Energy Economics 24 2002.

107 119

An analysis of factors affecting price volatility of the US oil market

C.W. Yang a , M.J. Hwang b,U , B.N. Huang c
Department of Economics, Clarion Uni ersity of Pennsyl ania, Clarion, PA 16214-1232, USA b Department of Economics, College of Business and Economics, West Virginia Uni ersity, P.O. Box 6025, Morgantown, WV 26505-6025, USA c Institute of International Economics, National Chung Cheng Uni ersity, Chiayi, Taiwan, ROC
a

Abstract This paper studies the price volatility of the crude oil market by examining the market structure of OPEC, the stable and unstable demand structure, and related elasticity of demand. In particular, the impacts of prosperity and recession of the world economy and the resulting demand shift on crude oil price are investigated. The error correction model is used to estimate the demand relations and related elasticity. The income effect on demand functions is evaluated to shed light on future prices. A simulation of potential oil prices under different scenarios on a cut of one million barrels per day by OPEC is evaluated. From our simulation, given the 4% cut in OPEC production, the oil price is expected to increase unless the recession is severe. The magnitude and scope of a price hike would be diminished if non-OPEC or domestic production were greatly expanded. 2002 Elsevier Science B.V. All rights reserved.
JEL classification: 022 Keywords: Crude oil; Price volatility; Demand elasticity

1. Introduction The volatility of crude oil prices creates uncertainty, and therefore an unstable economy for both oil-exporting and -importing countries. Higher prices result in an increase in inflation and a subsequent recession in oil-consuming nations, as oil
U

Corresponding author. Tel.: q1-304-293-7866. E-mail address: mjhwang@mail.wvu.edu M.J. Hwang..

0140-9883r02r$ - see front matter 2002 Elsevier Science B.V. All rights reserved. PII: S 0 1 4 0 - 9 8 8 3 0 1 . 0 0 0 9 2 - 5

108

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

prices are negatively correlated to economic activities Ferderer, 1996.. Most post-war recessions were preceded by oil price shocks, i.e. 1974, 1980 and 1990 economic recessions in the US Huntington, 1998.. Evidence that a recession depresses prices recently occurred in 1998, when oil prices declined to approximately $10 a barrel as a result of the Asian economic setback that started in 1997. Lower oil prices would prohibit economic development and might generate political instability and social unrest in some oil-producing countries. The rollercoaster of sharp oil-price fluctuations has been remarkable in the last three decades. Thus, it is of great importance to analyze important factors affecting the volatility of crude oil prices. The literature on price volatility of crude oil relates oil shocks either to the instability of the market structures or to the effect of the price elasticity of demand. Mork 1989. and Huntington 1998. demonstrated the asymmetric relationship, that a reduction in oil prices does not necessarily lead to noticeable output growth, while an increase can have a negative impact on output growth. The study of Ferderer 1996. points to the observation that disruptions in oil market not only give rise to higher prices, but also increase oil price volatility. Chaudhuri 2001. recently found that non-stationary commodity prices could be attributed to the non-stationarity in oil prices. In other words, real oil prices and real commodity prices are cointegrated. Thus, he suggested that the price of oil should be another variable in the aggregate production function. Given its volatility, it comes as no surprise that the oil price is considered by the majority of researchers as being non-stationary, i.e. it may well have a unit root e.g. Bentzen and Engsted, 1993, 1996; Jones, 1993; Hamilton, 1994; Arize, 2000., despite the conclusion by Pindyck 1999. that long-term oil prices are mean-reverting around shifting trend lines. While advances in the non-stationary time series technique are instrumental in understanding the behavior of oil prices, the mechanism of the data-generating process plays a critical role. That is, the underlying structure of oil markets, especially OPEC, can shed important light on the issue. In his pioneering work, Griffin 1985. characterized OPEC behavior into four categories: cartel, competitive, the target revenue, and property rights models. He
The most popular version is the one that considers Saudi Arabia or OPEC core countries e.g. Saudi Arabia, Kuwait and Qatar. as a dominant firm Pindyck and Hnyilicza, 1976; Tourk, 1977; Noreng, 1978; Houthakker, 1979; Aperjis, 1982; Alhajji and Huettner, 2000a.. On the other hand, MacAvoy 1982. attributes price increases to supply disruptions under open market conditions. The positively sloped supply functions imply a competitive oil market. In addition, Verleger 1987. ascribes oil price disruptions to problems on the demand side. Another non-collusive model is the target revenue theory: oil-producing countries capacity to absorb investment at an acceptable rate of return determines oil production Ezzati, 1976; Teece, 1982; Salehi-Isfahani, 1987; Cremer and Isfahani, 1991; Alhajji and Huettner, 2000b.. In addition, the production cutbacks can be viewed as a phenomenon of a backwardbending supply curve. As a result of increasing demand, the market price will increase and oil output will decrease with adequate oil revenue to cover the target investment Alhajji and Huettner, 2000b.. The property rights model Johany, 1979; Mead, 1979. makes use of the concept of the real discount rate and real oil price in the Hotelling theory. When ownership is transferred from the international oil companies to producing nations, the result is sharp production reductions and price increases Dasgupta and Heal, 1979..
1

