Crude Oil Prices between 1985 and 1994 Article Analysis - Assignment Example

 Crude Oil Prices Between 1985 And 1994 Andre Plourde and G.C. Watkins, in their study, suggest, “Between 1985 and 1994 crude oil was in the upper end of the range of all measures of price volatility studied, but not clearly beyond the bounds set by other commodities”[And98]. The authors of the article, “Crude Oil Prices between 1985 and 1994: How Volatile in relation to other commodities?” studied the volatility of oil prices between the years mentioned and the relationship between oil price volatility and other commodities. The article draws its origin from the observation that it had been indicated that from the mid-1980s, oil had become a commodity like other commodities and showed a considerable price volatility (Yang, Hwang & Huang, 2002, p 110). The authors point out that over time, competitive forces have caused a greater variance in the prices of oil in world oil markets even with the market arrangements brought by OPEC or by international oil companies. They agree with other authors such as Claudio Morana who states that both direct and indirect effects that came about because of consumption matters and technologies led to oil price volatilities[Mor12].Hence, the authors assert that between 1985 and 1994 there was a volatility in the price of oil as well as other non-oil commodities The two authors divided the article into six major parts.In the introduction, the authors introduce the trends in the volatility of the oil prices, the oil price shocks and the forces behind the volatility of the prices. In the introduction, the authors bring in a very important argument stating that the way competitive forces lead to upsurge in oil prices, so do the factors that determine the availability andprice of oil parallel the factors that determine other traded commodities[Ins12]. In the next section titled ‘background and motivation’ the authors look at the years before the 1985-1994 period and the manner in which oil prices were handled. The authors look at the failure of the major oil companies to set oil prices that led to the emergence of OPEC as the ultimate price determinant. They also look at the price of oil going into the 1980s period when OPEC was weakened by market forces in determining the price of oils. They point out 1983 as the most significant year when the transition to market forces happened and saw the creation of the New York Mercantile Exchange (NYMEX). Here, the authors ask one important question, “From an economic perspective, what could account for crude oil price volatility exceeding that for other commodities?”[And98]. The authors state that there are three factors that could account for crude oil price volatility and they include high storage costs for crude oil, skewed geographical distribution of crude oil reserves and high transport costs and lastly the world’s refining capacity that processes specific types of crude oil(Bagliano & Morana, 2012, p 5). In the next section titled ‘salient aspects of non-oil commodity markets’, the authors compare the volatility of the prices of other commodities to the prices. The authors argue that industries that are more concentrated display more price stability that others.They have looked at the prices of commodities such as metals that include bauxite, copper, tin, zinc and lead. They have also looked at the nickel industry dominated by Canadian producers that have influenced market prices. They have also looked at wheat as a commodity that has entered the world trade and faces volatility in its prices because of the effect of uncertainties, such as the climate (Watkins & McAleer, 2008, p 239). In this section, the authors have included a table that shows the characteristics of various industries of non-oil products selected in the study. They agree that all these commodities face price volatility because of factors such as exchange rates among other factors. In the fourth section, titled ‘commodity price data’, the authors look at the pricing of nine non-oil commodities that include copper, lead, aluminum, tin, zinc, nickel, wheat, silver and gold. They have used the IMF prices (Regnier, 2007, p 405). They also included two marker crude oils including WTI and Brent. They did a study with these commodities with three different price series. They measured the statistical significance of the differences in prices of those commodities. In the next level, the authors made statistical tests, described them and presented the results. They used monthly rates of price change: dispersion and absolute values of monthly rates of price change: location and distribution. The overall results indicated that at any time during the sampling period, there were price changes and the changes of oil prices over a period of one month wereaveragely larger in proportion in absolute value. They also found out that no test provided a statistically large value on test statistic. Therefore, there was no evidence that oil prices could be less volatile than for other non-oil commodities (Balke, Brown & Yucel, 2002, p 30). The last section is the concluding section. Here the authors summarize their findings and address the justifications for the methods they used in the analysis.The authors assert that they could only use non-parametic and robust parametic methods in the analysis because the series of analysis varied from normality and discouraged the use of comparative tests. However, they agree that oil commodities have more volatility than most of other non-oil commodities examined (Plourde, A., & Watkins, G. C., 1994, p 432). After reading the article, I find that the article has significant implication on the financial markets in the notion that it actually proves that the prices of oil commodities have volatility just like the prices of other non-oil commodities. However, oil prices are more volatile than the prices of other commodities. The article has made use of a proper analysis to come to its conclusion and could be used in helping players in commodity industries especially the oil industry to make appropriate choices and decisions bearing in mind that market forces always force price volatilities (Baumeister & Peersman, 2009, p 45). However, according to me, the authors could have also studied other commodities, such as minerals, tea, coffee and cotton to widen the scope of study from oil and metals. The use of IMF prices was excellent but the authors could have used a real market scenario, for instance regions or countries for comparisons to make their argument more concrete. Their research objectives wereappropriate, relevant, and justified. The only point of concern is the narrowed scope of study on specific types of oil and non-oil commodities, which could have been widened to include other commodities. References Bagliano, F.C and Morana, C., 2012, The Great Recession: US Dynamics and Spillovers to the World Economy, Journal of Banking and Finance, 36, P 1-13. Balke, N., Brown, S.P.A and Yucel, M., 2002, Oil Price Shocks and the US economy: Where does the asymmetry originate?Energy Journal, 23, P27-52. Baumeister, C. and Peersman, G., 2009, Sources of the Volatility Puzzle in the crude oil market, Mimeo: University of Ghent. Institute for the 21st Century Energy, 2012. METRIC OF THEMONTH: MAY 2012 A DEEPER LOOK INTO INTERESTING TRENDS IN ENERGY SECURITY DATA. [Online] Available at: http://www.energyxxi.org/sites/default/files/file-tool/MetricoftheMonth-MAY12CrudeOilPriceVolatility.pdf [Accessed 06 January 2012]. Morana, C., 2012. The Oil Price-Microeconomy Relationship Since the Mid-1980s: A Global Perspective, s.l.: s.n. Plourde, A. & Watkins, G., 1998. . Crude oil prices between 1985 and 1994: how volatile in relation to other commodities?Resource and Energy Economics, 20(3), p. 245–262. Plourde, A., & Watkins, G. C., 1994. How volatile are crude oil prices? OPEC review, 18(4), 431-444. Regnier, E., 2007. Oil and energy price volatility. Energy Economics, 29(3), 405-427. Watkins, C., & McAleer, M., 2008. How has volatility in metals markets changed? Mathematics and Computers in Simulation, 78(2), 237-249. Yang, C. W., Hwang, M. J., & Huang, B. N., 2002. An analysis of factors affecting price volatility of the US oil market. Energy Economics, 24(2), 107-119. Read More