A Price Index of Oil Stocks

Abstract

For a number of years the writer has been conducting a continuing economic study of the petroleum industry, based partly upon the rela? tively ample statistics with which this field is favored and partly upon the technology involved in the production, refining, and utilization of petroleum.* In order to ascertain whether the course of petroleum shares on the stock market is influenced by economic conditions peculiar to petroleum or is wholly a function of the forces common to the movement of industrial shares in general, a price index of oil stocks has been prepared and will be maintained. A brief description of the method employed and the results attained is herewith presented. The preparation of a practical stock index involves greater difficul? ties than many other types of indices, owing to the rapidity and the degree of scatter characteristic of the individual quotations, and the tendency of some of the items to die away and thus "load" the index with inactive components. The conventional type of index as cal? culated by financial journals and consisting merely of an arithmetic mean of a selected number of quotations is a crude expedient, as has been critically shown by Wesley C. Mitchell.f The main trouble with this type of index is that it is dominated by the more vigorous of its components and is, therefore, not a representative index. Obviously, if the more vigorous and more costly stocks are not to dominate in an index, the items must be weighted. The weights may be assigned directly to the items or introduced indirectly by converting the quotations into percentages of a fixed base. The latter method was preferred because it affords a double comparison and lends itself to convenient treatment.