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

109

rejected the last three models in favor of the OPEC cartel model. Recently, Alhajji and Huettner 2000a,b. employed the multi-equation estimation technique, and showed that neither OPEC nor the OPEC core could play the role of a dominant producer, because the demand for oil remains price inelastic in both cases.1 The remarkable price volatility reflects the market structure of OPEC, unstable demand structure, and shifting demand conditions. Both the inherent unstable demand structure and non-stationary economic variables must be addressed in order to dissect the behavior of oil prices. The supply of crude oil by production decreases or increases will also be emphasized, as it has an immediate impact on prices. In particular, the impacts of changes in the world economy and its resulting demand shift on crude oil prices will be investigated. This paper initially provides a theoretical analysis of crude oil pricing by expanding the elasticity theory developed originally by Greenhut et al. 1974.. The next section presents an extended model by incorporating marginal cost includes user cost. and highlights the unstable demand structure. Section 3 estimates and describes the demand structure and the volatility of oil prices. Section 4 presents a simulation of potential oil prices under different scenarios on a one million barrel cut per day by OPEC. The last section provides a conclusion.

2. Unstable demand structure of the oil market Assume a well-behaved demand function for OPEC oil P s P q, . of R 2 R1 , where P and q denote price average value of imported oil to the US. and output import of crude oil from OPEC., respectively, and is a shifting parameter e.g. income level.. We regard an increase in as an increase in demand outward shift in demand curve.. A general total cost function C q ., such that C q . s MC q ., reflects the cartels cost environment. A close-knit cartel maximizes the joint profit s Pq y TC q . with the following first-order condition: P 1 y 1re . y MC q . s 0 1.

2 According to Griffin and Teece 1982., the marginal cost of producing crude oil includes the conventional marginal production costs and user cost. The marginal production cost consists of conventional capital, labor and material costs of producing the last unit of output. The user cost is an opportunity cost of producing an extra barrel of oil, as oil is a non-renewable product and the decision to produce a barrel of oil today precludes the possibility of producing it at some time in the future. This marginal cost is estimated between $0.10 and $0.25 per barrel in most Persian Gulf countries during the 1970s. The user cost was estimated by Pakravan 1984. to be less than $0.10 in the Middle East during the 1960s and 1970s. In addition, per barrel user cost U0 . for OPEC may be used as a proxy for traditional marginal cost, as shown in the profit-maximizing condition P s U0r1 q 1r . by Alhajji and Huettner 2000a, p. 37.. By using their formulation, the user cost has three components: i. increased security cost military expenditure. per barrel; ii. royalties, which account for 12% to over 50% of total revenues or 0.17-fold the real oil price; and iii. the extraction cost s $0.5 in 1970, with an increase of 3% per year. This amounts to 0.5 1.03 31 s $1.25 for year 2001. Even with the three-component cost of $5, the k value is 5.6 for a price of $28 per barrel.

110

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

or P w 1 y 1re y MC q . rP x s P 1 y 1re y 1rk . s 0 where k s PrMC. Solving for e absolute value of the price elasticity . yields: eU s kr k y 1 . 3. 2.

