04 February 2009

GPPi publishes Policy Paper on oil price volatility

GPPi Fellow Timo Behr authored a Policy Paper entitled “The 2008 Oil Price Shock: Competing Explanations and Policy Implications.” The paper is being published in the Policy Paper series of GPPi’s Global Energy Governance Project.

Throughout 2008, world oil markets experienced volatility on an unprecedented scale. While crude oil prices shot up to the dizzying heights of almost $150 per barrel by the middle of the year, they came plunging down to close to $40 per barrel by December. Since that time, much ink has been spilled pondering the reasons for this unprecedented volatility. In this policy paper, Behr brings some clarity to the debate on the causes behind oil price volatility by disentangling the competing arguments and reviewing the evidence that supports them.

Behr finds that market fundamentals on their own do not explain the recent rise and fall of oil prices, and that financial markets, government policies and macroeconomic variables all played contributing roles in exaggerating price movements. As such, he suggests that any policy seeking to smooth volatility in oil prices will need to be based on a holistic approach, taking all of these factors into consideration. In terms of public policy, Behr suggests that increasing transparency and information about the oil market should be one of the most pressing concerns.

In that context, a more vigorous strengthening of the Joint Oil Data Initiative (JODI) should be pursued. Also, he argues that producer and consumer countries need to make a greater effort to facilitate investment into additional upstream and downstream capacity. Without considerable new investments, oil markets will become both increasingly tight and volatile
in the future.

Finally, Behr posits that although the specific impact of financial markets on oil prices remains a contentious issue, closing regulatory loopholes that might allow market manipulation or fuel irrational exuberance amongst market participants would seem advisable.

The publication of this Policy Paper was made possible by generous support from the European Commission.

For more information about GPPi’s work on global energy governance, please click here.

To read the Policy Paper please click here.

Back to: News Archive