Outlook of Oil Prices and Volatility from 1970 to 2040 Through Global Energy Mix-Security from Production to Reserves: A Nonparametric Causality-in-Quantiles Approach

Abstract

In the midst of the global challenge of climate change induced by the consumption of fossil fuels, energy security remains a global concern. Thus, this study examines the role of energy security from the witty perspective of the production and reserves of the world’s leading energy mix (oil, natural gas, and coal) in the dynamics of global crude oil prices and volatility over the period of 1970 to 2040. Having discovered a nonlinear dynamics in the relationship, we employ the nonparametric causality-in-quantiles test which differentiates causality-in-mean from the causality-in-variance. The results show that the causality-in-variance is exceedingly stronger than causality-in-mean for the predictability of oil price. The mean oil price is unpredictable by the production and reserves of the energy sources, except those of crude oil and natural gas at the lower quantiles. Moreover, the production and reserves of all the energy sources are strong predictors of the volatility of oil price for most of the quantiles. This is further confirmed by the causality-in-mean conducted for the actual oil price volatility series. In general, this study weighs in from the perspective of an effective policy instrument associated with the trilemma among crude oil price, energy security, and environmental sustainability.