Explosive oil prices

Spectacular oil price increases occur on a regular basis; the most recent one is dated July 2008. This paper puts forward the notion that extreme oil price movements of this type can be described as temporary explosive. The paper applies a forward recursive unit root tests and finds evidence of explosive behavior in the following periods: 1990/1991, 2005/2006, and 2007/2008. Currently existing oil price models are not capable of appropriately describing this type of behavior. A thorough discussion of the underlying reasons of these price hikes indicates these oil price episodes — even though extreme — are mainly fundamentally explained. This finding is insufficiently acknowledged in the literature on speculative oil price bubbles. Thus, policy interventions as response to extreme movements of this kind need to be very carefully thought through.