What does the market think? A general approach to inferring market expectations from futures prices
Christiane Baumeister, Lutz Kilian 19 November 2014
Futures prices are a potentially valuable source of information about market expectations of asset prices. This column discusses a general approach to recovering this expectation when there is no agreement on the nature of the time-varying risk premium contained in futures prices. The authors illustrate this approach by tackling the long-standing problem of how to recover the market expectation of the price of crude oil.
There has been rapid growth in the volume of trading on futures exchanges in recent years. For example, Irwin and Sanders (2012) document that trading volumes in agricultural futures markets have increased by a factor of 3 since 2000. Futures contracts allow market participants to lock in today the price of future transactions covering a wide range of commodities and financial assets. The price of such futures contracts is a potentially valuable source of information about market expectations.
Financial markets Frontiers of economic research
futures, expectations, trading, risk premia, asset prices, oil, oil prices, forecasting
Economic analysis of the US unconventional oil and gas revolution
Mathilde Mathieu, Thomas Spencer, Oliver Sartor 22 March 2014
The US unconventional energy boom has reversed the decline of domestic production, lowered oil and gas imports, reduced gas prices, and created political space for tougher regulations on coal-fired power plants. This column argues that it is not a panacea, however. Even if current estimates prove accurate, the long-run benefits to the US economy will be relatively small. Improving energy efficiency and promoting low-carbon technologies will be just as important as before – especially for the EU, given its more limited known reserves of unconventional oil and gas.
The recent rapid growth in the production of unconventional oil and gas (shale gas and tight oil) in the US has led to a significant decrease of natural gas prices as well as reduced oil imports. This has raised questions about the impacts of the unconventional oil and gas revolution on the US macroeconomy, industrial competitiveness, and energy sector. It has also raised questions about its implications for the EU (e.g. Beffa and Cromme 2013).
energy, US, environment, oil, gas, shale gas, fracking, tight oil, energy independence
Do food prices respond to oil-price shocks?
Christiane Baumeister, Lutz Kilian 30 November 2013
Recently, there has been great concern among policymakers worldwide about rising food prices and increased food-price volatility. It is widely believed that oil and food prices have become closely linked after 2006, owing in part to a shift in US biofuel policies. This column presents evidence that challenges this conventional wisdom.
Increases in agricultural commodity prices and food prices in recent years have raised concerns among policymakers about a global food shortage. For example, the director of the International Food Policy Research Institute testified in 2008 that rising prices for agricultural crops were causing food riots in many developing countries, and that, according to the Food and Agriculture Organization of the United Nations, 37 countries were facing food crises (Rosegrant 2008).
Commodity prices, Poverty, oil, food, biofuel, ethanol
Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation
Olivier Coibion, Yuriy Gorodnichenko 15 November 2013
During the Great Recession, advanced economies have not experienced the disinflation that has historically been associated with high unemployment. This column shows that using consumers’ (as opposed to forecasters’) inflation expectations restores the traditional Phillips curve relationship for recent years. Consumers’ inflation expectations are more responsive to oil prices than those of professional forecasters. The increase in oil prices between 2009 and 2012 may in fact have prevented the onset of pernicious deflationary dynamics.
“Prior to the recent deep worldwide recession, macroeconomists of all schools took a negative relation between slack and declining inflation as an axiom. Few seem to have awakened to the recent experience as a contradiction to the axiom.” (Bob Hall, 2013.)
“The surprise [about inflation] is that it’s fallen so little, given the depth and duration of the recent downturn. Based on the experience of past severe recessions, I would have expected inflation to fall by twice as much as it has.” (John Williams, 2010.)
Global crisis Monetary policy
inflation, Phillips curve, expectations, oil, global crisis, disinflation, Great Recession
Asymmetric oil: Fuel for conflict
Francesco Caselli, Massimo Morelli, Dominic Rohner 19 July 2013
Oil has often been linked to interstate wars. This column argues that asymmetries in endowments of natural resources are important determinants of territorial conflict. When one country has oil near its border with an oil-less country, the probability of conflict is between three and four times as large as when neither country has oil. In contrast, when the oil is very far from the border, the probability of conflict is not significantly higher than between countries with no oil.
"These acts are tailored in a very systematic way by the Chinese side with the aim to turn undisputed areas into disputed areas".
Vietnamese spokeswoman Nguyen Phuong Nga, following the 9 June 2011 incident where a Chinese fishing boat rammed the survey cables of the PetroVietnam ship.
