from Energy, Security, and Climate and Energy Security and Climate Change Program

Oil Market Volatility, Part Two

February 21, 2013

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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In a post earlier this month, I showed that by some measures crude oil price volatility is nearing a low ebb historically, though looking at historical volatility in isolation can mask the magnitude of recent years’ price changes in absolute terms and relative to the size of the broader economy.

Bob McNally, president of Rapidan Group, suggested a follow-up post modifying the calculus slightly. What would the graph look like if volatility times spot price were divided by U.S. GDP? Framing it that way might help provide a very rough sense of the scale of the movement relative to the size of the domestic economy over time.

See the result in Figure 1 in log scale below.

Source: Bloomberg; U.S. Bureau of Economic Analysis

One point to keep in mind when thinking through the macroeconomic implications of  oil price movements is that consumers, and hence government officials, experience these fluctuations much differently than volatility traders, for instance, do. Yes, implied and historical volatility may be historically low, but normal people live in a world where short-term swings in nominal prices have outsized importance. That said, the degree to which U.S. consumers are coping with retail fuel prices at today’s levels (including by driving less) would have defied the predictions of many economic models a few years ago.

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