Academic journal article Insight Turkey

International Dynamics of Oil Prices in Four Dimensions: An Analytical Investigation

Academic journal article Insight Turkey

International Dynamics of Oil Prices in Four Dimensions: An Analytical Investigation

Article excerpt


Oil is considered the world economy's bloodline. It is both an indicator and the determinant of economic growth. It is a curse and a necessity blended into a single commodity. It is a source of evil and a source of good, as prices oscillate between peaks and pits, providing new insights in every cycle. Oil price hikes and crashes are different every time and rarely anyone predicts a hike or a crash with correct timing. For the experts "it is different this time," for the ignorant "it was obvious". This eccentric nature of oil dynamics is the subject of thousands of studies. Still this very commodity is the quintessential example for those seeking to understand complex interactions between economy, finance, and geopolitics.

The subject is "as deep as the rabbit hole goes." But there is a possibility for abstraction. Through this process I will try to subset the major determinants of oil prices in four categories. These four categories are technology, economy, fear, and temporal effects. In this article, these relations will be explained and a methodology for understanding world oil price dynamics will be presented. Within this framework, major indicators for price movements will be listed. Financial and economic effects will be further elaborated followed by the geopolitical perspectives and consequences. In the last part, "predictions" for what type of future crises will occur and opportunities stemming from oil price movements and levels will be outlined. In summary, the story and future of the complexity of oil price developments is told through an analytical framework by using the system dynamics approach.

Theoretical and Conceptual Framework

An important aspect of oil prices is the influence of the "paper oil," or the so-called energy futures market. Especially, in explaining the "2008 Oil Bubble" (2008 bubble), one credible theory is the "phenomenal increase in financialization of commodity markets during 2006-2008" (1) However, the discussion has two sides. One group claims that the "oil price peak in 2008 was pure speculation" (2) The other side claims that there is not enough evidence to prove that speculation was the major driver for prices. The explanation for the 2008 bubble is said to rest on fundamentals, meaning oil market fundamentals. Oil market fundamentals, at the time, indicated a growing demand from China and emerging economies, a decrease in producer countries, and no new resources or technology on the horizon.

During that time one popular stream of semi-ideological theory was the "Peak Oil Theory" "Peak Oil" is a theory based on M. King Hubbert's idea that there is a point in time when the maximum rate of extraction of petroleum is reached, after which the rate of production is expected to enter terminal decline. The proof is illustrated in his paper "Nuclear Energy and Fossil Fuels" where Hubbert correctly predicted the decline of U.S. crude oil production. (3) Peak oil advocates assume the world oil reserves, as a stock or a tank. In the first 50 percent of this stock, production will be mostly from "low hanging fruits" But as stock nears 50 percent, production will be harder and more expensive. Hence, as the level of tank drops below 50 percent of its full capacity the oil production will start to drop dramatically. The theory does not consider improvements in technology or new kinds of resources. The reasons why Peak Oil Theory is important is that it triggered the fear that world oil production cannot cope with the growing demand, especially from China during 2000-2008. This fear may have helped both speculators and green movements. The arguments associated with Peak Oil Theory are generally fundamentals (supply, demand, geology etc.), but not all members of the "Fundamental Camp" associate themselves with Peak Oil Theory advocates. According to the Saudis, this "fear factor" has played into the hands of speculators.

WikiLeaks cables show that during the most heated times of the 2008 bubble, May 2008, U. …

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