What happened to the price of oil last year?

Oil price movements in 2007-08 were memorable:

 

Source: Hamilton.

What happened?  James Hamilton of UC San Diego (and Econbrowser) takes a stab at an explanation.  Here's the short version ( in two parts from Econbrowser): Causes of the Oil Shock of 2007-08 and Consequences of the Oil Shock of 2007-08.  Here's the long version (from the Brookings Institution) - Causes and Consequences of the Oil Shock of 2007-09.

Hamilton argues that the fluctuations can be explained by supply and demand, using income and price elasticities that are within the range of plausible value estimates.  The growth of Chinese demand, and stagnation in world supplies are both important.  There may have been speculative elements, but he doesn't think they were fundamental. 

About the future:

But while the question of the possible contribution of speculators and the Fed is a very interesting one, it should not distract us from the broader fact: some degree of significant oil price appreciation during 2007-08 was an inevitable consequence of booming demand and stagnant production. It is worth emphasizing that this is fundamentally a long-run problem, which has been resolved rather spectacularly for the time being by a collapse in the world economy. However, the economic collapse will hopefully prove to be a short-run cure for the problem of excess energy demand. If growth in the newly industrialized countries resumes at its former pace, it would not be too many more years before we find ourselves back in the kind of calculus that was the driving factor behind the problem in the first place. Policy-makers would be wise to focus on real options for addressing those long-run challenges, rather than blame what happened last year entirely on a market aberration.

Edited Apr 3.

Comments

[drilling rigs]

its all about supply and demand.

[oilfield equipment]

its the traders trading it up and down.

[energy stocks]

Good post.Thanks for your information..

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Every evening the national and local news would talk about the price of gas going up. Just hours later you could drive thru town and see the prices go on on the signs in front of the stations. I often wondered if nothing was said how fast would they have gone up. The prices went up so fast and it makes me wonder why when the price of oil started dropping it took so long to show at the pump. And it didn''t drop near as fast as it went up!