Now that I've let our guest blogger, David Zetland, get his feet wet (pun intended--he's a newly minted water economist--get it?) I decided to take up his challenge to look at world gas prices. Then after I looked at the wikipedia gas price list, I decided I didn't really have anything useful to say (do I ever?) about world gas prices and instead I would return to my jingoistic roots and look at U.S. gas prices.
We all know gas prices are going up. But are they also becoming more volatile over time? The graph to the right should look familiar--it's real (i.e. inflation adjusted) gas prices from 1990-present and there is a distinct upward trend. But what my finely trained eye also sees is increased price variability in recent years. So let's take a closer look...
In an attempt to take the trend out of the picture and instead focus only on price fluctuations, the next graph shows the weekly percentage change in prices. Again, a noticeable pattern emerges. The weekly swings in gas prices appear to be larger from about 2000 on than they were in the previous decade--not just in absolute terms, but also as a percentage of the previous weeks price.
Want more evidence? Graph #3 looks at the difference between the high and low gas prices over the previous 52 weeks. Again, the highs relative to the lows are getting bigger.
How about one more? Graph #4 is the one year moving standard deviation of prices. Again, an upward trend.
What does all of this mean? I have no idea. Gas prices appear to be getting more volatile. What are the common explanations for higher gas prices and can they explain increasing volatility?
- Increasing demand. That doesn't seem likely to cause increased volatility.
- Decreasing supply. Again, I can see this causing higher prices but not more variability.
- Political instability in oil producing countries. This one I might buy into but are these countries any more unstable than they were in the 1990's? If so, I guess we can blame always Bush.
- Speculation. I have to admit that this is the one I know least about, but seems to hold the most promise for explaining volatility. If oil is being treated as an investment commodity rather than a consumable commodity we might expect to see larger day-to-day price fluctuations. How that translates to the gas market, I don't know.
So there you have it. A completely uniformed look at gas price volatility. But to be fair, my intent isn't to answer the question but rather raise it: Why are gas prices more volatile now than 10 years ago?