Under a stable demand structure, the price elasticity converges toward kr k y 1.. For instance, the marginal cost 2 is approximately constant at 1r10 of the price i.e. for k s 10., and the long-run price elasticity of demand should approach y1.11. However, the MCrP ratio can be quite appreciable when oil prices slide below $10 a barrel.3 Using the chain rule and expanding the Greenhut Hwang Ohta theory Greenhut et al., 1974; the original model was well thought out by Greenhut and Ohta, 1975., we derive the following second-order condition: d2 dq
2

d P 1 y 1re . d P dP dq

dMC d P d P dq dMC dP dMC d q q MC P q q q P

4.

d P d P 1 y 1re . dq dP dq dP dq dP dq dP ) y 1 y e . e ) y 1 y e . e ) y 1 y e . e

d q d P MC yeMC P ye k

-0

-0

where s d qrdMC.MCrq . is the output elasticity on the marginal cost curve and U is the elasticity of price elasticity on a given demand curve i.e. U s ere .r PrP .. For a constant marginal cost curve, the second term in the parentheses drops out as . For an insignificant marginal cost, 1rk s MCrP
3 It is both interesting and paradoxical to note that the great majority of estimated price elasticity values absolute value. are less than unity, except that of Alhajji and Huettner 2000a. in the case where Saudi Arabia is the dominant player. The behavior of oil price changes cannot be entirely captured by traditional microeconomic theory. Nonetheless, the long-run inelastic demand is consistent with the switch elasticity model by Greenhut et al. 1974., upon which we expand.

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

111

is trivial. For a stable case of demand structure, it is sufficient that U ) 1 y e holds. Note that a similar result can be derived for the leadership model with residual demand. In the presence of a structural break in demand, that is from a competitive environment to an effective cartel scheme e.g. OPEC., the demand function experiences a sudden change in curvature. The divergent or oscillating price elasticity of demand signals an unstable demand framework, as indicated by d 2 rd q 2 ) 0 in Eq. 4. i.e. the second-order condition is violated.. A cartel can benefit from an increase in price if demand is inelastic. As the market demand changes from a relatively more elastic competitive market demand to an inelastic cartel demand i.e. a consequence of - 1 y e ., this unstable relation will make the elasticity diverge from e s kr k y 1.. The majority of empirically estimated price elasticities of crude oil fluctuate between y0.05 and y0.4 Griffin and Teece, 1982; Pindyck, 1978., which is far from the suggested stable long-run value of y1.11 at k s 10. or y1.22 at k s 5.6.. Clearly, the 1973 oil embargo ushered its way to an effective oil cartel, OPEC, in which the price elasticity of demand drastically diminished in absolute value as the price of crude oil was substantially raised i.e. was significantly negative.. Such an unstable demand structure may well contain the seed of recent great price volatility, as will be explained in the next section.

3. Volatility of crude oil price To investigate the volatility of oil prices, we follow the generalized autoregressive conditional heteroskedasticity GARCH. model developed by Bollerslev 1986.. The estimation period is from January 1975 to September 2000.4 The monthly crude oil price data are taken from International Financial Statistics published by the International Monetary Fund. The following relation is set forth to estimate the volatility of the price change: 5 DP s ln Pt f ln Pt y ln Pty1 . where Pt is the oil price in time period t;6 price in logarithmic difference.
4

5. ln Pt denotes rate of change of the oil

The GARCH model used in this model extends from 1975 to 2000, instead of from 1948 to 1998 for the following reasons. First, oil prices were low and non-volatile before the 1973 1974 energy crisis. Consequently, we exclude it from the volatility analysis. Second, inclusion of 1999 and 2000 data better highlights the recent price hike. We thank one referee for this point. 5 For small changes in price, we use d ln Pt s d PtrPt , which reflects the rate of change in price due to logarithmic differentiation. Note that the prefix of P or D. is only a notation, not a differentiation operator. 6 This paper employs annual data, and as such, does not accommodate for seasonality and its potential autocorrelation problem. Models using quarterly data can directly tackle such problems and give more detailed results Alhajji and Huettner, 2000a.. We thank one of the referees for pointing out this problem.

112

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

Fig. 1. Price of crude oil and conditional variance.

