Date of Award
Doctor of Philosophy
Dr. Matthew Higgins
Dr. Donald Alexander
Dr. Matthew Ross
Oil prices, refining margin, shale oil production, crude oil benchmarks, asymmetry, oil price volatility
The main objective of my three essays is to study the dynamics and interaction of the price of oil with the downstream sector (refined products), upstream sector (oil production), and across regional markets. I shed light on how the new technological innovation of horizontal drilling and hydraulic fracking that caused the shale oil revolution in the last decade impact the price of oil and impact the petroleum market in the United States.
In the first essay, the dynamic relationship between the monthly price of crude oil and its refined products is modeled. The long-run equilibrium carries valuable information for risk management and forecasting in the oil industry. The benchmark for the crude oil in this study is West Texas Intermediate (WTI), and the refined products are motor gasoline and No. 2 distillate (residential heating oil and diesel fuel). A test is conducted to detect the structural breaks in the long-run equilibrium due to several disruptions in the petroleum market globally. Structural breaks are found in July 2004 and March 2011. The structural break identified in July 2004 may be attributed to the surge in crude oil demand from China, while the other structural break may be explained by the shale oil boom. The test for price leadership in the oil market shows that the price of crude oil is weakly exogenous.
The second essay analyzes the relationship between tight oil production and the price of crude oil in an asymmetric environment in order to investigate the asymmetry in the long and short run. Evidence of asymmetry is found in the relationship between the price of WTI and total expected production from tight oil plays in the long run. This result implies that the United States is the marginal producer. The asymmetric behavior in the long run may be attributed to contracts hedging, geography legal obligation, and productivity of the tight oil plays. The tight oil production by play is disaggregated in order to examine if the asymmetric relationship on the plays level. These plays are Austin Chalk, Bakken, Bone Spring, Eagle Ford, Mississippi, Niobrara, Permian, Wolfcamp, and Woodford. While there is evidence that the asymmetric relationship does exist among the majority of the tight oil, no such evidence for the asymmetric relationship in the short run is found.
The third essay examines the time-varying volatility spillovers across the major crude oil benchmarks: WTI, Brent, and Dubai. Studying the time-varying spillovers is a crucial factor impacting the volatility of the price of oil. The dynamic conditional correlation is employed to investigate the contemporaneous correlation across global oil markets. There is evidence of strong correlation between the benchmarks of WTI and Dubai that may be attributed to integration in the Asian markets. There is a low correlation between WTI and Brent and Brent and Dubai. However, the correlation significantly increases at times of uncertainty in the global economy, especially in 2019. That uncertainty is characterized by the increased trade tensions between the United States and China. The elevated tensions in trade bring uncertainty to the energy sector. I extend the analysis using the connectedness measure to examine the time-varying connectedness for a longer time horizon using the rolling window approach. The findings can be summarized as follows: The benchmark of WTI is net transmitter, Brent is net receiver, and Dubai fluctuates between net receiver and transmitter. The results from the connectedness measures support the dynamic conditional correlation results that the co-movement increases at the time of global shocks.
Alaabodi, Ahmed, "Three Essays in the Dynamics of Oil Prices" (2020). Dissertations. 3664.