Crude oil is a key ingredient in many of our everyday products, from cars to food to pharmaceuticals. So it’s no surprise that its price has been incredibly volatile over the past decades. The question is, what drives this volatility? Do shocks to suppliers yank prices upward, or is shifting demand from developing countries at play? In order to answer this, economists need a massive amount of data. And that’s exactly what Gideon Bornstein, a PhD student at Northwestern University, and colleagues Per Krusell of Stockholm University have used to develop a new model for oil price fluctuations.
In their study, the authors analyze the dynamic evolution of crude oil price fluctuation using a nonlinear autoregressive distributed lag (NARDL) approach. The results show that the impact transmission mechanism of different fluctuation sources at various positions and trends in the evolution of oil prices differs from one another, making their influence asymmetric.
The findings also reveal that the supply of commodities and financial market risk have superimposed effects on the development of oil prices. For example, commodity factors promote the rapid rise of oil prices, while financial market risks amplify it.
The authors conclude that although sudden shifts in supply can increase or decrease the cost of oil, the overall trend is driven by economic and political events that are hard to predict. These events can include natural disasters (like the 2005 Hurricane Katrina), geopolitical conflicts, and fears of a worldwide economic slowdown (like in 2008 during the global financial crisis). This kind of uncertainty makes it difficult to switch to other energy sources or to update equipment to use less oil.