According to Mandelbrot 1963., large changes in prices tend to be followed by large changes of prices in either direction, and small changes tend to be followed by small changes. As shown in Fig. 1, such volatility clustering abounds in terms of oil price change. To accommodate for this phenomenon, Engle 1982. developed the autoregressive conditional heteroscedasticity ARCH. model. We first estimate DPt s a0 q a1 DPty1 q t q a2 ty2 and test its residuals based on the Lagrange multiplier LM. method with the 2 test statistic of 15.30 six degrees of freedom..7 As such, we reject the null hypothesis H 0 : no ARCH phenomenon of order six.. However, estimations of the ARCH q . model could involve long lags. To circumvent this problem, Bollerslev 1986. generalizes the model or GARCH p,q . to include past innovations regarding an oil price change tyq . and its previous conditional variance h typ .. Note that the ARCH model takes only tyq into consideration. From estimated and of the variance equation wsee Eq. 8. belowx and the corresponding t statistics, it is evident that volatility clustered and prevailed in the sample period. In addition, q ) 1 implies that shocks to the conditional variance are persistent, in the sense that they remain important for forecasts of all horizons. The volatility of DPt can be estimated via the GARCH q, p . ARMA m,n. model in terms of the conditional variance as shown below:
m n
t

DPt s a i j q

ai DPty1 q
is1

bj
js1

tyj

g N 0,h .

6.

We based our estimates on Eq. 8. as its residuals are white noise.

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

p q
i 2 tj

113

h t s ai j q

is1

js1

j h tyj

7.

The best-fit model is the one that requires standardized residuals u t s r6h and their squares u 2 s 2rh t obey the white noise process. And as such, we present t t the estimation results in the following:8 DP s 0.1205 q 0.1938 DPty1 q
0.5632 . 3.6011 .
t

y 0.1798

y3.1746 .

ty2

8.

h t s 2.2000 q 0.6909
6.3923 . 6.3674 .

2 ty1

q 0.4922 h ty1
9.1924 .

9.

log L s y985.1621 Q12 u t . s 11.0610 w 0.524x Q12 u 2 . s 7.3946 w 0.830x t Note that the numbers in parentheses are t statistics and those in brackets are P values. Log L is the logarithmic likelihood function value. Q12 u t . are 2 statistics 12-month lag. to test the null hypothesis that u t obeys the white noise process. Evident from Eqs. 8. and 9., the rate of change in the oil price exhibits a significant ARCH phenomenon as the estimated value of q s 0.6909 q 0.4922 ) 1 and are both significant.9 In addition, the problem of misspecification does not seem to exist, as u t or u 2 is free of the serial correlation problem up to t 12-month lag.. The conditional variance h t in Eq. 9. can be used to estimate the price volatility from January 1975 to September 2000. Fig. 1 presents the trends for both the price of crude oil dotted line. and the conditional variance solid line.. Again, oil price trends, to a large extent, synchronize with that of conditional variances. Spikes occurred in the periods of 1979 1980, 1986 and 1990. It is noteworthy that a large conditional variance from the GARCH model is a necessary condition for leading to a recession in the US. However, it is not a sufficient condition, as some spikes did not lead to a serious economic downturn. Starting from January of 1999, spikes in terms of conditional variances appear to have surged again. Our sample period does not fully capture this volatility due to lag effects and would be more accurate if more data were included.
8 9

Empirical results are obtained via the E-view package and are available upon request. The significance of estimated and in the GARCH model is also found in emerging stock markets Huang and Yang, 2000..

114

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

Table 1 Variable definition and unit root test Logarithmic scale ln P ln PN ln PC ln YR ln Q Definition of variable P s price of oil in cents per million BTU. PN s price of natural gas in cents per million BTU. PC s price of coal in cents per million BTU. YR s real income real GDP. Q s consumption of oil in quadrillion BTU. ADF statistics with lag of one y1.44 y1.47 y1.24 y2.05 y2.38

Source: The Annual Energy Review Department of Energy, 1998. and the Economic Report of the President United States Government Printing Office, 1998..

4. Demand and price estimation of the US oil market The problem of forecasting future oil price is confounded due to its volatile behavior. There, a stationary time series is preferred. Following the augmented Dickey Fuller ADF. unit root test, we cannot reject the unit root hypothesis, even after logarithmic transformation of the variables during the sample period 1949 1998.. The ADF statistics are listed in Table 1. Invoking the Engle Granger two-step cointegration test, we reject the null of ; I 1. of the demand function below, with the ADF statistic of y4.70: t lnQ s a q bln P q clnPC q dlnYR q elnPN q
t

10 .

