Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective
According to the standard analysis of commodity prices, stockpiling is a necessary signature of speculation. This paper develops an approach suggesting that speculation may temporarily push crude oil prices above the level justified by physical-market fundamentals, without necessarily resulting in a...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
MIT Center for Energy and Environmental Research Policy
2010
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| Online Access: | http://hdl.handle.net/1721.1/54754 |
| _version_ | 1811082477286981632 |
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| author | Babusiaux, Denis Pierru, Axel |
| author_facet | Babusiaux, Denis Pierru, Axel |
| author_sort | Babusiaux, Denis |
| collection | MIT |
| description | According to the standard analysis of commodity prices, stockpiling is a necessary signature of speculation. This paper develops an approach suggesting that speculation may temporarily push crude oil prices above the level justified by physical-market fundamentals, without necessarily resulting in a significant increase in oil inventories. Looking beyond debate on the value of oil-demand price-elasticity, showing a demand curve makes sense only if we consider a fixed time horizon (e.g. short-run). The scenario of oil demand slowly but continuously adjusting to a price fuelled by speculation implies that price elasticity of demand is an increasing function of the time horizon considered. Short- and long-run elasticities can then be used to calibrate this function. A very low very-short-run price elasticity suggests that an exogenously-driven rise in crude oil price has a very slight impact on demand in the very short run and therefore, with supply constant, leads to a minimal increase in inventories. This interpretation differs from the traditional view, according to which storage of just a few barrels is enough to raise prices when elasticity is very low. We present several analytical and numerical illustrations (with oil-demand adjustment following Gompertz, logistic and exponential paths). The role that speculation may have played in recent movements in oil prices is also discussed. |
| first_indexed | 2024-09-23T12:04:02Z |
| format | Working Paper |
| id | mit-1721.1/54754 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T12:04:02Z |
| publishDate | 2010 |
| publisher | MIT Center for Energy and Environmental Research Policy |
| record_format | dspace |
| spelling | mit-1721.1/547542019-04-12T23:37:57Z Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective Babusiaux, Denis Pierru, Axel According to the standard analysis of commodity prices, stockpiling is a necessary signature of speculation. This paper develops an approach suggesting that speculation may temporarily push crude oil prices above the level justified by physical-market fundamentals, without necessarily resulting in a significant increase in oil inventories. Looking beyond debate on the value of oil-demand price-elasticity, showing a demand curve makes sense only if we consider a fixed time horizon (e.g. short-run). The scenario of oil demand slowly but continuously adjusting to a price fuelled by speculation implies that price elasticity of demand is an increasing function of the time horizon considered. Short- and long-run elasticities can then be used to calibrate this function. A very low very-short-run price elasticity suggests that an exogenously-driven rise in crude oil price has a very slight impact on demand in the very short run and therefore, with supply constant, leads to a minimal increase in inventories. This interpretation differs from the traditional view, according to which storage of just a few barrels is enough to raise prices when elasticity is very low. We present several analytical and numerical illustrations (with oil-demand adjustment following Gompertz, logistic and exponential paths). The role that speculation may have played in recent movements in oil prices is also discussed. CFE (French affiliate of the WEC) 2010-05-11T15:43:14Z 2010-05-11T15:43:14Z 2010-04 Working Paper 2010-004 http://hdl.handle.net/1721.1/54754 en_US MIT-CEEPR (Series);10-004WP application/pdf MIT Center for Energy and Environmental Research Policy |
| spellingShingle | Babusiaux, Denis Pierru, Axel Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective |
| title | Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective |
| title_full | Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective |
| title_fullStr | Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective |
| title_full_unstemmed | Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective |
| title_short | Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective |
| title_sort | speculation without oil stockpiling as a signature a dynamic perspective |
| url | http://hdl.handle.net/1721.1/54754 |
| work_keys_str_mv | AT babusiauxdenis speculationwithoutoilstockpilingasasignatureadynamicperspective AT pierruaxel speculationwithoutoilstockpilingasasignatureadynamicperspective |