SPE 147227

Is There Evidence of Super Cycles in Oil Prices?

Abdel M. Zellou, John T. Cuddington, Colorado School of Mines

Copyright 2011, Society of Petroleum Engineers

This paper was prepared for presentation at the SPE Annual Technical Conference and Exhibition held in Denver, Colorado, USA, 30 October2 November 2011.

This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contents of the paper have not been
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Abstract
A number of authors have claimed that the strong upward movement in commodity prices since 2000 represents the early
phase of a super cycle (SC) driven by industrialization and urbanization in the BRIC countries (Brazil, Russia, India and
China), especially China. Moreover, Heap (2005), Cuddington and Jerrett (2008), Jerrett and Cuddington (2008) and others
have found evidence of SC (20-70 years in length from peak to peak or trough to trough) in metals prices associated with
earlier industrialization episodes in Europe, the U.S., and Japan. These cycles are much longer in duration than the typical
business cycle, defined as 2-8 years. The purpose of this paper is to address the question: is there evidence of super cycles in
crude oil prices?
Our approach to the empirical question posed in the title applies the asymmetric Christiano-Fitzgerald band-pass filter to
real crude oil prices from 1861 to 2010 in order to extract a cyclical component with a period between 20 and 70 years.
Our results suggest the existence of SC in energy commodities with a strong correlation between the SC of coal and oil
prices after World War II. The SC analysis is carried out using both nominal and real prices in order to determine whether
these SCs are an artifact of the price deflator used. There appear to be three obvious SCs in oil prices, the first one between
1861 and 1884, and the last two from 1966 to date. The period 1884-1966 is harder to interpret and has been aggregated into
one SC. These results are consistent with the recent work performed by Dvir and Rogoff (2009) on the changes in real oil
price persistence and volatility.
There has been renewed interest in commodity prices over the past decade. Evidence on the presence of SCs in energy
commodities is valuable for national and state governments, financial institutions and oil and gas companies. At the
government level, countries that rely on the import or export of energy commodities need to take SCs into account when
formulating resource extraction as well as revenue and expenditure policies. At the firm level, the exploration-development-
production-distribution-research-and-development cycle of energy projects often spans several decades, as do SCs. Hence
the investment decisions made by oil and gas companies should take into account the presence of these SCs.

Introduction

Background.
Since the beginning of the year, there has been turmoil in North Africa and the Middle-East where regimes are being
challenged (or have been overthrown) in Tunisia, Egypt, Libya and elsewhere. These revolutions have a direct impact on the
price of oil for two main reasons. First, there are the structural effects of a reduction in global oil supplies. Second, these
political events alter market expectations regarding future supplies, generating much uncertainty and hence higher risk
premiums in oil markets. Tunisia and Egypt are not significant exporters of crude oil but Libyas total production represents
2.1 % of the total world oil production (EIA (2011), Hamilton (2011)). It is also the 12th highest exporter of oil, with 1.525
million barrels per day in 2009. The impact of these uprisings on oil prices is indisputable. The price of oil (be it West
Texas Intermediate (WTI), Brent, or other benchmark) is reaching levels not seen since September 2008, right after the
historical peak in nominal terms of $147/barrel for the WTI reached on July 11, 2008. The price rise was not limited to this
particular energy commodity. We witnessed a general rise in the price of commodities across the board, from metals to
grains, softs and livestock. These price ebbs and flows can be observed at different frequencies -- daily, weekly, monthly,
yearly and longer timeframes or cycles. The cycles we will focus on in this paper are so-called super cycles (SCs), which are
defined in the literature (Heap 2005; Jerrett and Cuddington 2008; Jerrett 2010; Cuddington and Jerrett 2008) as having a
period between 20 and 70 years. The dating of these super cycles is discussed below under the stylized facts on SC. The
primary focus of this paper is the analysis of oil prices.
2 SPE 147227

Problem statement.
There is skepticism about the presence of SCs in crude oil price, perhaps due in part to the non-competitive structure of the
oil market. Indeed there was oligopoly at the end of the nineteenth century during the Rockefeller era, U.S. price controls
from the early 1930s through the 1960s, and the OPEC cartel, which was formed in the early 1960s but became much more
assertive in the 1970s. Two important questions have been raised by energy experts in academic and the finance community,
as well as by policy makers. First, is the rise in energy prices over the last decade sustainable or not? Second, are we in the
expansionary phase of a SC in energy commodities (if SCs even exist), as some have claimed is the case for metals
(Cuddington and Jerrett (2008), Jerrett and Cuddington (2008), IMF (2010))? The purpose of this paper is to examine the
statistical evidence in favor of super cycles in energy commodities, with an emphasis on crude oil.