In other words, a cointegration vector may reflect the long-run cointegration relation as shown below: ECM ty1 s lnQ ty1 q 0.1842ln Pty1 y 0.2264lnPC ty1 y 0.0083lnPNty1 y 0.5006lnYR ty1 11.

It should be pointed out these variables are of I 1. and, as such, t statistics cannot be used for statistical inference. We employ the error correction model ECM. to estimate the demand relation for the US oil market with the structural break that occurred in 1975.10 The estimated relation for 1949 1975 and 1976 1998 are reported in the following, respectively: lnQ t s y0.6716ECM ty1 y 0.074 ln Pt q 0.1875 lnPNt q 0.01887 lnPC t q 0.2141 lnYR t q e1 t 12 .

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

115

R 2 s 0.43, Q1. s 0.000 0.999., Q4. s 0.552 0.906. and Q12. s 4.490 0.973.. lnQ t s y0.25229ECM ty1 y 0.0375 ln Pt y 0.004 lnPNt q 0.3343 lnPC t q 0.7105 lnYR t q e2 t 13 .

R 2 s 0.91, Q1. s 0.887 0.833., Q4. s 3.57 0.312. and Q12. s 17.197 0.102., where Q1. is the Ljung Box statistic of lag one to test the white noise process; P values are in parentheses. However, care must be exercised in evaluating the price elasticity of demand in Eqs. 12. and 13. because the coefficients of y0.074 and y0.0375 are not the price elasticity.11 Rather, the elasticity can be approximated by 0.074.1r2 f 0.272 and 0.0375.1r2 f 0.194. The price of oil, to a large extent, impacts production decisions, especially in industrialized economies. Given the historical evidence of business cycles, derived demand for oil is subject to great fluctuations as well. Predicting future oil prices cannot be satisfactorily carried out without considering the income effect in the demand equation. This is especially true in the presence of the recent sputtering economy. As is commonly used, a constant elasticity demand, for a given level of PC and PN, can be rewritten as: Qs P b PC c YRd PN f 14 .

s mP b YRd

In order to simulate the impact of OPEC production reduction on the US

10

The break point is chosen endogenously by seeking the minimum sum of squares of error:
k T
2 i

SSE k . s

is1

jskq1

2 j

The lagged impact of the 1973 energy embargo was fully felt in 1975. 11 The coefficient of first-differenced logarithmic variables can be shown as elasticity squared for infinitesimally small changes: s d lnQ t y lnQ ty1 . d ln Pt y ln Pty1 . dQ t . 2 Q t2 d Pt . 2 Pt2 s d dlnQ t . d dln Pt .

d s d

/ /
Qt Pt d Pt

dQ t

y s

q q

1 Qt 1 Pt

= d2 Qt s e2 = d Pt
2

The second difference is approximately zero if the first difference is found to be stationary.

116

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

Table 2 Simulated US oil prices with a 4% cut in OPEC production OPEC production cut % 4 4 4 4 4 4 4 4 4 Real GDP as % of current GDP Simulated US oil in terms of a bench-mark price 1.403 1.345 1.2887 1.2342 1.1815 1.1305 1.0812 1.0336 0.9876

1.03 1.02 1.01 1.00 0.99 0.98 0.97 0.96 0.95

price,12 we express Eq. 14. in terms of its inverse: P s QU rm .

1rb

YRU y d r b.

15 .

in which b s 0.0375.1r2 s 0.194 and d s 0.7105.1r2 s 0.843 after the structural break. For a constant m and real GDP YR s YRU ., a 4% production cut translates into an approximate 23% price increase. This is to say, with Q s 0.96QU , the new price, ceteris paribus, is 0.96.1ry0.194 f 123.4% of the original level or a benchmark price.. If US real GDP is estimated to decrease by 5%, the new oil price according to our estimate will be: P s 0.961ry0.194 0.95y0 .843ry0.194 P U s 0.987P U This being the case, the future oil price, which plays a crucial role in the US economy, will actually be 1.3% lower than the current price. If the recession threat is indeed credible and serious 5% reduction in GDP., we report the simulated prices given the OPEC production cut of 4% in Table 2. An examination of Table 2 reveals the impacts of a 4% OPEC production cut under different income scenarios. Unless the recession is severe e.g. 5% drop in real GDP., the impact of the joint cartel production cut would most likely lead to price increases: a 40% hike is predicted if the US real GDP is up by 3% a rather unlikely case.. However, it signals the vulnerability of the US energy demand in terms of rising manufacturing cost. It is little wonder that US Energy Secretary, Spencer Abraham, warns that the nation faces a major energy supply crisis over the next two decades.
12 The structural break model highlights the changing price elasticity. To fathom the effect of production cuts actual or announced., we use the estimated demand relation after the 1973 energy crisis, as production cuts were non-existent before the formation of OPEC.

