The Role of Time-Varying Price Elasticities in Accounting for Volatility Changes in the Crude Oil Market

Christiane Baumeister & Gert Peersman
There has been a systematic increase in the volatility of the real price of crude oil since 1986, followed by a decline in the volatility of oil production since the early 1990s. We explore reasons for this evolution. We show that a likely explanation of this empirical fact is that both the short-run price elasticities of oil demand and of oil supply have declined considerably since the second half of the 1980s. This implies that...
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