Motivation and contribution of this paper.

Kamel Bennaceur, the chief economist at Schlumberger, one of the world leaders in services in the oil and gas sector, stated
at the World Energy Congress 2010 1 in Montreal that: There is high volatility in the energy sector in terms of prices and
investment. Oil and gas companies and service companies work on long-term investment and invest significant amounts of
resources on technology and developing people. Energy investments are for the long term: 30 to 50 years. We need long-term
commitments from both the energy suppliers and the demand sector. We need to project ourselves in 20 years. This
statement focuses mainly on the supply side and the timeframe is in the SC range.
There has been renewed interest in commodity prices over the past decade. Evidence demonstrating the presence of
super cycles in energy commodities is valuable for national and state governments, financial institutions, and oil and gas
companies. At the level of government, countries that rely on the import or export of energy commodities need to take into
account the presence of super cycles and energy commodity in order to define their revenue and spending policies. At the
firm level, the exploration-development-production-distribution-research-and-development cycle of energy projects often
spans several decades, as do super cycles. Hence, the investment decisions made by these oil and gas companies should take
into account the possible presence of these super cycles.
The primary contribution of this paper is to examine the statistical evidence regarding presence or absence of SCs and
very long-term trends in energy commodities (Figure 1 and Figure 2). The economic explanation of the underlying causes
of SCs has not yet been formally modeled, but any complete explanation would clearly focus on the structural transformation
that typically accompanies rising per capita incomes. Simon Kuznets (1973) describes how the initially high share of
agriculture in total employment gradually declines as the manufacturing sector rises with the industrialization and
urbanization that accompanies economic development. As incomes rise further, the service sector gains in relative
importance, and is ultimately associated with declines in manufacturing and further declines in agriculture. In the case of the
US, for example, the employment share in the manufacturing sector went from a few percent in 1800 to almost 40% in 1950
before dropping to around 25% at the beginning of this century. During that time period, the employment share in the
agricultural sector decreased sharply from 90% to single digits while the service sector increased from about 10% to 70%.
Presumably, these shifts in employment shares were mirrored by similar movements in expenditure shares (on the demand
side). Given that the manufacturing sector is presumably the most mineral and energy intensive of the three broad sectors
(agriculture, manufacturing, and services), one would expect a prolonged surge in mineral and energy demand during the
industrialization and urbanization process in developing nations.
Whether the sustained strength in mineral demand during industrialization leads to a prolonged period of higher mineral
prices will depend on the supply response, which in turn may be importantly affected by market structure. On the supply
side, the SC hypothesis is predicated on the belief that short-run metal and energy supply curves are very price inelastic due
to capacity constraints (which could be related to constraints in production, refining or transportation, via pipeline or tankers)
and the long gestation periods for capacity-expanding investment projects. In the long run, however, energy supply curves
are much more price elastic. The key factor when modeling market dynamics is the speed of adjustment, i.e. how long does
it take to go from the short run (where the supply curve is near vertical) to the long run (where it is more or less horizontal,
according to most mineral and energy economists)?

1
This conference gathers the leading scientists, regulators and business representatives from the energy sector worldwide.
The interview can be found at http://www.energy2point0.com/2010/09/15/kamel-bennaceur-chief-economist-schlumbergerw/
SPE 147227 3

Figure 1: Super cycles for the real oil price and metals prices. The shading corresponds to the super cycles in real oil prices with
the corresponding dates (from trough to trough). Four different SCs are identified. There appear to be three obvious SCs in oil
prices, the first one between 1861 and 1884, and the last two between 1966 to date. The period 1884-1966 is harder to interpret and
has been aggregated into one SC. The units on the vertical axis represent percentage deviations from trend. For example, +0.40
indicates 40% above the long-term trend (shown in Figure 2 below).