Energy Politics and economics
oil, Conflict, wars
Simon Commander, Alexander Plekhanov 29 January 2013
Russia aims to diversify its economy and reduce its dependence on natural resources. Despite laudable aims, this column argues that progress has been sluggish. Longstanding obstacles of corruption, low business-entry rates and weak competition afflict other countries that, like Russia, are in transition. Yet Russia comes pretty much bottom of the class. Crucially, the fact that economic diversification requires improvements to education and skills acquisition has been somewhat overlooked by the state. What attempts the state has made, such as supporting technology innovation, appear to have been ineffectual and, at times, counterproductive. Going forward, Russia would do well to focus on improving incentives for market-relevant research and development, complemented by private sector-led sources of finance for early-stage firms.
Russia aims to diversify its economy, thereby moving away from its dependence on oil and gas. Despite much political rhetoric, our research (European Bank for Reconstruction and Development 2012) indicates that, to date, relatively little has been achieved. Oil and gas still account for nearly 70% of total merchandise exports and around a half of the federal budget. Figure 1 shows the increasing share of minerals in total exports when measured in constant prices.
Figure 1. Russia: Structure of exports in real terms (at constant prices)
Russia, education, skills, oil, gas, economic diversification
Financialisation in oil markets: Lessons for policy
Bassam Fattouh, Lavan Mahadeva 21 December 2012
In the last decade, there has been an explosion in the variety of instruments that permit speculation in oil, such as futures, options, index funds, and exchange-traded funds. This has been called the financialisation of the oil markets. This column examines whether this has affected the oil price and predicts powerful natural limits on the ability of financialisation shifts to raise spot prices in frictionless markets.
In the last decade, purely financial players with no interest in the physical commodity, such as hedge funds, pension funds, insurance companies and retail investors, have become more prominent in oil futures and derivatives markets. In parallel, there has been an explosion in the variety of instruments that permit speculation in oil, such as futures, options, index funds, and exchange-traded funds. This massive expansion of the financial layer of oil has been called the financialisation of the oil markets. Has this affected the price of oil? And does it matter?
Energy Financial markets
oil, oil price, financialisation
Managing and harnessing volatile oil windfalls: Three funds, three countries and three stories
Ton van den Bremer, Rick van der Ploeg 14 December 2012
Many countries experience substantial revenue windfalls from natural resources. The consensus is that these should not be consumed but put in a fund to smooth the benefits across generations. This column examines how policy recommendations may differ among oil-rich countries, here Norway, Ghana and Iraq. It suggests that oil exporters may need to accumulate not only an intergenerational fund but also a liquidity fund to cope with oil price volatility and a domestic investment fund to alleviate the burden of capital scarcity.
Many countries experience substantial revenue windfalls from natural resources. The consensus is that these should not be consumed immediately but put in a fund, typically a sovereign wealth fund, in order to smooth the benefits across generations and deal with the otherwise adverse effects of Dutch disease and the resource curse. But should they? And if so, why? In a recent column, Cherif and Hasanov (2012) addressed the oil exporters’ dilemma, i.e. how much of the windfall to save and how much to invest.
Energy Macroeconomic policy
oil, resource curse, oil funds
Oil price risk, expropriation and bilateral investment treaties
Johannes Stroebel, Arthur van Benthem 21 October 2012
The sharp increase in the oil price between 2003 and 2008 brought back the practice of expropriating assets of independent oil companies. This column suggests that bilateral investment treaties may mitigate expropriations and allow resource-rich countries to shift a larger proportion of the risk associated with variations in natural resource prices to oil companies.
The sharp increase in the oil price between 2003 and 2008 brought back a phenomenon commonly observed in the 1960s and 1970s. Countries are expropriating assets of independent oil companies – directly with large unexpected windfall taxes. Countries with recent expropriations include Bolivia, Ecuador, Algeria, Russia, China and Venezuela. The subsequent collapse of the oil price highlighted how exposed many countries are to oil-price fluctuations, and many government budgets needed to be slashed in response to the price decline.
Energy Politics and economics
oil, expropriation, bilateral investment treaties
Do oil prices help forecast US real GDP? The role of non-linearities and asymmetries
Lutz Kilian 29 June 2012
It has long been argued that changes in the price of oil can help forecast US real GDP growth. This column addresses the common concern among many policymakers that the feedback from oil prices to the economy may become stronger once the price of oil reaches a certain level.
There has been much interest since the 1970s in the question of whether lagged oil price changes help forecast US real GDP growth (Hamilton 2009). This question has taken on new urgency following the large fluctuations in the price of oil in recent years. There is interest not only in the question of possible asymmetries depending on whether the price of oil goes up or down, but also in the idea that increases in the price of oil beyond certain time-varying thresholds may trigger recessions.
Energy Macroeconomic policy
US, energy prices, oil prices, oil, real GDP