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

117

Table 3 Simulated US oil prices with a 4% cut in OPEC production and 1% output expansion from non-OPEC or domestic production OPEC production cut %. Real GDP as % of current GDP Simulated US oil in terms of % of a bench-mark price when non-OPEC or domestic production expands by: 1% 4 4 4 4 4 4 4 4 4 1.03 1.02 1.01 1.00 0.99 0.98 0.97 0.96 0.95 1.3303 1.275 1.2217 1.17 1.12 1.0717 1.025 0.9793 0.936 2% 1.2618 1.2095 1.1586 1.1098 1.062 1.0165 0.9721 0.9289 0.8878

If non-OPEC or domestic supply expands by 1%, the net OPEC output reduction would be reduced to 3%. The impact on oil prices can be similarly calculated Table 3.. The magnitude of higher oil prices is reduced from 40.3% to 33.03% if real GDP increases by 3%. An aggressive supply-side policy could enhance the non-OPEC oil production by 2% i.e. the net OPEC output curtailment would be 2%.. The impacts of higher production costs can be appreciably diminished, as shown in the last column of Table 3.

5. Concluding remarks When oil prices plunged to $10 a barrel in late 1998, OPEC was on the brink of collapse. With the price reaching a 10-year high at $37 a barrel in 2000, the newly energized oil cartel has regained an assertive role on the global economic stage. It is apparent that a cartel such as OPEC tends to promote higher prices with lower production. An excessively high price would generally create conditions where there is a potential for inflation and economic recession. On the other hand, as a consequence of reduced demand and oversupply, along with relatively more elastic demand, the oil price would then drop, as indicated in our analysis. The excessive price volatility spells uncertainty for both oil-exporting countries and major consuming nations, such as the US and Japan. Consequently, the recent proposal of a price band between $22 and $28 a barrel may well be in the best interest of OPEC members. Strictly speaking, the seed of volatile oil price is contained in the switching elasticity theory by Greenhut et al. 1974.. Thus, the logarithmic difference is needed to ensure a reasonable estimation of the demand structure. Unless the Western economy is recession-proof, a prediction of oil prices relying only on estimated price elasticity may be inadequate. A large conditional variance could be

118

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

a harbinger for recession, a distinct possibility currently facing major economies. From our simulation given the 4% cut in OPEC production, the oil price is expected to increase unless the recession, if it exists, is severe. The magnitude and scope of a price hike would be diminished if non-OPEC or domestic production were expanded, as is planned by the Bush administration in its energy policy.

Acknowledgements The authors would like to thank the co-editor and two anonymous referees for very helpful comments on an earlier draft.