Figure 2: Real oil prices, along with their trend and super-cycle components. The upward trend in real oil prices started during
World War II. In real terms, the trend in oil prices has increased by roughly 125% over the past 65 years, representing an average
annual increase of about 2%. Note that the SC component was only 20% above the trend in 2010, whereas the earlier SC peak in
1981 was almost 100% above the long-term trend. This suggests the current SC is far from over. The shading corresponds to the
different super cycles in real oil prices as defined in Figure 1 above.

Methodology, Analytical Framework, and Applications.

Following the methodology that Cuddington and Jerrett (2008) used to study metal prices, we apply the asymmetric
Christiano-Fitzgerald (ACF) band-pass filter to real crude oil prices from 1861 to 2010 to extract a cyclical component with a
period between 20 and 70 years. Cyclical components with periodicity greater than 70 years are then defined as the (very)
long-term trend. Short and intermediate-term cyclical components (<20 years) were also extracted, but are not of concern to
us here. After extracting the super cycle component in crude oil prices, we ask: are they similar in timing to those found by
Cuddington and Jerrett (2008) for metal prices? We also compare our oil price super cycles to the oil price epochs
discussed in Dvir and Rogoff (2009).

A Brief History of Oil.

Hamilton (2011) and Yergin (1991) provide a very comprehensive description of the history of the oil market. The brief
chronology provided in Appendix A relies mainly on these two sources.
4 SPE 147227

Organization.
This introductory section provides a problem statement, the motivation and contribution of the study, the methodology,
analytical framework and applications, and a brief history of oil. The second section covers the stylized facts on the various
cyclical components determined by the ACF band pass filter. The third section lists the data and sources used for this study.
Section 4 and 5 provide an analysis of trends and super cycles in nominal and real oil prices. These results are interpreted by
referring important facts about the economic history of the oil market and industrialization episodes in different regions of the
world. Section 6 relates our analysis of oil price super cycles to the analysis of oil epochs in a recent paper by Dvir and
Rogoff (2009). Section 7 concludes the paper.

Stylized Facts on the Various Cyclical Components of the asymmetric Christiano-Fitzgerald (ACF) Band
Pass Filter

Four Different Cyclical Components in Oil Prices obtained from the asymmetric Christiano-Fitzgerald Band-Pass
Filter (ACF BPF).
Trends and cycles have been widely studied in various subfields in economics. Seasonal fluctuations, business cycles (6 to
32 quarters), Kitchin inventory cycles (3-5 years), Juglar fixed investment cycles (7-11 years), Kuznets cycles applied to real
estate and infrastructural investment (15 to 25 years), Bronson asset allocation cycles (around 30 years) and Kondratiev
waves or grand super cycles (45 to 60 years) are among those that have received attention.
Cuddington and Jerrett (2008) were the first to apply the ACF BPF to commodities, specifically to metals prices. We are
applying the same technique to oil prices. Using the ACF filter, we extract four mutually exclusive and completely
exhaustive cycles, although we focus only on the latter two here: (i) the business cycle component (2-8 years), (ii) the
intermediate cycle (8-20 years), (iii) the super cycle component (20-70 years) and (iv) the long-term trend (with cyclical
components >70 years). Table 1 displays these four different components (plus the noise and seasonal components, which
are not measurable with annual frequency data). The components of any series decomposed with the ACF in this manner
will necessarily sum to the actual series. That is, Actual = SN + BC + IC + SC + T

Cycle Annual Quarterly Monthly

Seasonalityand
Noise SN NA 26 218
BusinessCycle BC 28 632 1896
IntermediaryCycle IC 820 3280 96240
SuperCycle SC 2070 80280 240840
Trend T 70 280 840
Actual 2 2 2
Table 1: Period windows for the various cyclical components when using annual, quarterly and monthly frequency data.

