Determinants of High Crude Oil Price: A Nonstationary Extreme Value Approach

Abstract

There are a number of factors that influence crude oil prices. We use a nonstationary extreme value approach to model crude oil prices. The model includes world oil demand, supply, dollar index, oil consumption, geopolitical and economic events as exogenous factors influencing crude oil prices. We assess the change in crude oil price dynamics as the consequence of changes in covariates. The primary objectives of the study are as follows: firstly, to investigate the impact of some exogenous variables on high crude oil prices; secondly, to fit the best nonstationary generalized extreme value model; thirdly, to compute the return level of crude oil prices for certain values of exogenous variables; fourthly, to compute the probability of crude oil prices which are extreme in nature; and finally, to measure the relative risk of a high oil price due to different covariate values. The finding shows that it is reasonable to model extreme oil prices using the nonstationary extreme value approach as opposed to the stationary approach. Moreover, the study shows that some of the independent variables considered here have significant roles in high crude oil prices and their changes create high risk of occurring extreme crude oil prices.