A State-of-the-Art Review of Finance Research in Physical and Financial Trading Markets in Crude Oil

It goes without saying that crude oil is important for both developed and emerging economies, with crude oil-related expenditures representing a significant proportion of total economic inputs, and an even more substantial share of total energy consumption. For example, energy expenditures of about $1,233 billion in the US currently account for some 8.8% of its GDP (from a high of 13.7% in 1981), with crude oil products (including distillate, jet fuel, liquefied petroleum gas, and gasoline) representing some 35.27% of total end-use energy expenditure, ahead of 23.56% for natural gas and 19.76% for coal. Of this, the residential, commercial, and industrial sectors respectively account for 11.4%, 5.9% and 47.1% of end-use expenditure and the transportation sector the remainder. It is then clear to see economic activity positively depends on crude oil requirements and expenditures. It also explains why Hamilton (1983) very early concluded that a dramatic increase in the price of oil has preceded almost every post-World War II recession in the US. Accordingly, as a key factor input, crude oil price changes have the potential to alter dramatically the financial performance of economies at large and the performance and behavior of the firms that operate within them. Hence, understanding the relationship between oil prices and various financial markets is paramount, and there is a role for finance research in this regard.