How the asymmetric Christiano-Fitzgerald Band Pass Filter allows us to extract these four components.
Jerrett (2010) and Cuddington and Jerrett (2008) provide a good description of the asymmetric Christiano-Fitzgerald band
pass filter methodology used in this paper to extract the super cycles in oil prices. 2 The use of band pass filters in the field of
economics has been promoted by Baxter and King (1999) and Christiano and Fitzgerald (2003). 3 The band-pass or
frequency filter extracts cyclical components of a given time series that lie within a specified window or range of
frequencies or (conversely) periods. The user specifies the lower and upper bounds of the periods of the cycles of interest,
e.g. cyclical components with periods within the 20-70 year interval. Thinking of frequency filters in terms of time rather
than frequency domain, Baxter and King explain that band-pass filters are sophisticated two-sided moving averages. They
differ from the standard moving averages in two ways. First the (ideal) weights of various leads and lags are chosen to filter
out cyclical components that do not fall within the chosen window. By choosing symmetric weights on each lead and
corresponding lag, phase shift in the extracted component is prevented. Second, there are asymmetric as well as symmetric
filters. Although asymmetric filters invariably introduce some phase shift into the filtered series, they have the advantage of

2
See also EViews Help and Christiano and Fitzgerald (2003). EViews is an econometrics software package.
3
Similar band-pass filter techniques are used in different fields, e.g. hard sciences such as electronics and physics. The first
author has encountered it, for example, in spectral imaging and spectral decomposition in geophysics in the oil and gas
industry to extract 3D images of reservoirs in the presence of oil, gas or water.
SPE 147227 5

allowing computation of the filtered series over the entire data span rather than being limited to a trimmed data span caused
by the number of leads and lags used in calculated the filtered series. This is obviously advantageous if one is particularly
interested in studying cyclical behavior near the end (or beginning) of the available data span.

Data and Sources

The data sources for this paper are summarized in Table 2. The oil price series is from the BP Statistical Review. It spans
over 1861-2010 in annual frequency. To get this long span series, BP splices three different oil price series. From 1861 to
1944, the US average oil price is used. From 1945 to 1985, the oil price from the Arabian light posted at Ras Tanura is used.
Finally from 1986 to 2010, the Brent spot price is used. The Arabian light series begins in 1945, while the Brent series
begins in 1986. An Oregon State University website publishes longest span U.S. Consumer Price (CPI) Index series starting
in 1774 on an annual basis 4 .

Description Units Frequency Range Source

BP statistics:
http://www.bp.com/sectiongenericarticle.do?category
Oil price $/bbl annual 1861-2010 Id=9023773&contentId=7044469
Metals varies with
prices annual the metal Alan Heap (Citi Group) Database
PPIACO annual 1800-2010 Prof. Carol Dahl up to 1913 and then FRED database
FRED database and
oregonstate.edu/cla/polisci/download-conversion-
CPI annual 1774-2010 factors
GDP
deflator annual 1870-2010 www.historicalstatistics.org
EIA
Oil http://www.eia.gov/dnav/pet/pet_stoc_wstk_dcu_nus
Inventories annual 1913-2009 _a.htm

Table 2: List of data and sources used for this paper.

Analysis of Nominal and Real Oil Prices

Super Cycle in Nominal and Real Oil Prices.

One might wonder if the SCs displayed in Figure 1 depend on the price deflators used, i.e. Producer Price Index for All
Commodities (PPIACO, hereafter PPI) vs. the Consumer Price Index (CPI). Figure 3 displays the SCs for real price of oil
calculated using the alternative deflators. The base year used in this study to compute the real prices is 2005, but this has no
impact on the characterization of cycles. Using the PPI or CPI as a deflator gives very similar results. The difference occurs
mainly during the price control period in the 1930s. There is strong statistical evidence of three SCs in oil prices (SC 1, SC 3
and SC 4 as defined in Figure 1), the first one between 1861 and 1884, and the last two from 1966 to date. The period 1884-
1966 is harder to interpret and has been aggregated into one SC for three main reasons: 1. the 1884-1966 period include the
price control era, 2. there is less of a match in the SCs depending on the deflator used, and 3. there is a lower variance in the
price of oil during that period (Figure 4).
Given the market structure in the global oil market, one may wonder if the presence of SCs is not just an artifact of the
price deflator in the denominator of the real oil price series, rather than movements in the nominal price of oil itself.
Figure 1Figure 3 shows the SCs for both nominal and real oil prices, as well as the SC in the CPI used as deflator. Note
that the SCs for the nominal and real price of oil are very similar. Thus, we can conclude that the SCs in real oil price are not
due to movements in the deflator. Table 3 shows the correlation coefficient matrix between the SCs of the real price of oil,

4
A full description of the methodology used to compute the CPI and the different conversion factors are provided in an Excel
spreadsheet, downloadable from oregonstate.edu/cla/polisci/download-conversion-factors
6 SPE 147227

the nominal price of oil, and the PPI. We can note that the SC for the nominal and real price of oil have a very high
correlation of 0.95, while the correlation coefficient of the nominal price of oil and the price deflator is 0.79. Appendix B
provides an analysis of the comparison of the WTI and Brent nominal prices, the unit root tests (which inform the choice of
parameters in the ACF filters detrending method), and structural break tests at the splicing dates of the BP price series.

