energies Article Detecting West Texas Intermediate (WTI) Prices’ Bubble Periods Theodosios Perifanis Energy and Environmental Policy Laboratory, Department of International and European Studies, University of Piraeus, 18532 Piraeus, Greece; [email protected]; Tel.: +30-210-414-2657 Received: 8 June 2019; Accepted: 8 July 2019; Published: 10 July 2019 Abstract: Oil prices have had considerable surges and bursts since the first oil crisis of 1973. Until then its price was stable, with almost zero volatility. Since then, apart from the two oil crises of 1973 and 1978/9, oil prices had consecutive bubble episodes like the surges up to 2008 and 2014 and their successive bursts, respectively. The trace of these bubble periods is of crucial importance for policymakers, since their drivers and consequences impact global economic developments. Phillips et al. and Phillips et al. methodologies are applied to detect whether West Texas Intermediate prices experienced bubble periods. Both methodologies suggest that WTI prices experienced explosive episodes, which could be fundamentally, speculatively, or politically attributed. Some suggested periods coincide for both methods, but the second methodology seems to be more sensitive than its predecessor is, leading to better bubble detection but also to identification of non-existent bubbles. The identified bubble periods are compared to relevant research in the literature concerning their presence, duration, and explosiveness. The main goal of the research, apart from the detection of bubbles’ presence and duration, is to identify the causal underlying reasons for each explosive episode. Further, we compare the start and endpoints of each bubble episode with time-points when structural changes occurred. The contribution of the paper is that it clearly defines the bubble episodes with their corresponding drivers. The paper identifies the importance of market fundamentals’ swifts in explaining the bubble periods. The findings of the papers can help policymakers and other stakeholders to monitor oil price shifts and their underlying reasons, and then proceed with prompt actions. Since bubble episodes are fundamentally explained, then the practical utility is that by focusing on the market fundamentals, stakeholders can avoid actions that could result in market failures. Keywords: WTI; bubbles; explosive prices; Augmented Dickey Fuller (ADF) test; PWY (2011); PSY (2015) 1. Introduction The global oil market suffered heavy disruptions during many periods in the past. These periods start from the first oil crisis of 1973. The second came a few years later in 1978–1979. In the 80s, it was the OPEC collapse of 1986 [1]. The oil price surged in 1990/1991; time spot coinciding with the Gulf War. The oil price was increasing from 2001 to 2008, when the global financial crisis occurred. From 2011 to 2014, it remained at high levels until a burst occurred, reaching the lowest level in 2016. Since 2016, the price has increased. It is easily understood that the oil price has followed a pattern since 1973, in which a hike is followed by a burst and vice versa. This course with structural breaks, sudden upward or downward, called jumps reflect the high volatility of the market. The duration of these movements is also not the same. It took more than three months for oil price to peak in 1991, but seven years between 2001 and 2008 (Figure1). Energies 2019, 12, 2649; doi:10.3390/en12142649 www.mdpi.com/journal/energies Energies 2019, 12, 2649 2 of 16 Energies 2017, 10, x FOR PEER REVIEW 2 of 16 Figure 1. RealReal Monthly Monthly West West Texas Texas Intermediate Intermediate (W (WTI)TI) Price—Nominal Price—Nominal WTI WTI CPI CPI (Consumer (Consumer Price Price Index) deflated,deflated, Author’s calculations, source: FRED. Testing of bubblebubble episodesepisodes inin financialfinancial marketsmarkets isis thoroughlythoroughly conducted.conducted. 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