Opinion and Economic Analysis and Banking & Finance

HICKS: Uncertainty always leads to oil-price fluctuations

February 26, 2011

I must confess that events occurring in Egypt, Libya, Algeria and elsewhere in the region are deeply satisfying to your columnist.

Having spent some time as an exchange officer with the Egyptian Army and having engaged in the liberation of Kuwait (20 years ago this week), I invested a great deal of my youth in a safer and freer Arab world. So, whatever else transpires, I am pleased that a liberty bell is ringing in some places yet unsure of its sound.

All of this is reassuring for those of us with a long view, but, as with our own revolution, the short run will not be easy. Lest we grow impatient with the peoples of the Levant and Middle East, it is worth remembering that it took a dozen agonizing years to craft the U.S. Constitution. And this most perfect of human creations required another 89 years and a civil war to right the greatest of our national wrongs. We ought to be tolerant of imperfection in these countries that seek to be more like us. This patience may be difficult because disruptions of the status quo will painfully remind us of the interconnectedness of economies, and most especially that of energy markets. That brings us to oil.

Being a commodity, changes to oil prices are frequent and instantaneous. Changes to supply or demand of petroleum in the Middle East affect the price at the pump in the Midwest within hours. It would be convenient to grouse about oil companies, but blaming them is of no use. I do not say this because I disbelieve that oil companies are money-grubbing profit maximizers, but rather because I know they are. They just cannot manipulate markets; otherwise, $100-a-barrel prices would have long been the norm.

The frequent changes to petroleum prices are obviously linked to our own prices at the pump. So, too, are such things as war, rumors of war, natural disasters and the like. The coincidence of frequent price changes along with these four horsemen of the apocalypse provide fertile ground for economic research.

So, this week, I resurrected one of my statistical models of gasoline prices. This model predicts monthly gas-price changes as a function of recent history, the unemployment and interest rates, trends and seasons, and big events in the Middle East. I have data from the mid-1970s to today.

Some of the answers the model gives are reassuring: A growing economy and the cost of buying drilling and storage equipment explain most price changes. This model tells us that short-term turbulence in the Middle East has no discernable effect on gas prices. Even Desert Storm’s effect was short and muted.

But, anything that has a doubtful or long-term effect has a large and immediate influence on gas prices. Desert Shield, in the uncertain months leading up to war, saw a nearly 10-percent per-month change in prices at the pump. That is likely to happen again, but short-term gas spikes are much preferable to another war.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.
 

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