Figure 3: Super cycles in nominal and real price of oil using CPI and PPI (base year 2005) as price deflators. There is little difference
between the two series, except during the price control period in the 1930s. The shading corresponds to the expansionary phase of
the super cycles in real oil prices using the CPI as deflator. The shading corresponds to the different super cycles in real oil prices
as defined in Figure 1.

Correlation Real Nominal

Nominal 0.95 1.00
Deflator
(PPI) 0.57 0.80

5
Table 3: Super cycles in nominal and real oil prices: correlation coefficient over 1861-2010.

Volatility in the Real Price of Oil.

The work of Dvir and Rogoff, which conjectures that tighter inventories during market upswings should be associated with
higher price volatility, led us to examine how price volatility might change over the super cycle. In particular, are SC
upswings associated with tighter inventories and hence greater price volatility? To investigate, we calculated the 15-year
centered moving variance for real price of oil shown in Figure 4, which also superimposes the SC for oil.
There are periods of high and low price volatility: a period of high volatility up to the end of the 19th century followed by
a period of low volatility up to the early 1950s, finally followed by another period of high volatility. Moreover, the super
cycles have a period averaging about 30 years, if SC 2 is excluded (Table 4). Figure 4 shows these results. The volatility
cycles correspond to half of the SC periods, hence an average of about 30 years for oil.

Trend and Super Cycles in Oil

Super Cycle and Business Cycle in Real Oil Prices.

Figure 5 displays the supercycle component and the trend in real oil prices. In this figure the super cycle in oil price is
overlaid with the super cycle in six metals price, as defined using principal component analysis for the six LME metals in
(Cuddington and Jerrett 2008). There appears to be a high correlation between the oil and metals super cycles.

5
All the correlation coefficients in this table and in the following correlation coefficient table are statistically significant
unless marked otherwise.
SPE 147227 7

Trough Expansion SCfor

year Phase SC metals
SC1:~1850
~1850(?) ~18501869 1884
1884 18841896
SC2:1884
1906 19061919 1966 ~19001937
1932 19321944 19371965
SC3:1966
1966 19661981 1996 19651999
1996 1996? SC4:1996? 1999?
Table 4: Period in oil price super cycles over the period 1861-2010. This table displays the expansionary phase (from trough to peak)
of the SCs in oil prices, as well as the entire SCs (from trough to trough). For comparison purposes, the SCs for metals are given.

Figure 4: Fifteen-year centered moving variance of oil prices and the super cycle component for oil. The shading corresponds to the
different super cycles in real oil prices as defined in Figure 1.

Figure 5: Super cycle and trend in real oil prices using the CPI (base year 2005) as price deflator. In the lower panel, the super cycle
in oil price is overlaid with the super cycle in metal prices, defined by the principal component of the SCs in the six LME metals in
Cuddington and Jerrett (2008). There is a correlation of 0.73 between the oil and the metals super cycles. The right axis is for the
trend and the real price of oil, while the left axis is for the SCs. The shading corresponds to the different super cycles in real oil
prices as defined in Figure 1.
8 SPE 147227

Comparison of the Super Cycle in the Nominal and Real Price of Oil.
We investigated the correlation between the SC in the nominal and real price of oil and found a correlation coefficient of 0.64
over the entire time span and 0.71 for the period after World War II (Figure 3).

Interpretation of the Trends and Super Cycles in Oil.

