Do booms and busts identify bubbles in energy prices?. (June 2022) - Khan, Khalid
Abstract: The rapid growth of the energy industry and its impact on the global economy have attracted special attention. This study examines the explosiveness of different energy prices from 2000:01 to 2021:09 through Supremum Augmented Dickey-Fuller (SADF) and Generalized Supremum Augmented Dickey-Fuller (GSADF) and finds multiple bubbles. It explores that liquefied natural gas is the most explosive, followed by crude oil prices and coal prices, which are induced by speculation, economic and political events. Natural gas and heating oil prices are less volatile, indicating a single bubble. The most important period that coincides with the energy price bubble is 2007–2008, driven by strong economic growth and the global financial crisis. Similarly, there is a bubble around 2014–2015, which is caused by slow economic growth and an oversupply of oil. The result is consistent with the present value model, establishing that the energy market prices deviate from its fundamentals, and bubbles appear. The results provide early warning information for governments, investors, regulators and economists. Early warning enables stakeholders to mitigate the impact of potential bubbles. Therefore, setting energy prices at the right time provides regulators and policymakers with a preemptive opportunity. Highlights: We examine the explosiveness of different energy prices for bubbles. Find multiple bubbles in energy prices except natural gas heating oil prices. Liquefied natural gas is most volatile followed by oil and coal prices. Driven by strong economic growth and the global financial crisis and oversupply. Consistent with the present value model.