Louis Ederington, the Michael F. Price Chair in Finance, Emeritus and George Lynn Cross Research Professor Emeritus, Chitru Fernando, the Rainbolt Chair in Finance and Director of the Division of Finance and the Center for Financial Studies, and Professor Scott Linn, the John and Donnie Brock Chair and Research Director of the Price Energy Institute, all researchers in the Price College Division of Finance, have ‘energized’ their intellectual curiosity and drive to produce unique research focused on energy finance and energy markets. Their efforts have produced, in addition to publications in leading academic journals, six funded research grants from the Energy Information Administration of the U.S. Department of Energy. The topics they have studied for the U.S. DOE span a gamut of issues related to the behavior of energy prices and energy markets. The menu of research studies funded by the U.S. DOE collectively fall under one umbrella: the behavior and determinants of oil, natural gas, gasoline, distillate and other petroleum product prices, including both spot and futures prices.
Price Research Has Energy in Mind
From left are Chitru Fernando, Louis Ederington and Scott Linn
Of special note is their work focused on frictions that exist in energy markets that can impede the adjustment of spot and futures prices (PDF 1.1MB) to information, such as storage constraints. The study presents new evidence that such frictions can and do influence price adjustments. A second study asked the important question, “Where is new information first incorporated into oil prices – in the spot market for oil or in the futures market?” The authors find unanimous confirmation that this happens first in the futures market, confirming the importance of such markets in the overall allocation of resources. How energy market participants form expectations about supply and demand conditions, and adjust prices to new unexpected information, formed the basis for another DOE study. The authors explored in detail the short-run reactions of market futures prices for oil, natural gas and petroleum products, to unexpected fundamental information on product held in storage, macroeconomic announcements including monetary policy announcements, and movements into and out of the U.S. Strategic Petroleum Reserve. One final mention, the authors study the crucial question of how petroleum product prices respond to changes in oil prices and whether changes in product prices such as gasoline prices, influence oil prices or the reverse. The overwhelming evidence is that oil price shocks translate into petroleum product price shocks, but that there have been episodes in which product prices (such as gasoline prices) respond differently to increases in oil prices as compared to the response to oil price decreases.
As an example of the impact of their research, the U.S. Department of Energy, commenting regarding one contract awarded to these faculty professors, explained, “not only have these researchers done extensive research in the area of the financial-physical interactions in the U.S. crude oil market and have published numerous academic papers on this topic, but also the individual team members have extensive knowledge, skill and understanding of both the U.S. crude oil market and the petroleum product market, which makes the research team at OU uniquely qualified for this research.”
The authors are in discussion with the U.S. DOE and researchers at the EIA about a future study focused on the quickly evolving market for liquefied natural gas and the formation of LNG prices.