Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us

It has been 40 years since the oil crisis in 1973/1974, which also coincided with the emergence of a new regime in the global market for crude oil and free fluctuation of prices in response to the forces of supply and demand Pro rata. The crisis deepened when the price of imported oil nearly quadrupled over the course of a quarter, forcing substantial adjustments in oil consuming countries, Sui generis. Indeed, the extent to which oil price fluctuations are unexpected depends on how expectations are formed. In this context, we have demonstrated the alternative measures of oil price expectations postulated by economists, policymakers, financial market participants and consumers respectively. In economist premise, we employ per se a VAR model specification that includes the real price of oil, global crude oil production, global real economic activity, and vicissitudes in global crude oil stocks. In policymakers’ oil price expectation, the natural source of market expectation is the price of oil futures contracts, which de facto permit the market participants to lock in today a price at which to buy a fixed quantity of crude oil at a predetermined date in future. This is how the International Monetary Fund (IMF) and many Central Banks of the world may exert their expectations for the oil prices, in toto. However, in the case of financial market oil price expectations, the futures prices as measures of market expectations are valid if and only if, they will be adjusted viz-a-viz the risk premium which de jure denoted as the compensation that arbitrageurs receive for assuming the price risk faced by hedgers in the oil futures market. The consumer’s oil price expectations approach insinuates on real price of oil which prima facie consists of the current price of oil and an inflation forecast. Thus, it is the rule of thumb presumption of consumers that form their oil price expectations even if their expectations are not accurate pari passu with alternative measures of expectations. But, unless we afford to predict the future underpinning of oil price determinants, the stochastic permutation in the price of oil emanated from the unexpected shifts in oil demand or oil supply is ineludible. Though, the distinction between the heterogeneous oil price expectations across the economic agents over the transmission effect of oil price shocks bears significant axiological value, Ipso facto.