The 2008 Financial Crisis and Its Effects on Gas and Oil
The 2008 Great Financial Recession disrupted the world economy, and all its driving forces were devastated. Primarily, this crisis destroyed the banking and real estate sector due to the defaults of subprime borrowers. Still, its effects were seen in other sectors, and the most important among them included the oil and gas sector. This crisis also resulted in the loss of jobs, leading to unemployment. Additionally, people also saw a decline in income. During the recession period, the demand for oil and gas decreased, severely affecting the prices. The prices had reached their lowest levels.
The crude oil market was enormously fluctuating pre and post-Great Recession period. Before the recession of 2008, crude oil prices rose by more than 200% from 2000 levels. Before the recession, the cost of crude oil surged from $52.51 per barrel to as high as $145.31 per barrel; it was the case when the crude oil market was increasing rapidly. But after the 2008 financial downturn, the crude oil market collapsed for multiple reasons, and the price saw a sharp decline of about 80% to its new lowest level of $30.28 per barrel, and this downside move continued for five months. The crisis disrupted the crude oil market as it accounts for 50% of the general commodity index market. Likewise, there was a significant impact on the gas sector.
Insights of Fluctuations in the Crude Oil Market
Changes in terms of Volatility
The volatility in the crude oil market was very strictly observed in the pre-recession and post-recession periods due to high economic uncertainties. The common cause of such volatility in the crude oil market in both pre-recession and post-recession periods was an unexpected shock in the economy that resulted in negative impacts and worsening market conditions.
In the pre-recession period, the volatility was high in terms of rapidly increasing crude oil prices due to curbs on production by Saudi, high consumption of crude oil by the developing economies, etc.
Fluctuations in terms of Market Efficiency
Before the 2008 recession, the prices in the crude oil market were discovered based on economic aspects like supply, demand, and speculations that shift the cost curve.
When the 2008 recession began, uncontrolled external macroeconomic factors severely affected the pricing mechanism, which psychologically impacted market participants' expectations. This change in pricing mechanism affected market efficiency that created instability.
The pricing mechanism was affected because the recession ushered in decline in commercial crude oil trading, and the trading shifted to non-commercial trading. Another factor that disturbed the pricing mechanism of the natural oil market was speculation.
After the recession, it was speculated that the crude oil market would rise as part of economic recovery in the world; consequently, the speculators took a long position in the future demand for the securities underlying crude oil in the hope of recovery in the oil sector. This investment strategy of speculators was based on autonomous dynamics, which resulted in a positive response and gave a slowly decaying return. But these independent dynamics strategies of speculators disturbed the efficiency of the market and its long-term equilibrium because their speculation of positive change in crude oil prices made the prices more predictable, which reduced the market's randomness and disturbed the market's efficiency.
The Bottom Line
The gas and crude oil sector is the primary sector for all economic activity worldwide.
The crude oil market was quite unstable before the crisis and at the time of trouble, but after a few months, it returned to its previous level, but the crisis affected the oil sector system. The gas and oil market deviated from its long-term equilibrium after the recession. The uncontrolled contingent market events negatively affected the market and increased the rate of its volatility. Furthermore, it also disturbed the market's efficiency.
After the 2008 recession, the inclusive financialization in the crude oil market created complexity in the price mechanism that changed the crude oil market properties and reduced the chances of adverse effects on the efficiency and long-term equilibrium of the market through intensified investor's collective phenomena. it has also been suggested that regulators should impose disclosure policies against the speculators' potential risk, to safeguard by producing accurate information to the regulators for each trade.