Non-market effects, such as strategic decisions by the Organization of the Petroleum Exporting Countries, energy legislation and speculative bubbles, move crude oil prices away from the level implied by supply and demand for extended periods. These effects should be more proactively monitored and regulated to suit national and international objectives.
Messages for Policy
Non-market forces — such as strategic moves by key players such as OPEC, political events, panic buying and speculative bubbles — move crude oil prices away from the level implied by market fundamentals by large amounts for extended periods.
These deviations can transfer billions of dollars between consumers and producers and between oil producing and oil consuming nations.
It should not be assumed that market fundamentals always determine price in the oil market.
The role of non-market forces in changing prices should be quantitatively monitored.
Policy makers should be more proactive in regulation of the non-market forces and their effects, in service of economic, environmental and welfare goals.
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References
Further Reading
Hamilton, J. D. Oil and the macroeconomy since World War II. J. Polit. Econ. 91, 228–2248 (1983). Pioneering work that connects changes in oil prices to non-economic factors and how price increases slow economic activity.
Yergin, D. The Prize: The Epic Quest for Oil, Money, & Power (Simon & Schuster, 1991). Detailed chronlogy of political events that shape oil prices.
Kaufmann, R. K., Dees, S., Karadeloglou, P., Sánchez, M. & Sanchez, M. Does OPEC matter? An econometric analysis of oil prices. Energy J. 25, 67–90 (2004). Statistical analysis of the relation between oil prices and proxies for oil supply and demand.
Kilian, L. Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. Am. Econ. Rev. 99, 1053–1069 (2009). Attributes price changes since the 1970s to unexpected changes in market fundamentals.
Kaufmann, R. K. The role of market fundamentals and speculation in recent price changes for crude oil. Energy Policy 39, 105–115 (2011). Evidence for a speculative bubble based on break-downs in previous relations among measures of the oil market.
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Kaufmann, R.K., Connelly, C. Non-market forces significantly affect oil prices. Nat Energy 5, 129–130 (2020). https://doi.org/10.1038/s41560-020-0563-3
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DOI: https://doi.org/10.1038/s41560-020-0563-3