VOLATILITY ANNIVERSARY SERIES™

Oil crisis: OCTOBER 15, 2014


Images may be enlarged by clicking on the picture.

In June of 2014, oil prices began a broad decline of 23% from highs of $107 per barrel to $81 per barrel by the time market volatility peaked on October 15th. These declines represented a massive transfer of wealth from producers to consumers, estimated at $1.5 trillion annually by economist Edward Yardeni.

At the time economists believed that the decline could help boost the global economic recovery while causing significant political strain for some of the largest exporters including, Nigeria, Venezuela, Russia, and Iran. Although there are many potential contributing factors, it is generally believed that the primary cause was supply and demand, too much supply chasing lower than expected global need to be more specific. It was widely speculated at the time that Saudi Arabian supplies remained stable, while the U.S. and Canada began ramping up production. From 2013 to 2014, U.S. crude oil production increased by 17%.

Economist Larry Goldstein stated at the time that the small shift in the supply-demand balance resulted in significant price changes because oil demand is “price inelastic.” He argued that even modest surpluses or shortages in supply could trigger dizzying price swings because consumers’ needs – in the short run – are rigid. Shortages can cause a scramble for supply, where surpluses tend to produce price plunges to ‘clear’ the market.

From the high on September 9, 2014, the S&P 500 dropped 9.44% through October 15, 2014. The sudden drop in the equity market caused an increased demand for protection. The VIX volatility index would spike 169% during this time frame, topping out at 31.06. Aftershocks continued over the next two years as oil prices and emerging markets continued to spook investors.


Sources: Washington Post, Bloomberg Finance