Andreas Economou

Thesis title: Investigating the relationship between the real oil price and its drivers across oil market regimes

Primary supervisor: Dr. Paolo Agnolucci
Secondary supervisor: Dr. Tristan Smith

Starting date: 23 September 2013
Projected completion date: 23 September 2016

Andreas’ research investigates the post-financialisation evolution of the oil price in line with the structural changes of the oil market and examines the intertemporal importance of the supply-side of the market, namely the physical availability of crude oil supply confronted by demand growth, into three stages:
1.    Investigating how the dynamics of the relationship between pricing power, upstream costs and investment have shifted in recent years and how these changes factor in the evolution of the oil price cycle; 
2.    Introducing a new measure that jointly identifies and disentangles the supply shocks of crude oil into exogenous and endogenous, by quantifying the positive and negative shocks of oil production caused by events outside the oil market (exogenous) or as a normal functioning of the oil market (endogenous); and 
3.    Quantifying the dynamic effects of supply and demand shocks on the real price of oil under the new specification of the supply determinant and examining their cumulative effects to changes in the real oil price during crisis periods, thus putting into test the conventional approach of the empirical analysis of oil prices using fundamental measures.

Findings from Andrea’s research are relevant for both academia and market participants, as they will expand the current understanding on the importance of the oil price drivers by tackling important aspects such as the security of supply, the volatile nature of geopolitics, the dynamic intertemporal behaviour of OPEC and the oil price evolution across different oil market regimes. In addition, the research attempts to contribute to UCL’s Energy Institute support towards UCL Grand Challenges by shedding light to a topic with significant impact on energy and the economics of sustainable resources, the world economy and the human wellbeing.

Description:

The crude oil price path has evolved vis-à-vis the structural changes of the oil market: (1) from the integrated and regulated market that prevailed until 1971; (2) to the transitional period in the aftermath of the first and second oil shocks between 1973-84; and (3) the commodity and deregulated market, in which prices are determined today, conditional to expectations about supply-demand tightness. On the supply side, expectations are primarily influenced by the physical availability of crude oil supply and the uncertainty pertaining to the future availability of production capacity. On the demand side, expectations shift in accordance with fluctuations in the global business cycle and the uncertainty associated with unanticipated shortfalls of the levels of available supply relative to the anticipated levels of petroleum demand. Taken together, these market imbalances correspond to a rich record of episodes in the form of ‘oil shocks’, around which researchers have built a central framework for analysing the oil prices. Yet, the oil market has changed significantly over the last decades and the set of economic principles used in the empirical analysis of oil prices needs to be revisited. This research introduces a new toolkit that fully embraces the key structural transformations in the fundamental principles of the oil market and their impact on the economics of oil, thus putting into test the conventional approach in the analysis of oil prices using fundamental measures.