Figure 2 shows a pronounced upward trend in real oil prices since World War II. In real terms, the trend component in oil
prices more than doubled with an increase of 126% over the past 65 years, representing an average annual increase of about
2%. Moreover the SC component was about 20% above the trend in 2010, knowing that the highest upswing was witnessed
in 1981 with a magnitude of almost 100%. The trend component presumably reflects the opposing effects of increasing
scarcity due to depletion and ongoing technological change to alleviate scarcity. An increase in scarcity in oil causes an
increase in the price of oil in real term as described by Hotelling (1931). An improvement in technology reduces cost and
increases the reserves that can be developed from a given resource. Between 1860 and World War II, we witness a
downward trend, which may be interpreted as oil being more abundant with the discovery of major oil fields and
technological change with the first logging tool being used in the 1920s for instance. On the other hand, the upward trend
after World War II suggests that increasing scarcity was not completely offset by technological advance.
The expansionary phase of the SCs can be related to historical episodes of industrialization. Cuddington and Jerrett
(2008) suggest that the SCs in metals prices that they identify are associated with the industrialization in the US in the late
19th, early 20th century, the reconstruction of Europe after World War II, the Japanese renaissance in the 1960s and finally the
industrialization in the BRIC countries, mainly driven by China in the 1990s. These SCs in metals match the ones of oil as
you can see on Figure 5.

Discussion

How are the Results of Super Cycles Consistent with Dvir and Rogoff (DR hereafter)?
DR perform a statistical analysis of the change in the persistence and the change in volatility of the price of oil, provide an
extended commodity storage model and give a historical explanation of these transition points related to industrialization and
a change in market structure.
DR analyze the same long-span real oil price series considered in this paper. At the outset, they note that Studies of the
time series properties of real oil prices have taken one of the following approaches in the face of these clear non-linearities in
the series: either analyzing the series as a whole, or, much more commonly, treating the series as composed of separate series
pasted together, and proceeding to analyze them in isolation. They pursue the second approach, using a number of
econometric techniques to test for possible structural breaks at unknown dates. Their tests allow for changes in persistence
and volatility of the oil price series: In what follows we will treat both the assumption of a pure I(0) process and the
assumption of a pure I(1) process as our null hypotheses, and test whether the series exhibits a shift from I(0) to I(1) (or vice
versa) against both of these assumptions. [] This allows us to test for structural change without taking an a-priori stand
regarding the null hypothesis.
In contrast, our approach of looking for very-long cycles requires that we consider the price series as a whole. One
cannot detect 20-70 year cycles, in subsample of the data span that are of relatively short duration. The BPF analysis requires
the specification of the nature of the underlying trend: mean stationarity, trend stationarity or a unit root process with drift.
Based on our unit root test results, we adopted the latter specification. Clearly, this is less general than the DR approach of
allowing for shifts in the persistence of the oil price series from I(0) to I(1), but unavoidable if one wants to employ existing
BPF methodology.
Dvir and Rogoff detect three epochs in oil prices characterized by changes in persistence and volatility
Epoch I from 1861-1877 has high prices and high volatility
Epoch II from 1878-1972 is a period of low prices with low (1878-1933) and then even lower (1934-72) volatility
Epoch III from 1973-2009 is again a period of high prices and high volatility.
See Table 5, which reports their summary statistics by epoch.

Figure 6 displays the three epochs from DR with the shading overlaid on our oil price SCs. For consistency, we use the
CPI as the deflator, as in DR. There is a similarity between the epochs defined by DR and the SCs. The dating of their
epochs matches up well with the neutral zero value for the super cycle component. We define our super cycle expansions
going from trough to peak, whereas the DR epochs in effect go from our SC midpoint to midpoint. Interestingly, the BPF
analysis identifies the start of a new SC emerging from a trough around 1996.
SPE 147227 9

Table 5: Sample statistics of oil price series taken from Table 1 in Dvir and Rogoff.

Why are these results consistent with Dvir and Rogoff?

DR emphasize that their epochs reflect a confluence of strong demand growth (associated with industrialization in major
regions of the world) and important changes in market structure on the supply side. They stress the pivotal role of supply
restrictions in leading to the high volatility and high prices in Epoch I and Epoch III when industrialization was occurring in
the US and South East Asia, respectively. During Epoch I, the restriction of supply was initiated by Rockefeller with the
quasi monopoly on oil refining and the oligopoly of the railroad companies in the transportation of oil. In Epoch III, the
restriction of supply was due to the rising market power of OPEC.
The amplitude of our first and last two SCs is much more pronounced than in the middle where the SCs are affected by
price regulation. In that respect, we do see similarities if we take into account the amplitude of these SC and superimpose it
on the three epochs defined by DR. DR used a different statistical technique and we arrive at similar conclusion in terms of
the price behavior of oil in the long-term.