References
Alhajji, A.F., Huettner, D., 2000a. The target revenue model and the world oil market: empirical evidence from 1971 to 1994. Energy J. 21 2., 121 144. Alhajji, A.F., Huettner, D., 2000b. OPEC and world crude oil markets from 1973 to 1994: cartel, oligopoly, or competitive? Energy J. 21 3., 31 58. Aperjis, D., 1982. The Oil Market in the 1980s, OPEC Oil Policy and Economic Development. Ballinger Publishing Company, Cambridge, MA. Arize, A.C., 2000. US petroleum consumption behavior and oil price uncertainty: test of cointegration and parameter instability. Atl. Econ. J. 28 4., 463 477. Bentzen, J., Engsted, T., 1993. Short- and long-run elasticities in energy demand: a cointegration approach. Energy Econ. 15 1., 9 16. Bentzen, J., Engsted, T., 1996. On the estimation of short- and long-run elasticities in US petroleum consumption: comment. South. Econ. J. 62, 783 787. Bollerslev, T., 1986. Generalized autoregressive heteroskedasticity. J. Economet. 52, 307 327. Chaudhuri, K., 2001. Long-run prices of primary commodities and oil prices. Appl. Econ. 33, 531 538. Cremer, J., Isfahani, D., 1991. Models of the Oil Market. Harwood, New York. Dasgupta, P.S., Heal, G.M., 1979. Economic Theory and Exhaustible Resources. Cambridge University Press, Cambridge. Department of Energy, 1998. Annual Energy Review. Energy Information Administration, DOE. Engle, R.F., 1982. Autoregressive conditional heteroskedasticity with estimates of the variance of UK inflation. Econometrica 50, 987 1008. Ezzati, A., 1976. Future OPEC price and production strategies as affected by its capacity to absorb oil revenues. Eur. Econ. Rev. 5 3., 190 194. Ferderer, J.P., 1996. Oil price volatility and the macroeconomy. J. Macroecon. 18, 1 26. Greenhut, M.L., Ohta, H., 1975. Theory of Spatial Pricing and Market Area. Duke University Press, Durham. Greenhut, M.L., Hwang, M.J., Ohta, H., 1974. Price discrimination by regulated motor carriers: comment. Am. Econ. Rev. 64 4., 780 784. Griffin, J.M., 1985. OPEC behavior: a test of alternative hypotheses. Am. Econ. Rev. 75 5., 954 963. Griffin, J.M., Teece, D.J., 1982. OPEC Behavior and World Oil Prices. Allen & Urwin, London. Hamilton, J.D., 1994. Time Series Analysis. Princeton University Press, Princeton. Houthakker, H., 1979. The Political Economy of World Energy. Harvard Institute of Economic Research. Discussion Paper No 617. Huang, B.N., Yang, C.W., 2000. The impact of financial liberalization on stock price volatility in emerging markets. J. Comp. Econ. 28 2., 321 339. Huntington, H.G., 1998. Crude oil prices and US economic performance: where does the asymmetry reside? Econ. J. 19 4., 107 132.

C.W. Yang et al. r Energy Economics 24 (2002) 107 119

119

International Monetary Fund, 2001. International Financial Statistics, CD-ROM, Data Base, Washington D.C. Johany, A.D., 1979. OPEC and the price of oil: cartelization or alteration of property rights. J. Energy Dev. 5 1., 72 80. Jones, C.T., 1993. A single-equation study of US petroleum consumption: the role of model specification. South. Econ. J. 59, 687 700. MacAvoy, P.W., 1982. Crude Oil Prices: As Determined by OPEC and Market Fundamentals. Ballinger Publishing Company, Cambridge. Mandelbrot, B., 1963. The variation of certain speculative prices. J. Bus. 36, 394 419. Mead, W.J., 1979. The performance of government energy regulations. Am. Econ. Rev. Proc. 69, 352 356. Mork, K.A., 1989. Oil and the macroeconomy when prices go up and down: an extension of Hamiltons results. J. Polit. Econ. 91, 740 744. Noreng, O., 1978. Oil Politics in the 1980s. McGraw-Hill Book Company, New York. Pakravan, K., 1984. Estimation of users cost for depletable resource such as oil. Energy Econ. 6, 35 40. Pindyck, R.S., 1978. Gains to producers from the cartelization of exhaustible resources. Rev. Econ. Stat. 60, 238 251. Pindyck, R.S., 1999. The long-run evolution of energy prices. Energy J. 20 2., 1 27. Pindyck, R.S., Hnyilicza, E., 1976. OPEC and the monopoly price of world oil. Eur. Econ. Rev. 8, 139 154. Salehi-Isfahani, D., 1987. Testing OPEC Behavior: Further Results. Department of Economics, Virginia Polytechnic Institute and State University. Working Paper 87-01-02. Teece, D.J., 1982. OPEC behavior: an alternative view. In: Griffin, J.M., Teece, D.J. Eds.., OPEC Behavior and World Oil Prices. Allen & Urwin, London. Tourk, K., 1977. The OPEC cartel: a revival of the dominant firm theory. J. Energy Dev. 7 2., 321 328. United States Government Printing Office, 1998. Economic Report of the President. US GPO, Washington, DC. Verleger, P.K., 1987. The evaluation of oil as a commodity. In: Jocoby, R., Zimmerman, M. Eds.., M. Adelman, Energy Markets and Regulation: Essays in Honor of M.A. Adelman. MIT Press, Cambridge, MA.