The Complexity of Energy Price Fluctuations

As a topic of widespread concern in the international community, the issue of energy prices has “increased in popularity” in recent years due to its prominent strategic position and the impact of the development of alternative renewable resources. For a long time, the overall trend of energy price fluctuations has been based on the actual situation of supply and demand. However, in 21st century, under the influence of the financialization trend of various energy products, energy price is linked to more factors due to speculation and other international financial operations. Various liquidity changes, such as dollar exchange rate fluctuations and energy futures price changes, have different degrees of impact on energy prices. In short, energy prices can not only reflect the supply and demand mechanism but also represent the attributes of financial derivatives.

In the context of various volatile changes in the international situation in recent years, such as the impact of public health emergencies, the intensification of regional conflicts, and trade frictions, studies regarding the complexity of energy price fluctuations focus on analyzing the special fluctuation characteristics of energy prices in different historical ranges. Since the financial crisis in 2008, energy prices have been in a new historical price range, and the factors that dominate energy price fluctuations have undergone earth-shaking changes along with economic and social development. The force of financial markets often plays a relatively active role, meaning researchers who study of the law of energy price fluctuations face a new-era task. The outbreak of the COVID-19 pandemic in late 2019 has profoundly affected people worldwide in terms of transportation and daily livelihood. The price changes in special energy categories represented by natural gas and oil have their own characteristics, forming a special price influence mechanism. Geopolitical conflicts such as the China–US trade friction, the Russia–Ukraine conflict, the Iranian nuclear issue, and tension and conflict on the Arabian Peninsula have led to sudden changes in regional energy supply. The innovative development of alternative renewable energy and the comprehensive construction of international dialogue in the tense stage have played an increasingly important role in the impact of energy prices. Based on the research needs of various direct and indirect factors in energy price fluctuations and the inevitable requirements of multi-transmission research on the impact mechanism of energy price fluctuations, in this paper, we selected eight papers in the hope of providing a relatively comprehensive analytical angle according to the multiple dimensions pointed out above.

Brief summaries of the selected papers are provided here.

José Noguera-Santaella [1] conducted an intervention time series analysis to explore the relationship between 32 armed and civil conflict (considered from the American Civil War to the Arab Spring) episodes and real oil prices, using monthly data since 1859. They concluded that geopolitical events positively affected oil prices before the year 2000, but have had little impact, if any at all, afterwards.

Liu Y. et al. [2] investigated the oil price reactions to different OPEC announcements during distinct periods. They found that the reactions to the announcements of a production increase showed an inverted “U” shape, whereas there was a linear reaction to cut decisions. In addition, when an unchanged decision was formulated by the OPEC, the oil prices had no obvious change over the sample period. According to the diverse mechanisms during pre- and post-crisis periods, the announcement of an increase in oil production drove prices up during pre-crisis periods, whereas it caused oil prices to drop and then rise again dramatically during post-crisis periods. When a cut decision was announced, the reaction seemed to be more sensitive to oil price during pre-crisis periods than it was in the post-crisis periods. Additionally, the oil price reactions were moderate when the production quotas remain unchanged.

Peng Hou et al. [3] comprehensively examined the overall positive impact of energy prices on energy efficiency and the heterogeneity of related impacts in individual regions using linear and nonlinear benefit analysis methods based on Chinese provincial data. The difference in the impact capacity between the east and the west was demonstrated by a domain-based study. At the same time, the authors concluded that the impact of energy price on energy efficiency is significantly different due to the different thresholds of energy price distortion, environmental regulation intensity, and economic development level. Therefore, the market-oriented reform of energy price in China must be promoted and designed according to the actual situation.