Figure 6: Super cycles on real prices of oil (2005) (CPI deflated) with the epochs defined by Dvir and Rogoff (shaded in this graph).

Conclusions and Extensions

Our band-pass filter analysis and reflections on the findings yields the following conclusions:

There do indeed appear to be super cycles in crude oil prices, i.e., cycles with a period in the 20-70 year range.
We have identified four super cycles in oil price over the 1861-2010 period. There appears to be three obvious
SCs in oil prices, the first one between 1861 and 1884, and the last two from 1966 to date. The period 1884-
1966 is harder to interpret and has been aggregated into one SC.
There is an upward trend in the real price of oil that started during World War II. It has averaged 2% per year
over the past 65 years, but this trend has been obscured by super cycles as well as shorter-term business cycle
fluctuations.
We are currently in an expansionary phase of the super cycle that started from a trough in 1996.
The timing of the last two crude oil price super cycles roughly corresponds to the timing of SCs in metals
prices, which in turn matches the timing of the industrialization and urbanization phase of economic
development in US, then Europe and finally Asia.

We are in the process of extending our analysis to coal prices; there appears to be a strong correlation between the SCs in
oil and coal prices, in spite of very different market structures for the two energy products. We are also developing a simple
theoretical model capable of generating super cycle behavior.
10 SPE 147227

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Hamilton, James. 2011. Lybia, Oil Prices and the Economic Outlook 2011 [cited 23 February 2011]. Available from
http://www.econbrowser.com/archives/2011/02/libya_oil_price.html.
Hamilton, James D. 2011. Historical Oil Shocks. National Bureau of Economic Research Working Paper Series No. 16790.
Harvey, David I., Stephen J. Leybourne, and A. M. Robert Taylor. 2006. Modified tests for a change in persistence. Journal
of Econometrics 134 (2):441-469.
Heap, Alan. 2005. China - The Engine of a Commodities Super Cycle. edited by E. R. Global. New York City: Citigroup
Smith Barney.
IMF, International Monetary Fund. 2010. World Economic Outlook October 2010.
Jerrett, Daniel. 2010. Trends and Cycles in Metals Prices, Economics and Business, PhD dissertation (Mineral and Energy
Economics), Colorado School of Mines, Golden.
Jerrett, Daniel, and John T. Cuddington. 2008. Broadening the Statistical Search for Metal Price Super Cycles to Steel and
Related Metals. Resources Policy 33 (4):188-195.
Kuznets, Simon. 1973. Modern Economic Growth: Findings and Reflections. American Economic Review 63 (3):247-258.
Perron, Pierre. 1989. The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Econometrica 57 (6):1361-1401.
Yergin, Daniel. 1991. The Prize: The Epic Quest for Oil, Money, and Power. Edited by N. Y. S. a. Schuster.
Zivot, Eric, and Donald W. K. Andrews. 1992. Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root
Hypothesis. Journal of Business & Economic Statistics 10 (3):251-270.
SPE 147227 11

APPENDIX A A brief history of oil

Hamilton (2011) and Yergin (1991) provide a very detailed description of the history of the price of oil. The brief chronology
provided here relies mainly on these two sources.
1859-1899: Let there be light
o 1862-1864: the first oil shock with the rapid drop in oil prices
o 1865-1899: evolution of the industry: still drop in price
Hamilton does not see agree with the interpretation of Dvir and Rogoff on the similarities in the
behavior of oil prices, in terms of restriction of access to the excess oil supply, between the 19th
century and the last quarter of the 20th century. Indeed, Hamilton argues that oil did not have as
much economic importance at the end of the 19th century compared to the end of the 20th century.
The share of oil in GNP is much smaller in the 19th century compared to the last quarter of the 20th
(0.4% of 1900 GNP compared to 4.8% of 2008 GDP).
1900-1945: Power and transportation
o The west coast gasoline famine of 1920
o The great depression and state regulations. These state regulations focused on restricting production, which
allowed a better management of the East Texas Oil Field compared to the early fields in Pennsylvania (see
Figures 1 and 5 of the cited paper.
1946-1972: The early postwar era.
o State regulation
o 1947-1948: Postwar dislocations: increase in the price of oil due to acceleration in the use of vehicles.
o 1952-1953: supply disruptions and the Korean conflict.
o 1956-1957: Suez Crisis
o 1969-1970: Modest price increases.
1973-1996: The age of OPEC.
o 1973-1974: OPEC Embargo.
o 1978-1979: Iranian revolution.
o 1980-1981: Iran-Iraq War.
o 1981-1986: The great price collapse.
o 1990-1991: First Persian Gulf War.
1997-2010: A new industrial age.
o 1997-1998: East Asian Crisis.
o 1999-2000: Resumed growth.
o 2003: Venezuelan unrest and the second Persian Gulf War.
o 2007-2008: Growing demand and stagnant supply.
12 SPE 147227

