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Friday, May 16, 2008

Is the price of crude oil non-stationary?

A non-stationary price would seem incompatible with a stable market. I don't have the time at the moment to test whether the price of crude oil, and thus the price of gasoline, is non-stationary, but this graph would suggest that it is:

What can explain this run-up in price? Look for papers in the American Economic Review in the next two to three years.

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I have heard theories that widespread speculation and the introduction of pension funds that invest in oil futures have both contributed to the recent increases in the price of crude oil. This would suggest that oil prices are not supported by market fundamentals. I reserve my judgement at this time. It is an interesting question.
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