Michael Giberson
The New York Times observes that crude oil price volatility has been exceptionally high for the last eighteen months.
(Hmmm. Eighteen months ago … January 2008 … the Iowa caucuses … the U.S. presidential primary season gets underway in earnest … nahhh, couldn’t be all due to presidential politics.) Actually, eyeballing the chart that accompanies the article, it looks like volatility didn’t really take off until the macroeconomic slide later in 2008. From the story:
“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”
Volatility in the oil markets in the last year has reached levels not recorded since the energy shocks of the late 1970s and early 1980s, according to Costanza Jacazio, an energy analyst at Barclays Capital in New York.
Energy price volatility may have implications for various energy policy proposals seeking to dramatically reshape the industry. Research published in the Energy Journal (“Does oil price uncertainty affect energy use?” Gerard Kuper and Daan van Soest, 2006. Link to abstract.) reported that oil price volatility discourages investment in new energy-using technology:
Volatility clustering implies that high levels of volatility today give rise to the expectation that volatility will remain high in the foreseeable future, and hence the probability of price change reversals is expected to remain high as well. Volatility itself induces firms to respond sluggishly to energy price changes, and this effect is exacerbated if volatility is clustered over time as higher volatility today implies that tomorrow volatility is likely to be high too….
Our results thus give support to the theoretical prediction that energy price volatility renders energy-saving technologies less attractive. The policy implications are that in uncertain times, energy taxes are not expected to be very effective in reducing energy use, and that reducing and managing uncertainty should be high up on the policy agenda.
AN ASIDE: Between when I first read the NYT story yesterday and posting about it this morning, the title of the article morphed from “Volatile swings in price of oil stir fears on recovery” to “Swings in price of oil hobble forecasting.” I wonder if that change is a editorial judgment to minimize negative tone toward the economy, or just an effort to make headlines into statements of the obvious?
ANOTHER COMMENT: The Energy Journal doesn’t make it easy for web-based researchers to locate and link to articles in the journal (as compared to, say, the Electricity Journal or Energy Policy). As research has become increasingly web-based, that is probably not the best long-term approach.