The 2006-2008 Oil Bubble and Beyond

TL;DR

This paper analyzes the 2006-2008 oil price surge, identifying bubble-like behavior and speculative dynamics, while examining discrepancies in supply-demand data as indicators of market uncertainty.

Contribution

It introduces a method to detect bubble behavior in oil prices and interprets supply-demand data discrepancies as signs of market uncertainty and speculation.

Findings

Oil prices exhibited faster-than-exponential growth indicating bubble dynamics.

Discrepancies between EIA and IEA data reflect increased market uncertainty.

Speculative behavior likely amplified the oil price run-up.

Abstract

We present an analysis of oil prices in US$ and in other major currencies that diagnoses unsustainable faster-than-exponential behavior. This supports the hypothesis that the recent oil price run-up has been amplified by speculative behavior of the type found during a bubble-like expansion. We also attempt to unravel the information hidden in the oil supply-demand data reported by two leading agencies, the US Energy Information Administration (EIA) and the International Energy Agency (IEA). We suggest that the found increasing discrepancy between the EIA and IEA figures provides a measure of the estimation errors. Rather than a clear transition to a supply restricted regime, we interpret the discrepancy between the IEA and EIA as a signature of uncertainty, and there is no better fuel than uncertainty to promote speculation!