Oil Markets: The Analytical Challenges
Oil markets are especially hard to analyze. Since late 1973, when the Organization of the Petroleum Exporting Countries (OPEC) first flexed its muscles, the oil price has been on a roller coaster ride. Not only does one have to analyze the politics and economics of OPEC, but there have been major resource discoveries, such as the North Sea, as well as supply-side technological revolutions with hydraulic fracturing of shale oil. In addition, we are now looking forward to demand-side technological disruption from electric vehicles. The inability to assume a stable political or technological environment is a major challenge since the one thing that seems certain is that the supply and demand parameters are time-varying, and the parameter shifts seem to come in jumps and not in a steady pattern. Failure to use statistical techniques allowing for regime shifts can lead to estimates that unintentionally embed the view that the past is a useful predictor of oil market prices – which it is decidedly not. Our analysis here includes the major longer-term technological changes to consider on the supply and demand side, as well as examining short-term influences on oil prices in 2018.