APPENDIX B Econometric Analysis of the BP Price Series

Comparison of the WTI and Brent Nominal Prices.

Figure 7 displays the nominal price of oil (on natural logarithm scale). In order to assess if the choice of benchmark (Brent,
WTI, Arabian light ) is impacting the analysis, we decided to make a comparison between WTI and Brent over the 1986-
2010 period. Figure 8 gives the price of oil in log scale using WTI. Figure 9 shows both prices (Brent and WTI) in logs as
well as the difference. There is no significant difference between WTI and the Brent prices. The correlation coefficient, for
the trending series, between the nominal price of Brent and WTI is .999 over that period. Hence, the results presented in this
paper will be using the BP series only, even though we computed the SCs in both cases using Brent and WTI.

Figure 7: Nominal price of oil in level on a log scale (Source BP statistical review (BP 2011)).

Figure 8: Nominal price of oil in level on a log scale using the WTI starting in 1986.

Figure 9: Nominal price of the WTI and Brent in logs over the 1986-2010 period and the difference.
SPE 147227 13

Unit Root Tests.

As described earlier, the oil series is composed of three different prices, with the Arabian Light price being used after 1944
and the Brent price starting in 1986 and. We want to investigate whether there is a presence of a structural break at these
splicing points (at 1986 and 1944).
First, we checked the presence of a unit root on the log of the real price of oil. The Phillips-Perron test statistic in Table 6
shows that the log of the real price of oil is integrated of degree one (I(1)). It means that the time series needs to be
differentiated once to be stationary. Failing to do so will lead to spurious regressions as described by Cuddington, Ludema,
and Jayasuriya (2007) and Cuddington and Urzua (1989). The Philips-Perron unit root test is preferred to the Dickey-Fuller
test in the case of time varying volatility, which is the case here. The Philips-Perron unit root test uses robust standard error
while the Dickey-Fuller does not. The null hypothesis of a second unit root is rejected. The lag length selection criteria show
that two lags are necessary based on the sequential modified likelihood ratio (LR) test statistic and the Akaike information
criterion (AIC) (Table 7). Hence, we will run the following univariate model:
DLPRoil _ BP _ cpit = + 1 DLPRoil _ BP _ cpit 1 + DLPRoil _ BP _ cpit 2 + et
A unit root test in the possible presence of structural breaks can also be implemented based on the work of Cuddington
and Nishioka (2005) where a new Lagrange Multiplier unit root test is used. It adds to the previous work of Perron (1989)
and Zivot and Andrews (1992) on unit root hypothesis related to the oil price shock.

Table 6: Unit root test on the real price of oil. The series is I(1).

Table 7: Lag length selection for the real price of oil.

14 SPE 147227

Structural Breaks.
When using the univariate equation specified above to test for the presence of structural breaks at the splicing date we find
that there are no structural breaks (Table 8, Figure 10 and Table 9). We also performed a Chow breakpoint test at several
other dates around these splicing dates, in 1945, 1946, 1984 and 1985, and they all rejected the presence of a structural break.

Table 8: Univariate regression of the real price of oil using two lags.

Table 9: Chow test to test for structural breaks at the splicing points of the oil price series in 1944 and 1986. There are no structural
breaks.

Figure 10: Correlogram of the residual corresponding to the univariate regression of the real oil price above (in first difference of the
log term).