Publications: Notes at the Margin

What Determines Oil Prices? (July 22, 2024)

 

Myriad academic papers have dissected oil price determination. Many consulting firms and investment bank analysts have published similar papers. Few, if any, of these scribblings have realized their goal. The academic papers and consulting reports explain historical events but rarely offer correct insights into the future, and the bank analysts’ analyses are simply wrong more often than not. Indeed, price modeling efforts are doomed from the outset because oil price determinants vary over time.

Here, we start with a July 17 Investopedia paper titled “What Determines Oil Prices?” to frame our discussion. As the Investopedia author observes, speculators play an important role—sometimes. Inventories, a topic he ignores, are a more important factor, as are market disruptions. Inventory taxes also play a critical role that no study considers. The periodic collapses and restorations of OPEC and OPEC+ agreements have led to significant price cycles ignored by academics. Product market circumstances can also influence crude oil prices. 

 

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