Preliminary Results

1
Long-run Evolution of Fossil Fuel Prices
Evidence from Persistence Break Testing (Work in
Progress) Aleksandar Zaklan (DIW Berlin), Jan
Abrell (TU Dresden) and Anne Neumann (University
of Potsdam and DIW Berlin)

• Motivation
• Fossil fuels are key inputs into electricity
  generation, industrial processes and
  transportation.
• However, there is no consensus on the persistence
  properties of non-renewable resource prices in
  the literature.
• Understanding whether prices are stationary is
  important for
• Testing the validity of certain theoretical
  approaches (e.g. Hotelling (1931))
• Choice of admissible estimation frameworks
• Optimizing forecasting performance

• State of the Literature
• Empirical literature
• Testing of resource theory (Slade, 1982)
• Appropriate model choice (Ahrens and Sharma,
  1997)
• Improving forecasting performance (Berck and
  Roberts, 1996 Pindyck, 1999 Lee et al., 2006)
• Recent theoretical literature on persistence
  break testing
• Kim (2000), Kim et al. (2002), Busetti and Taylor
  (2004) Harvey et al.(2006), Cavaliere and Taylor
  (2008)
• Dvir and Rogoff (2010) apply this methodology
  historical crude oil prices, we take it a step
  further
• Extend their analysis to natural gas and
  bituminous coal prices
• Allow for breaks in persistence and breaks in the
  trend

Data and Methodology

• Data
• Long-term price data at annual frequency
• Bituminous coal prices (1870-2009) from Manthy
  (1978) and U.S. Energy Information Administration
  (EIA)
• Crude oil prices (1861-2009) from BP (2011)
• Natural gas prices (1922-2009) from U.S. EIA

Preliminary Results

• Summary of Main Results
• Coal prices may be stationary over the long term
• For oil and natural gas prices stationarity is
  rejected in favor of a switch from I(0) to I(1)
  behavior having taken place.
• Particularly for natural gas the persistence
  break point is estimated to be implausibly early

• Preliminary Conclusions and Next Steps
• The literature strongly suggests the existence of
  structural breaks in natural resource time series
  (Perron, 1989 Lee et al., 2006)
• ?This may bias persistence break test statistics
  if unaccounted for
• Our results appear to confirm that a bias exists,
  cautioning against accepting the result by Dvir
  and Rogoff (2010) as is
• We therefore aim to incorporate structural breaks
  into the persistence break testing procedure

Selected References Ahrens, W.A. and V.R. Sharma
(1997) Trends in Natural Resource Commodity
Prices Deterministic or Stochastic? Journal of
Environmental Economics and Management, 33(1),
pp. 59-74. Berck, P. and M. Roberts, 1996
Natural Resource Prices Will they ever turn up?
Journal of Environmental Economics and
Management, 31(1), pp. 65-78. BP, 2011.
Statistical Review of World Energy 2010.
Historical data available at http//www.bp.com/sec
tiongenericarticle.do?categoryId9033088contentId
7060602 Busetti, F. and A. M. R. Taylor. 2004.
Tests of Stationarity Against a Change in
Persistence. Journal of Econometrics, 123(1), pp.
33-66. Cavaliere, G. and A. M. Taylor. 2008.
Testing for a Change in Persistence in the
Presence of Non-stationary Volatility. Journal of
Econometrics 147(1), pp. 84-98. Dvir, E. and K.
Rogoff. 2010. Three Epochs of Oil. Mimeo, Boston
College. Hotelling, H., 1931. The Economics of
Exhaustible Resources. Journal of Political
Economy 39, 137-75.
References (continued) Harvey, D. I., S. J.
Leybourne, and A. M. R. Taylor. 2006. Modifed
Tests for a Change in Persistence. Journal of
Econometrics 134(2), pp. 441-469. Kim, J.-Y.
2000. Detection of Change in Persistence of a
Linear Time Series. Journal of Econometrics,
95(1), pp. 97-116. Kim, J.-Y., J. Belaire-Franch,
and R. B. Amador. 2002. Corrigendum, Journal of
Econometrics, 109(2), pp. 389-392. Lee, J., J. A.
List, and M. C. Strazicich, 2006 Non-renewable
resource prices Deterministic or stochastic
trends? Journal of Environmental Economics and
Management, 51(3), pp. 354-370. Manthy, R. S.
1978. Natural Resource Commodities A Century of
Statistics. Baltimore and London Johns Hopkins
University Press. Perron, P. 1989. The Great
Crash, The Oil Price Shock, and the Unit Root
Hypothesis. Econometrica 57(6), pp. 1361-1401.
Pindyck, R. S. 1999. "The Long-Run Evolution of
Energy Prices." The Energy Journal, 20(2), pp.
1-27. Slade, M.E., 1982 Trends in
Natural-Resource Commodity Prices An Analysis of
the Time Domain. Journal of Environmental
Economics and Management, 9(2), pp. 122-137.