Opinion: Is Oil Price Volatility Increasing in the Long Run?

RED President Steve Hendrickson examines oil price volatility in a historical context and whether U.S. shale producers should act as a “shock absorber” for oil supply.

Steve Hendrickson, Ralph E. Davis Associates
Opinion: Is Oil Price Volatility Increasing in the Long Run?

In addition to several other factors, Hendrickson believes that the greater connectedness of our economies and the flow of information will lead to more rapid oil price swings as events in one part of the world are more quickly felt elsewhere. (Source: Hart Energy)

If you’re like me, you probably feel that the volatility of oil prices has been very high in the past couple of years. After all, oil prices were well above $100/bbl recently and had a negative price scarcely two years ago. And we’re experiencing significant global events that have an economic impact that influences oil prices, particularly the COVID pandemic and the Russian invasion of Ukraine.

I began to wonder, however, if other forces might be at play that will lead to persistently higher oil price volatility even after the influence of these events passes. Specifically, it occurred to me that the United States’ re-emergence as a major oil producer could introduce more volatility since we don’t coordinate our output with our large producers to “stabilize” the market. And, since our production is heavily dependent on unconventional wells that produce at high initial rates and decline rapidly that they introduce the prospect of more rapid swings in supply that could move prices more quickly.

In his 2015 paper “The New Economics of Oil,” Spencer Dale addressed this second concept. He concluded that unconventional oil should act as a “shock absorber” for oil supply because it could quickly respond to price signals.

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