂ emissions in 2008–2012 to the 1990 level. It is shown that this uncertainty depends on the strength of the economy and leaves the Japanese government with a difficult policy dilemma. If there is a resurgence in growth to something near the annual average growth rate since the early 1980s a considerable effort will be required in order to meet its Kyoto target; requiring not only using the Kyoto Mechanisms, but also additional tougher domestic policies and measures such as emissions capping, R&D incentives, and education for energy conservation in addition to a pricing and tax policy.     

Assessing the impact of US ethanol on fossil fuel markets: A structural VAR approach

Despite the growing importance of biofuels, the effect of biofuels on fossil fuel markets is not fully understood. We develop a joint structural Vector Auto Regression (VAR) model of the global crude oil, US gasoline, and US ethanol markets to examine whether the US ethanol market has had any impact on global oil markets. The structural VAR approach provides a unique method for decomposing price and quantity data into demand and supply shocks, allowing us to estimate the distinct dynamic effects of ethanol demand and supply shocks on the real prices of crude oil and US gasoline. Ethanol demand in the US is driven mainly by government support in the form of tax credits and blending mandates. Shocks to ethanol demand therefore reflect changes in policy more than any other factor. In contrast, ethanol supply shocks are driven by changes in feedstock prices. A principle finding is that a policy-driven ethanol demand expansion causes a statistically significant decline in real crude oil prices, while an ethanol supply expansion does not have a statistically significant impact on real oil prices. This suggests that even though US ethanol market is small, the influence of US biofuels policy on the crude oil market is pervasive. We also show that ethanol demand shocks are more important than ethanol supply shocks in explaining the fluctuation of real prices of crude oil and US gasoline.     

Energy prices,volatility, and the stock market: Evidence from the Eurozone

This paper constitutes a first analysis on stock returns of energy corporations from the Eurozone. It focuses on the relationship between energy market developments and the pricing of European energy stocks. According to our results, oil price hikes negatively impact on stock returns of European utilities. However, they lead to an appreciation of oil and gas stocks. Interestingly, forecastable oil market volatility negatively affects European oil and gas stocks, implying profit opportunities for strategic investors. In contrast, the gas market does not play a role for the pricing of Eurozone energy stocks. Coal price developments affect the stock returns of European utilities. However, this effect is small compared to oil price impacts, although oil is barely used for electricity generation in Europe. This suggests that for the European stock market, the oil price is the main indicator for energy price developments as a whole.     

Correlation between Chinese and international energy prices based on a HP filter and time difference analysis

To establish a reasonable system and mechanism for Chinese energy prices, we use the Granger causality test, Hodrick–Prescott (HP) filter and time difference analysis to research the pricing relationship between Chinese and international energy prices. We find that Chinese and international crude oil prices changed synchronously while Chinese refined oil prices follow the changes of international oil prices with the time difference being about 1 month to 2 months. Further, Australian coal prices Granger causes Chinese coal prices, and there is a high correlation between them. The U.S. electricity price is influenced by the WTI crude oil price, the U.S. gasoline price and the HenryHub gas price. Due to the unreasonable price-setting mechanism and regulation from the central government, China′s terminal market prices for both electricity and natural gas do not reflect the real supply–demand situation. This paper provides quantitative results on the correlation between Chinese and international energy prices to better predict the impact of international energy price fluctuations on China′s domestic energy supply and guide the design of more efficient energy pricing policies. Moreover, it provides references for developing countries to improve their energy market systems and trading, and to coordinate domestic and international energy markets.     

A linear programming analysis of liquid-fuel production and use options for Australia

The linear programming model, MARKAL, was used to analyse minimum discounted cost configurations for the Australian energy system over the period 1980–2020. Particular attention was focussed on options available for augmenting falling local oil production and for maintaining liquid fuel supplies to the transport sector. Two different assumptions for future primary energy prices were analysed: a linear doubling of real prices by 2020, and a constant real price.Under the increasing price scenario, Australia has opportunities to bring brown coal liquefaction, oil shale production and methanol production from natural gas to add to liquid fuel supplies. On the demand side, vehicles fueled by LPG and CNG, and coal-fired ships provide the best methods to curtail oil imports within the framework of the assumptions and data used.On the other hand, if primary energy prices were to remain constant in real terms to 2020, Australia's self-sufficiency in oil products would decline to less than half present levels and with only limited methanol production becoming viable on the supply side. However, even under this assumption, ready opportunities exist to reduce the system cost by switching away from fuels derived from imported oil to indigenous supplies of LPG, CNG, and coal.     

How does the U.S. natural gas market react to demand and supply shocks in the crude oil market?

