I discuss the short-run dynamics of commodity prices, production, and inven
tories, as well as the sources and effects of market volatility. I explain
how prices, rates of production, and inventory levels are interrelated, and
are determined via equilibrium in two interconnected markets: a cash marke
r for spot purchases and sales of the commodity, and a market for storage.
I show how equilibrium in these markets affects and is affected by changes
in the level of price volatility. I also explain the role and behavior of c
ommodity futures markers, and the relationship between spot prices, futures
prices, and inventory behavior, I illustrate these ideas with data for the
petroleum complex - crude oil, hearing oil, and gasoline - over the past t
wo decades.