CRUDE OIL PRICE

Crude Oil Price



Introduction

Since the 1970s of the twentieth century, the international crude oil price has been going up and down, showing daily volatile oscillation as well as several clear-cut rising and falling segments. Figure 1 shows the crude oil price fluctuation from January 1974 to March 2010 and it shows that the price has been raising quickly since 2002. The highest nominal price jumped to 127.77 US dollars/barrel (monthly average) in July 2008, which was an increase of nearly 12 times compared to 9.59 US dollars per barrel in January 1974. Meanwhile, the real price rose from 12.27 US dollars per barrel in February 1999 to 113.47 US dollars in July 2008, an increase of nearly nine times. Huge fluctuation in crude oil price has far-reaching implications on the world economy; many studies have been done in the literature since 1970s.

In recent years, reconsidering the structural origins of crude oil price fluctuation is one of the hot topics on studies about international oil issues. During the 1970s and 1980s in the last century, the main causes of oil price fluctuation was mainly attributed to exogenous factors such as geopolitical issues, military conflicts, etc. The macroeconomic structural factors the origins of fluctuation in crude oil market is not limited to, or even not determined mainly by exogenous (supply) factors. Those macro demand factors are important driving forces of oil price volatility and the relative weight of demand side effects increased gradually and significantly since 2002. The basic idea of such research (methods) relies heavily upon the integrated analysis of the impact of demand and supply side factors of oil price fluctuation. There appeared a theoretical consensus among quite a few of US mainstream scholars that the demand side shocks not only had been the decisive factor in the rising oil price since 2002, but also the most important explanatory variables of oil price fluctuation since January 1973.

An important logic starting point and purpose of our research is to explore whether such a point of view has theoretical and empirical support. In addition, to a research was only up to 2005 while the almost uniform view is that crude oil price soaring since 2005 may be subjected to more subtle factors. Therefore, our study in this paper extend research sample period to 2010, which covers a brand new full round of up and down cycle of oil price fluctuation (Santini, 2009, 18-25).

Analysis

Factors Influencing Crude Oil Price Fluctuation

Previous studies in the literature show that the main influencing factors include supply and demand imbalance, speculation and hedging activities, geopolitics and the value fluctuation of the US dollar, etc. Owing to the possibilities of variable quantification and data availability, the relevant studies of economics are mainly carried out from the perspective of generalized supply and demand analysis. Our research in this paper will also follow the similar assumption that crude oil prices are influenced by four categories of structural shocks, likely, the general supply and demand factors, geopolitics, and expectation effects - those ...