Peng, J. et al. [4] focused on the impact mechanism of oil price fluctuations. Firstly, the trends and causes of strengthening crude oil price fluctuations were analyzed from the perspective of a fluctuation source structure. Secondly, the nonlinearity auto regressive distribute lag (NARDL) model was adopted to capture the characteristics of the influencing mechanism of crude oil price in different locations and different fluctuation trends. Thirdly, an event shock model with dummy variables was constructed, and it was determined that there is a strong correlation between event shocks and event types in the evolution of crude oil price fluctuation. The characteristics and mechanisms of different impacts of the subprime mortgage crisis, the geopolitical crisis, and major public health emergencies on oil price fluctuations were discussed, and the differences were fully demonstrated.

In recent years, scholars have tried to investigate the logical connection between COVID-19 cases in different countries and energy price fluctuations. H Nyga-Ukaszewska and K Aruga assessed how the pandemic has influenced oil and gas prices based on energy market reactions in the United States and Japan [5]. They concluded that in different energy markets in different countries, price fluctuations have different effects due to possible seasonal changes in market expectations and differences in the severity of the epidemic and epidemic prevention policies. Furthermore, since the United States plays the dual role of an energy supply and demand country, while Japan is simply on the demand side of energy, their differences are based on the diverse roles of countries in the energy market.

Feng, Y., Xu, D., Failler, P. et al. [6] adopted the TVP-FAVAR model to capture the time-varying impact of economic policy uncertainty (EPU) on crude oil price fluctuation. They not only discovered that the price volatility of crude oil is directly relevant to major events, but they also found heterogeneity in the impacts of EPU in net-oil exporters and net-oil importers on crude oil price volatility in terms of fluctuation range, fluctuation intensity, and stage. Similarly, Ars, A., and B. Xle [7] employed Markov-Switching GARCH models to investigate the volatility patterns of oil and natural gas prices in the United States and how they have changed due to economic policy uncertainty in the pre- and post-shale era. They found heterogeneous volatility regimes, i.e., high vs. low volatility, for both oil and natural gas. The natural gas market experienced significant price changes during the two sub-periods, while the volatility persistence for oil price is similar. Using quantile regressions, they also found that economic policy uncertainty increased the probability of agitated market conditions of both markets, although this effect has weakened during the post-shale period.

Ding Y. et al. [8] adopted a quantile-on-quantile regression method to explore the overall impact of three types of uncertainties (economic policy uncertainty, geopolitical risk uncertainty, and climate policy uncertainty) on crude oil prices. They discovered significant differences in the overall impact of the three types of uncertainties on crude oil prices, and this heterogeneity is reflected in quantiles of the peak impact intensity, the impact direction, and the fluctuation change. They also found that economic policy uncertainty has a more significant impact on crude oil prices in the long term; climate policy uncertainty has a significant impact on crude oil prices in the medium term; geopolitical risk uncertainty has a significant impact on crude oil prices in the short, medium, and long term.

Based on the above literature review, in the future, research regarding the complexity of crude oil price fluctuations can be carried out from the following three aspects.

The first concerns price fluctuations related to the dual attributes of crude oil. The commodity and financial attributes of crude oil make the corresponding pricing mechanisms vary significantly. The commodity attribute of crude oil depends on the cost pricing mechanism, while the financial attribute of crude oil relies on the capitalization pricing mechanism, i.e., on the expected future earnings. Therefore, it would be worthwhile to study price fluctuations due to the dual attributes of crude oil further.

Second, the external impact factors of crude oil price fluctuations deserve deep exploration. In recent years, the impact factors have become more complex. For example, with the increasing uncertainty of different external shocks such as the development of digital energy technologies, the conflict escalation between Russia and Ukraine, and the constant mutation of the COVID virus, the impact of external shocks on oil price has become more complex.

Third, the chain and network characteristics of the crude oil price chain need further study. With the development of trade and technology, the chain of crude oil price fluctuation among different industries is longer, and the network of crude oil price fluctuation is closer. However, the location and embedding degree of different economic entities in the chain and the network have a significant impact on crude oil price fluctuation. The crude oil price fluctuation makes the centrality of different economic entities change, and the behavior and decision making of entities will affect the fluctuation of crude oil price, causing multiple responses through the chain and network.