oil price volatility: how can it be managed?paul+stevens.pdf2016/06/15 · oil price volatility:...
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Oil price volatility: how can it be managed?
Professor Paul Stevens Distinguished Fellow, Chatham House Professor Emeritus, University of Dundee Visiting Professor, University College London (Australia) Distinguished Fellow, Institute of Energy Economics, Japan
IEEJ 50th/APERC 20th Anniversary Joint Symposium 2016 Tokyo 26-27 May 2016
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Presentation outline
• The recent history of price volatility?
• Drivers of price volatility?
• Prospects for future price volatility?
• Why does price volatility matter?
• Possible solutions to price volatility?
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Recent history of price volatility
0
20
40
60
80
100
120
140
1980
19
82
1984
19
86
1988
19
90
1992
19
94
1996
19
98
2000
20
02
2004
20
06
2008
20
10
2012
20
14
Crude oil prices 1980-2014 (Brent 2014 $US)
1980-85
1986-2004
2005-2010
2011-2014
• Previously an administered market
• 1928 Achnacarry Agreement + Gulf Plus • Posted prices 1950s/60s • OPEC price setting post October 1973
• Now a competitive market
• Saudi Arabia and market share. November 2014 • Absent an administered market, greater price volatility?
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Drivers of price volatility? The problem is there are two oil markets
Wet barrel market *Trading real barrels PRICE DETERMINED BY PHYSICAL SUPPLY AND DEMAND Economics 101
Paper barrel markets *NYMEX/ICE – futures markets PRICE DETERMINED BY PAPER PROMISES ABOUT SUPPLY AND DEMAND Psychology 101
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Wet barrel market Paper barrel markets
Influences perceptions about surplus/shortage
“Signals” what prices might be
The two oil markets – the linkages?
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Key point is that perceptions and signals can change very quickly: ITS ALL IN THE MIND!
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Wet barrel market Paper barrel markets
Influences perceptions about surplus/shortage
“Signals” what prices might be
“the paper barrel market” often misread the “wet barrel market”. They don’t understand the oil industry… “Scapegoat theory” in foreign exchange markets
The two oil markets – a further problem
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Prospects for future price volatility? Short term
• Price range in a competitive market?
• Floor price = variable cost of US tight oil? $20-25?
• Ceiling price = what breaks the “fracklog”? $50-55?
• Supple disruptions?
• “Accidents” (Canadian fires)
• Geo-political problems • Unrest in producers (Venezuela) • Growing Iranian frustration with
the JCPOA • The Middle East is a mess!
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120
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160
US$
per
bar
rel
Source: Ali Aissaoui Apicorp Economic Commentary Vol 9 N0. 708 July- August 2014
OPEC Median Budgetary Break-Even Price
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Prospects for future price volatility? Medium term
• A supply crunch? • Increasing demand
and lower investment in conventional upstream?
• Changing price elasticity of supply • Shale technology
revolution and lead times
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Prospects for future price volatility? Long term
• Remember: long term = the sum of a series of short terms
• Longer term the issue is price trends rather than price volatility
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Prospects for future price volatility? Conclusions
• While oil prices are determined in a competitive market, volatility is likely to get worse
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Why does price volatility matter?
• Global • Impact on global GDP • Impact on energy
investments
• Producers • Macro consequences –
budgets and balance of payments
• Consumers
• Balance of payments • Domestic energy policy
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50
100
150
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250
-6
-4
-2
0
2
4
6
8
1971
19
72
1973
19
74
1975
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76
1977
19
78
1979
19
80
1981
19
82
1983
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84
1985
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86
1987
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88
1989
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90
1991
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1993
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94
1995
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1997
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1999
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00
2001
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02
2003
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04
2005
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06
2007
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08
2009
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10
2011
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12
2013
20
14
% annual change oil
price
% annual change GDP
OECD GDP Growth and Oil Price growth 1971-2014
GDP price $2014
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Possible solutions to price volatility? • Revert to an administered price?
• Prospects for agreements? – OPEC/Non-OPEC? Revive OPEC quotas?
• Physical stock piling?
• Hedging and the use of paper markets?
• Manage it by creating “stabilization funds”?
• Live with it!
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