The Petroleum Market: the Ongoing Oil Price 'Shock' and the Next 'Counter-Shock'

Abstract

This paper documents that the oil market has a natural tendency to experience an alternation of periods of turbulence and stability because of weak price-elasticities of supply and demand, responsible for the fact that “there is always too much or too little oil” (Watkins, 1937). In particular, it proposes a simple “Econ 101” explanation for the surge in both the level and the volatility of oil prices over the last few years. The analysis shows that despite the 2009 global recession, there still is “too little oil”, therefore the energy crisis is not yet over and the price should rise to new record levels in the mid-term. On the other hand, simulations provide evidence that spare capacities should be built up again in the long-term—that is, there might be “too much oil” again—and hence the nominal price could correct downward and enter a new steady period once sufficient investment is made.Oil prices; supply and demand equilibrium; forecasting and simulation