Evaluating a Year of Oil Price Volatility

Over the last 14 months, the average price of oil has fallen by about 60 percent. Oil prices fluctuate for a number of reasons. Rising global economic activity can increase demand and push prices higher, while rising production rates can cause prices to decline. Although simple supply and demand stories are useful in describing oil price movements, the factors driving such changes are often difficult to identify. As a result, large swings in oil prices can come as a surprise, as was the case with the recent decline starting in mid-2014. The recent period of price volatility is not unique. Oil prices also fell by over 50 percent during the Great Recession of 2007-09. Howev-er, the price decline during the Great Recession was due primarily to a pronounced slowdown in global economic activity. Soft global demand during this period also caused prices for commodities other than oil to fall sharply. Prices for some of these commodities, such as copper, fell again in 2014, but nowhere near the extent of oil prices. These move-ments suggest that only a portion of the decline in 2014 is likely due to weaker global economic activity.