Why do crude oil prices fluctuate so much?

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Why do crude oil prices fluctuate so much?

Crude oil prices are the major determining factor in the price of a gallon of gasoline. I think the government is investigating the wrong question. Not manipulation of gasoline prices by oil companies, but rather manipulation of crude oil prices by the market. Large investment companies are manipulating crude oil prices.

There is no need to manipulate crude prices. The structure of the oil industry is such that highly unstable prices are a virtual certainty.

On the one hand, oil is a storable commodity, so it is theoretically possible to make money by stockpiling oil during periods of high prices and selling the stockpiles off during perions of high prices. Moreover, there are at least two very large actors in this play who actually (and actively) stockpile oil in periods of RISING prices, further contributing to price hikes. They are the U.S. government and the Japanese government.

On the other hand, investments in oil production tend to be large and irreversible, so oil companies wait until the last minute to commit to production expansion efforts, just to make sure that higher prices are not a temporary phenomenon. Needless to say, once every oil company starts expanding production, glut ensues and prices drop…

A formal model of the above and its application to the aluminum market can be found in this article:

Fridrik M. Baldursson, “Modelling the price of industrial commodities,” Economic Modelling, Volume 16, Issue 3, 3 August 1999, Pages 331-353

Baldursson concludes that his model predicts the behavior of prices and inventories very similar to what is observed in reality: volatile prices, asymmetric adjustment of production to price changes and long inventory cycles…

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