Sunday, May 25, 2008

Hamilton: understanding crude oil prices

Jim Hamilton, the renowned econometrician and an expert on oil price prediction came out with this research paper. I recommend all who are interested in the issue should read the whole paper.

He listed three theories for current high oil prices:

1. storage arbitrage (the investory story)
2. index future speculators (the speculation story)
3. the recent feature of scarcity (the limited supply story)

Here are some really nice charts from his research (click to enlarge, hat tip to Jim Hamilton):

The US is less reliant on oil.

How much will be the impact?

Not very promising on the supply side: