Thursday, September 20, 2012

Speculation Demystified: Virtuous Volatility

In recent years, the oil market has been characterised by rising, and at times, rapidly fluctuating price levels. From April 2012 to June 2012 alone, Brent crude oil prices gyrated between USD 125 and USD 89 per barrel. Higher volatility adversely affects oil exporting countries’ fiscal revenues and investment, reducing confidence in the economy, while it worsens inflation and growth prospects for oil importers.

In 2011, the Group of 20 (G20) nations called for policy options to combat increased volatility in commodity markets in general, and in oil markets in particular. In response, a G20 experts group emphasised the importance of improving data transparency in both financial and physical markets as well as phasing out inefficient fossil fuel subsidies. The experts group also urged the use of country-specific
monetary and fiscal responses to support inclusive growth in order to mitigate the impacts of excessive price volatility.

However, it is important to note that volatility itself is not the main problem. Instead, the main challenge would be elevated price levels combined with higher volatility. ...

My article appeared in print on September 20, 2012, on pages 34 and 35 of the IEA Energy Journal-Issue 3, Autumn 2012. You can read this article here (SSRN)

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