A RATIONALIZATION OF UPS AND DOWNS OF OIL PRICES BY SLUGGISH DEMAND, UNCERTAINTY, AND NONCONCAVITY

摘要

Motivated by the recent switching between low oil prices and high oil prices, this paper provides an economic explanation for oil price volatility. Given the characteristics of the oil marketsluggish, concave, and uncertain demand, as well as noncompetitive playersthe corresponding profit maximizing strategy is to switch between a low price and a high price depending on whether the current demand is below or above a certain threshold. This provides an economic rationalization of oil price volatility (including the low prices) as alternative, or at least as complement, to the typically offered political explanations.