Tuesday, June 24, 2008

Rising Cost of Oil 'Due to Speculation'

Finally, a research work done in the field of econophysics that I've actually found to be "relevant" and interesting! :)

This is a preprint by a group from ETH Zurich and the East China University of Science and Technology. In it, they claim that the rising cost in oil cannot be explained simply via supply and demand, that the major cost for the increase is due to oil speculation. You can read a review of this preprint at the Physics World website (free registration is required).

In an economy without speculation, the price of commodities tends to grow by a fixed percentage every year; this is an exponential rate of growth. But when an economy is influenced by speculation, the percentage increase can grow too. This gives rise to a power-law growth or, as the researchers call it, a “super-exponential growth”.

Sornette’s group has looked at three different models to see if oil prices exhibit super-exponential growth. Each of these models is based on a “log-periodic power law”, which characterizes the super-exponential growth, and contains three main parameters: the time when the bubble is expected to end; the exponent of the power law; and a scale factor. The researchers found that all three models fitted the oil-price data well, implying that the growth has indeed been a bubble.

Apparently, this group also predicted back in 2005 of the burst of the US housing market. And look at where we are now?


1 comment:

KB said...

To be fair, everyone in the know predicted the housing market bust.

Did this study take into account that the Asian markets for energy are growing at a possibly exponential rate?