In this paper we use monthly data (over the period from January 1976 to December 2012) and a structural VAR model to disentangle demand and supply shocks in the global crude oil market and investigate their effects on the real price of natural gas in the United States. We identify the model by assuming that innovations to the real price of crude oil are predetermined with respect to the natural gas market and show that close to 45% of the variation in the real price of natural gas can be attributed to structural supply and demand shocks in the global crude oil market.     

Price and income elasticities of crude oil import demand in South Africa: A cointegration analysis

This paper examines the demand for imported crude oil in South Africa as a function of real income and the price of crude oil over the period 1980–2006. We carried out the Johansen co integration multivariate analysis to determine the long-run income and price elasticities. A unique long-run cointegration relationship exists between crude oil imports and the explanatory variables. The short-run dynamics are estimated by specifying a general error correction model. The estimated long-run price and income elasticities of −0.147 and 0.429 suggest that import demand for crude oil is price and income inelastic. There is also evidence of unidirectional long-run causality running from real GDP to crude oil imports.     

Relationships between oil price shocks and stock market: An empirical analysis from China

This paper investigates the interactive relationships between oil price shocks and Chinese stock market using multivariate vector auto-regression. Oil price shocks do not show statistically significant impact on the real stock returns of most Chinese stock market indices, except for manufacturing index and some oil companies. Some “important” oil price shocks depress oil company stock prices. Increase in oil volatility may increase the speculations in mining index and petrochemicals index, which raise their stock returns. Both the world oil price shocks and China oil price shocks can explain much more than interest rates for manufacturing index.     

Physical market determinants of the price of crude oil and the market premium

We analyze the determinants of the real price of crude oil by means of an equilibrium correction model over the last two decades where we focus on the aspects of the physical market that impact on the clearing price. We find that two cointegrating relations affect the changes in prices: one refers to OPEC's behavior, attempting to control prices using its market power and quotas; the other to the coverage rate of OECD expected future demand using inventory behaviors. We derive a forecasting equation for the change in oil prices which we use to assess the speculative elements of the price increases of the period 2000–05. We show that worries alien to the physical markets were the causes of the increase in oil prices and we quantify their overall impact.     

Linkages between oil price shocks and stock returns revisited

In this paper, we revisit the debate on the relationship between oil price shocks and stock market returns by replicating the quantile-on-quantile (QQ) regression model for the US stock market in Sim and Zhou (2015, Journal of Banking and Finance), and extending it to 15 countries. The classification of these countries as oil importers or oil exporters depends on their net position in crude oil trade. Our results indicate that the main finding by Sim and Zhou (2015) that large negative oil price shocks can bolster stock returns when markets are performing well is only partially supported by the three largest oil importers in our sample – China, Japan and India – during the period 1988:1–2007:12. However, when extending the study to more recent data (period 1988:1–2016:12), we find that China and India experience higher returns when markets perform well and there is a large positive oil price shock. Also, large positive oil price shocks often lead to higher stock market returns when markets perform well for both oil exporting countries – Canada, Russia, Norway – and moderately oil dependent countries – such as Malaysia, Philippines and Thailand. In most cases large negative oil price shocks depress further already poorly performing markets, as in Sim and Zhou (2015). These findings highlight that the relationship between the distributions of oil price shocks and stock market returns is not stable over time in most countries studied. Furthermore, the asymmetric effect between positive and negative oil price shocks observed in the US market by Sim and Zhou (2015) is less evident in most countries for both the baseline and extended periods.     

The US dollar and the world oil market

Due to the increasing value of the dollar, world oil prices rose rather than fell relative to the price of OECD exports between 1980 and 1984. The real crude oil price of OECD countries increased by approximately 30% more than its counterpart for the USA. This paper calculates that if OECD oil prices had not risen but followed the trend for US prices, world oil demand in 1984 would have been about 3 million barrels per day — 6.6% higher than otherwise. Two plausible scenarios which assume the same nominal oil price, US inflation rate and OECD growth rate but different values for the dollar are considered. World oil consumption by 1990 could vary by 4 million barrels per day, depending upon shifts in the exchange rates and the value of the dollar. This variation is comparable to the range associated with significant differences in the economic growth rate between now and 1990. The paper shows that shifts in exchange rates could produce changes in oil prices in 1990 comparable to the effects of gradually removing 5 million barrels per day from total oil production by 1990.     

Continuity and reversal in oil spot price movements

The hypothesis that prices follow a random walk is tested using daily data for 1978–1984 on the Rotterdam spot gas oil market. The method uses a filter test statistic to evaluate possible dependencies between successive price changes in the movement domain. The results show a significant tendency for small price changes to persist, but for reversal to be exhibited for larger price changes. It is shown that this dependency can be exploited in a very profitable trading rule. The hypothesis that the gas oil market is efficient is rejected. This is attributed to the relative immaturity of oil spot markets.